New Tax Incentives Drive Growth

The Israel Innovation Authority constantly has its finger on the pulse of Israel's high-tech industry and proactively helps provide the best possible conditions for this key sector to thrive. "Our job is to be a seismometer that knows everything that's happening in the high-tech sector," says Yael Mazuz Harpaz, Vice President and Head of the Policy Division at the Israel Innovation Authority. "Our role is to ensure that Israel's high-tech sector remains at the forefront globally. We do this mainly through grants, investments, and other forms of support throughout the ecosystem. In addition, we try to make sure that the business environment is as attractive as possible."

Taxation is a crucial issue when examining a business environment. Harpaz explains that in recent years there have been important changes to tax laws around the world and Israel must align itself with this new reality in order to remain competitive. In particular, the OECD began implementing a global minimum corporate tax rate of 15% for large multinational enterprises. This has impacted the global tax environment, catalyzing countries, including Israel, to reevaluate how they can remain attractive to businesses.

The Israel Innovation Authority, together with the Israel Tax Authority and the Finance Ministry recently undertook a transformational tax reform aimed at ensuring that Israel's business environment remains as attractive and competitive as possible. Holistic and comprehensive in nature, the tax reform takes into account the needs of the entire ecosystem—startups, large multinational companies, entrepreneurs, investors, etc. The goal was to remove potential obstacles, eliminate tax uncertainty and maximize competitiveness vis-à-vis other countries.

Incentives for conducting R&D in Israel

Israel is a high-tech powerhouse first and foremost because of its extraordinary human capital and this is a top reason why it is one of the best countries in the world for establishing tech companies and also for acquiring them. New tax incentives aim at encouraging companies to conduct as much research and development as possible in Israel, using the first-rate talents and skills offered by the local workforce.

Specifically, a new law has been approved that benefits companies operating in Israel that have more than 200 workers and whose revenues exceed $200 million. These companies are now eligible for R&D tax credits of up to 30% of the total approved R&D expenditure. The credit applies to a broad range of costs, including payroll expenses for R&D employees, depreciation on assets used in R&D, payments to subcontractors, and a general overhead component covering additional expenses recognized as part of R&D costs in financial statements.

Although the percentage of the tax credit varies, many large companies and those based in the periphery are set to benefit from very substantial tax credits. Unlike other countries, which usually cap the amount for which companies can receive such tax credits, Israel's new law does not include a maximum limit. "We want to encourage large companies to conduct as much R&D as possible in Israel. In fact, the larger the amount, the higher the tax credit rate will be," notes Harpaz.

This tax incentive is also unique because it doesn't only benefit companies that are already profitable. If after three years the company isn't profitable yet, it receives the tax credit as an outright grant. "This is especially important for startups which invest a great deal in development and are not profitable for several years. We want the business environment here to be as attractive as possible for them as well," Harpaz explains.

This new tax law is the product of intensive work with industry and with the government. It is an engine for encouraging companies to hire more workers and to invest as much as possible in R&D.

The second important new tax legislation that encourages conducting R&D in Israel targets multinational companies that acquire Israeli companies. Usually, these 'exits' result in the acquired Israeli company being turned into an R&D center for the large multinational enterprise. The problem with this is that there is a risk that the Israeli company's intellectual property (IP) will leave the country. Until now, these situations created a great deal of friction between the acquiring multinational and the Israel Tax Authority regarding the ownership of the IP. The lack of clarity resulted in long, drawn out negotiations.

The new regulation spells out a clear tax policy, enabling acquiring companies to know in advance exactly what they can expect as far as taxes are concerned. "For the first time, we have created clarity regarding exits, which are central to the Israeli ecosystem. We want to make sure that operations remain in Israel following these acquisitions," Harpaz elaborates.

Encouraging Israelis to return

Since the high-tech sector is inherently global, Israeli entrepreneurs and professionals often relocate abroad to pursue career opportunities. Sometimes, tax issues play a role in their decision to return home. In particular, employees who received stock options while they lived abroad used to face severe tax burdens when exercising these options upon returning to Israel. To encourage Israelis to return, the Israel Tax Authority recently announced a new policy whereby Israelis returning from living abroad will not face any harmful tax consequences when exercising stock options.

This new policy has a critical impact on people working in large international companies overseas, many of whom receive a very substantial share of their salary package in the form of stock options, sometimes up to half of their entire salary. Until now, if they moved back to Israel, they would be taxed on these options as much as hundreds of thousands of dollars.

Another part of the new tax reform that is a gamechanger for many Israelis living abroad targets those who have been overseas for more than ten years. If they return to Israel during 2026 or 2027, they will receive a very significant abatement from the Israel Tax Authority. The abatement will be highest in the first year and will be gradually reduced each year for five years. Since the opportunity to take advantage of this important benefit is limited to the next two years, it is expected to encourage Israelis who are thinking about returning home to take the step now.

"This is a really a good reason to move back. Whoever is hesitating should come back now," insists Harpaz. Although this is a tax benefit enjoyed by all returning Israelis, regardless of their occupations, many of those who left Israel more than ten years ago are high-tech workers.

In addition, the Israel Innovation Authority is eager to encourage investors through tax incentives for venture capital (VC) funds. Until now, the taxation of VCs was based on individual tax payments that were subject to discussion with the Tax Authority. "The goal is to create a consistent and transparent tax framework for VCs that will enable their directors and investors both in Israel and abroad to know in advance exactly what their tax burdens will be. A clear tax framework will help attract investors to Israel and will help Israeli companies raise funds," says Harpaz.

Altogether, these new tax policies are designed to make a real difference at all levels of the ecosystem. "The beauty of this is that the Israel Tax Authority and Finance Ministry really understand the significance of the high-tech sector for Israel's economy and are willing to take steps to spur its growth. Moreover, we are working closely with the industry to ensure that we are aware of their needs and are committed to solving their problems and preserving their competitiveness," Harpaz concludes.

For more information, visit innovationisrael.org.il

Partnered with the Israel Innovation Authority