Dear Friends, Clients and Colleagues,

Last week the Israeli Minister of Finance has announced that Israel will move forward with legislating a qualified domestic minimum top-up tax (“QDMTT”) in accordance with the OECD’s “two pillar solution”.  The two-pillar solution is intended to combat international tax planning by multinational enterprises and to distribute the taxing rights among countries more equitably. Pillar Two specifically is intended to apply a global minimum corporate tax of 15%.

According to the Minister’s announcement, the QDMTT legislation, which will ensure that all Israeli resident companies that are members of in-scope multinational groups pay the minimal 15% tax, will come into effect starting in 2026. The Pillar Two taxes generally apply to groups that meet the required annual revenue threshold of € 750 million.

We note that while most EU member states and the UK have decided to apply the QDMTT also to purely domestic groups that meet the minimal revenue threshold, it appears that at least currently the intention of the Ministry of Finance is to limit the application of the global minimum tax to multinational groups only, consistent with the OECD’s minimal requirements for the global minimum tax in this respect.

The Minister of Finance further announced that currently the recommendation is not to adopt the income inclusion rule (IIR) or undertaxed profits rule (UTPR), which allow countries to collect tax on income generated by non-domestic group companies that was subject to tax at effective rates of below 15%. The potential implementation of IIR and UTPR will be reconsidered only after the QDMTT is applied.

While the current Israeli corporate tax rate (23%) is higher than the minimum 15% QDMTT tax rate, the introduction of QDMTT may still result in additional tax burden in certain scenarios. This is both because the Pillar Two tax base is calculated based on accounting income or loss (without accounting for domestic tax adjustments) and does not exclude from scope companies which enjoy certain preferential tax regimes available in Israel that may reduce the effective corporate tax rate. Taxpayers should be aware of these potential discrepancies between domestic tax liabilities and Pillar Two tax liabilities, in order to plan their economic activities in a manner that ensures compliance with all applicable legal requirements without paying any excess tax liability.

We will continue to update you on any developments in Pillar Two legislation in Israel, including the specifics of the QDMTT mechanism, the Pillar Two safe harbors and the potential introduction of IIR and UTPR in the future.

Please feel free to approach our tax department with any questions related to Pillar Two legislation in Israel or any other tax related questions in Israel.

Sincerely,

The Tax Department

Herzog Fox & Neeman

This client update should not be considered legal advice and should not be relied upon without proper legal advice.