New draft bill to implement Pillar Two rules in Israel

The Israeli Ministry of Finance published on October 5, 2025, a draft bill to implement the principles of the OECD’s Pillar Two. The Israeli Government is accepting public comments on this draft bill until October 26, 2025.

The Pillar Two rules, which were adopted by the OECD as part of the BEPS project, are intended to ensure the application of a global minimal corporate tax on large multinational groups. In recent years, many jurisdictions have adopted these rules into local legislation. This draft bill, when enacted into law, will be an important step in harmonization of the Israeli tax system with these globally accepted standards.

We note that the bill memorandum also includes a further update from the Ministry of Finance, according to which the Government is currently working on updating the Israeli incentive programs to be based on a qualified refundable tax credit (QRTC) mechanism that is allowable under Pillar Two. The intent is to allow Israel to preserve its competitive advantages in attracting foreign direct investments in accordance with the globally accepted rules of Pillar Two.

Details of the Draft Bill

Consistent with past statements made by the Minister of Finance, Israel intends at this stage to apply only the Qualified Domestic Minimum Top-up Tax (“QDMTT”) mechanism, starting in 2026. The two other main taxation mechanisms of Pillar Two – the Income Inclusion Rule (“IIR”) and the Under Taxed Profits Rule (“UTPR”) – will be reconsidered in the future but are not part of the existing draft bill.

Under QDMTT, Israeli constituent entities that are members of a multinational group that is in-scope of Pillar Two rules will be subject to a “top-up tax” if their effective tax rate is below 15%. A constituent entity for these purposes includes any legal entity (such as an Israeli company or partnership) and any financial unit that is included in consolidated financial statements (such as an Israeli branch or permanent establishment). A multinational group is in-scope of Pillar Two if the revenue in the consolidated financial statements of its ultimate parent entity is at least €750 million in 2 out of the 4 years before the tested tax year.

The draft bill includes mostly provisions intended to coordinate between Israeli law provisions relating to reporting, tax assessments and appeals, and the QDMTT mechanism. The substantive provisions of the new tax are incorporated by references to the applicable rules, commentaries and guidance published by the OECD. Furthermore, in an unusual step in Israeli legislation, the draft bill explicitly provides that the new law should be interpreted based on the English version of the Pillar Two rules and commentaries published by the OECD in order to promote consistency in the implementation of these rules with global standards.

The suggested technical provisions of the draft bill may have significant effect on the tax liability of multinational groups operating in Israel. The Pillar Two rules generally apply on a jurisdictional basis, and the top-up tax is levied only if the effective tax rate on the aggregate income of constituent entities in a jurisdiction is below 15%. However, the draft bill suggests that the QDMTT will be applied in Israel on an entity-by-entity basis, unless the multinational group designates a local entity to file Pillar Two reports and an election is made by the group to be taxed on jurisdictional basis. Multinational groups will be well advised to pay close attention to the procedural aspects of Pillar Two reporting in Israel, and their potential effect on actual tax burden.

Relevance of Israeli QDMTT to Multinational Groups Operating in Israel

As noted, the new QDMTT regime will apply to Israeli constituent entities of in-scope multinational groups that are subject to an effective tax rate below 15%. The Israeli corporate tax rate of 23% presumably excludes most taxpayers from the new regime.

However, it should be noted that Israel provides extensive tax benefits under the Israeli Law for Encouragement of Capital Investments, which may reduce the Israeli corporate tax rate to 6% – 16%, depending on the circumstances. In addition, the effective tax rate for Pillar Two purposes is determined based on accounting income, and not the Israeli taxable income which is subject to certain adjustments according to domestic tax laws.

As a result, many multinational groups, especially groups that applied beneficial tax rates to their taxable income, may be in-scope of the new Israeli QDMTT regime. We recommend our clients to review in advance their potential tax liability under the QDMTT in order to plan their Israeli operations accordingly and ensure compliance with Israeli tax laws.

Our tax group is available to answer any questions you may have regarding the new draft bill and the potential implications of adoption of QDMTT in Israel.