On November 2, 2025, a new tax policy reform was announced with the aim of increasing the attractiveness of Israel’s high-tech sector. The reform, formulated in collaboration with the Tax Authority, Ministry of Finance, Innovation Authority, and industry representatives, includes a series of legislative measures and changes in procedures designed to remove barriers and provide incentives for growth.
Key Principles of the Reform:
Venture Capital Funds: Establishment of a uniform income tax rate on success fees for Israeli and foreign investment funds; classification of investments by Israeli investors in venture capital funds as passive investments; exemption from VAT on success fees; and exemption from capital gains tax for foreign investment entities and companies on direct high-tech investments, without limitation on investment volume.
Mergers & Acquisitions: Significant relief in the processes of company acquisitions and mergers, already approved and effective as of March 2025 (including, among other things, easing of commercial mergers between companies, elimination of the requirement to maintain a certain level of shareholding for two years after the merger, increase of the permissible cash component in share-swap transactions, and more).
Acquisitions by Multinational Companies: Establishment of guiding principles for intellectual property valuation and for determining transfer pricing methods for R&D centers; creation of a pathway for advance approval from the tax authorities to provide certainty regarding expected tax liability; and adoption of OECD PILLAR 2 rules.
Return from Relocation: Establishment of guidelines for the allocation of equity compensation income between Israel and abroad; granting a tax exemption for income generated and accrued outside of Israel; establishment of a foreign tax credit mechanism; and creation of a streamlined process for transitioning from Section 3(i) taxation to Section 102. In parallel, legislation is being advanced to enhance certainty in determining tax residency.
The purpose of the reform is to increase tax certainty, shorten bureaucratic processes, and encourage continued sector growth in Israel. The reform is intended to make Israel a more attractive country in terms of tax process simplicity and regulatory certainty.
The announced mechanisms will be translated into detailed arrangements in a series of documents to be published soon by the Tax Authority, as well as in legislative arrangements and regulations to be brought before the Finance Committee of the Knesset.
We will, of course, continue to update you regarding the progress of the legislation, regulations, and administrative directives that will bring this reform into effect.
We recommend reviewing the implications of the reform on your business activities and would be pleased to assist in adapting your corporate and tax structure accordingly.
The contents of this memorandum do not constitute specific legal advice. We are at your disposal for any discussion or clarification regarding the matters included herein.
*The review was written by Adv. Amir Zolty, Partner and Head of Hi-Tech Practice.