Multi-Stage Reform in the Taxation of High-Tech Companies

The Ministry of Finance and the Israeli Tax Authority (ITA) announced, in a joint press conference on November 2nd 2025, a significant reform intended to support and strengthen Israel’s high-tech industry (hereinafter: the “Reform”). The Reform is expected to be phased, via regulations requiring Knesset approval and professional circulars clarifying  the ITA’s positions. We will provide further detailed updates regarding these regulations and circulars when they are published.

This Reform is designed to remove barriers and provide certainty both for investors and for multinational corporations. It marks a significant milestone for Israel’s high-tech sector and lays a foundation for continued investment, growth, and employment in the Israeli economy. The Reform addresses the full life cycle of technology companies – from startups and growth-stage companies to multinational enterprises.

Main Elements of the Reform

Investment Funds:

The Ministry of Finance has published draft regulations together with anticipated legislative amendments, addressing the taxation of venture capital funds and other investment funds, including hedge funds. The draft regulations must be approved by the Knesset Finance Committee, and legislative amendments are expected.

Key proposed reliefs for fund managers and investors (both venture capital and hedge funds) include:

• VAT Exemption: Success fees and management fees received from foreign residents would be exempt from VAT.
• Preferential Taxation of Success Fees: Success fees (carry interest) received by the general partner would be taxed at a preferential rate of 27%, plus an additional 3% surtax. The additional 2% surtax applicable to passive income will not apply.
• General partner Investments: Investments by the general partner of up to 10% of the fund’s capital would be treated as capital gains.
• Foreign Investor Exemption: A tax exemption would be granted to foreign residents – whether or not investing through a fund – with respect to qualifying investments in qualifying technology companies, essentially, Israeli technology companies whose primary assets and activities are located in Israel and are production-oriented.

Transfer Pricing for Multinational Corporations:

In recent years, significant assessments requiring multinational groups to allocate a larger portion of foreign profits to Israel have created operational uncertainty, making it difficult to operate in Israel.

To enhance certainty for these multinational groups, the ITA is expected to issue a professional circular requiring senior headquarters approval before an assessing officer may apply the Profit Split Method (i.e., increase profits attributed to Israel) to increase profits attributed to Israel.  Specifically, approvals would be required from the ITA Professional Division and Legal Department, and in some cases from the Director of the ITA.  The objective is to ensure consistency, avoid arbitrary discretion, and account for the sensitivity of globally active high‑tech operations.

Tax Liability on IP Transfers:

Following acquisitions of Israeli companies, many foreign acquirers have sought to transfer the Israeli company’s IP to the parent company or another group entity outside Israel, often for non-tax reasons such as IP protection. Valuation disputes between the ITA and multinational corporations regarding the valuation of IP have been common and have reached the district courts, with many cases ongoing.

To ease this burden on multinational groups, the recently published circular introduces a valuation formula under which, subject to certain conditions, the ITA will accept the IP valuation if it amounts to 85% of the acquisition purchase price (net of cash and other adjustments) for large multinational groups. The circular also guarantees the use of the Cost-Plus method (+COST) for transfer pricing purposes for a period of eight years.

For further details regarding this circular, please see our client update [link].

Marketing Intangibles:

A “marketing intangible” refers to an asset whose consideration does not qualify for tax benefits under the Encouragement of Capital Investments Law. Classification as a marketing intangible can significantly reduce available benefits and may create incentives for assessments favoring such classification.

To increase certainty on this issue and align with OECD guidance, the ITA has committed to publishing a position paper clarifying the matter and providing indicators for identifying a marketing intangibles. Decisions by assessing officers will be subject to stricter supervision and headquarter oversight to ensure consistent and professional handling.

Taxation of Employee Stock Options for Returning Employees (Relocation):

Under the ITA’s previous guidance, employees returning from relocation who were not eligible for the ten-year exemption were fully taxable in Israel (at a 50% rate) on all options granted while they were foreign resident. To encourage high-tech talent repatriation, the ITA is expected to allow gains to be spread over a six-year period, whilst exempting the portion attributable to years of foreign residency.

At the same time, if a taxpayer prefers not to have part of the income taxed as employment income, they may (as under the current rules) elect the “green route” – transferring from Section 3(i) to Section 102, resulting in a 25% tax rate.

The above constitutes only a preliminary description of the anticipated Reform as presented during the ITA’s press conference. As noted above, we will issue detailed updates once the relevant regulations and ITA circulars are released.

Our Tax Department has extensive experience in the areas discussed above. We advise and assist multinational corporations in M&A transactions and represent Israeli companies that are part of multinational groups in tax audits, tax appeals, advance ruling requests, and other related matters. If any of the topics included in the Reform are relevant to you or may impact your international tax strategies, we invite you to contact us to discuss possible options and solutions.

Sincerely,
The Tax Department – Herzog Fox & Neeman

*This client update is provided for informational purposes only and does not constitute legal advice. It should not be relied upon without obtaining appropriate legal counsel.