In an attempt to stop the brain-drain of Israel’s brightest minds, The Ministry of Finance, the Israel Tax Authority, and the Israel Innovation Authority announced a comprehensive reform of Israel’s high-tech taxation framework on Sunday, aimed at strengthening the country’s position as a global innovation hub.
“The Tax Authority recognizes the high-tech industry as the growth engine of the Israeli economy and understands its need for a stable, transparent tax environment that supports expansion of existing investments, attraction of new ones, and the continued growth of Israeli companies,” said Shay Aharonovich, Director of the Israel Tax Authority.
The reform package, presented by Finance Minister Bezalel Smotrich, introduces wide-ranging legislative and regulatory changes designed to enhance tax certainty, remove investment barriers, streamline bureaucratic procedures, and encourage the rapid return of Israeli professionals from abroad.
In April, a report by the Israel Innovation Authority found that 8,300 Israelis working in the high-tech sector had left the country between October 2023 and July 2024, representing 2.1% of the entire workforce of Israel. In comparison, a total of 1,207 tech employees left in October 2023.
According to Dror Bin, CEO of IIA, the reforms are a “deep structural change that continues to establish Israel as a strategic target for multinational companies, investment funds and entrepreneurs."
“Israel is renowned for its innovation capabilities, however in order to maintain its status as a global high-tech power, it must be not only creative and technologically advanced, but rather also a place where it is easy, predictable, and worthwhile to do business,” said Israel Innovation Authority CEO, Dror Bin. “The reform we are introducing today stems from deep familiarity with the needs of the ecosystem and creates a meaningful change in the business environment by ensuring tax certainty, simplifying procedures, and providing incentives.”
The primary goal of the reform is to increase tax certainty and streamline bureaucratic processes at critical junctures, in order to encourage the continued growth of Israel’s high-tech industry.
The reform was formulated by a team that included representatives from various government bodies (the Israel Tax Authority, the Ministry of Finance, and the Israel Innovation Authority) in collaboration with industry representatives. Their work began with working groups that engaged in identification of the main challenges the industry faces, followed by discussion sessions in which the proposed measures for coping with such were developed and agreed upon.
What's in this reform package
The reform package addresses the entire lifecycle of high-tech companies, from early-stage incorporation and initial funding rounds, through expansion and advanced capital raising, to IPOs or acquisitions by multinational corporations.
It introduces new measures to ease the activity of both Israeli and foreign investment funds, while also providing greater transparency and predictability in income tax and VAT. At the same time, it removes barriers for institutional investors and companies seeking to invest directly in high-tech ventures, and introduces regulatory relief to encourage mergers and acquisitions within the sector.
Should a multinational company want to acquire an Israeli company, the reform establishes guiding principles for determining the value of intellectual property, the pricing method of R&D centers, and focusing on the treatment by senior staff officials. It also establishes a track for obtaining preliminary approval by the tax authorities to determine the pricing method model that will provide certainty to the R&D centers regarding the tax liability expected in Israel and it adopts the OECD’s Pillar 2 rules establishing an incentive mechanism aligned with international standards.
Another key element of the reform is the encouragement of Israeli professionals to return from relocation abroad. The new framework sets clear rules for the taxation of equity-based compensation, grants exemptions on income generated outside Israel, and introduces credit mechanisms for foreign taxes already paid. Residency for tax purposes will now be determined solely by the number of days spent in Israel, reducing uncertainty for returning employees.
“Israel is already one of the most attractive countries in the world for high-tech investment, due to its tax rates and high-quality human capital. From now on, it will also be a country known for the simplicity of its tax processes and its regulatory certainty,” said Finance Minister, Bezalel Smotrich.
After two years of uncertainty due to the war between Israel and Hamas, Jerusalem is attempting to accelerate investment, encourage corporate growth, and bring back Israeli talent, all in order to ensure that the country’s high-tech sector continues to thrive in an increasingly competitive global market.