The Ministry of Finance, the Tax Authority and the Israel Innovation Authority are announcing a comprehensive reform in high-tech taxation

The Minister of Finance, Bezalel Smotrich presented today a new reform in the taxation policy designed to facilitate activities and increase the attractiveness of the Israeli high-tech industry. The reform includes a series of legislative steps and changes in the Tax Authority‘s Operational procedures, which will remove barriers and provide incentives for the growth of Israeli high- regulate the acquisition of Israeli high-tech companies, the rapid return of hi-tech professionals to Israel from relocation and investment in companies throughout the life cycle of the industry: From early-stage incorporation and initial funding rounds, through expansion and advanced capital-raising stages, up to IPO or acquisition by multinational companies.

Among other things, the reform includes measures to ease the activity of investment funds in high-tech (Israeli and foreign) and investors (foreign and Israeli); legislation to increase transparency and certainty in the income tax and VAT worlds; removal of investment barriers to investment entities and companies in direct investment in high-tech companies; regulatory easing in the field of structural change to increase the activity of mergers and acquisitions especially in the Israeli high-tech industry; measures to increase taxation certainty for multinational companies, with an emphasis on the stages of acquisition of Israeli companies and management of R&D centers in Israel; a move to increase the certainty in taxation of marketing intangibles ; and steps to increase the tax viability for rapid return to Israel from relocation.

Minister of Finance, Bezalel Smotrich: “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.”

Director of the Israel Tax Authority, Shay Aharonovich: “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.”

Israel Innovation Authority CEO, Dror Bin: “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. 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. This is a deep structural change that continues to establish Israel as a strategic target for multinational companies, investment funds and entrepreneurs.”

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. The team’s 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.

The key issues that were discussed: 

• Enhancing tax certainty concerning the tax policy in respect of management fees and carried interest in investment venture funds activity, in general and specifically concerning both foreign and Israeli investors in venture funds
• Establishing VAT guidelines on carried interest and management fees.
• Tax incentives for direct investments by institutional investors and companies, other than by venture funds as intermediaries.
• Necessary tax relief in the field of corporate restructuring, to facilitate the growth of Israeli companies (through mergers and acquisitions of Israeli companies).
• Increasing tax certainty for multinational corporations acquiring Israeli companies and managing R&D centers in Israel.
• Increasing tax certainty among employees returning to Israel from relocation and reducing disincentives , in order to encourage a quick return to Israel – with an emphasis on tax liability for equity-based compensation (employee stock options).

The solutions the reform proposes:
Venture capital funds activity:

• Uniform income tax rate on carried interest of investment funds: both Israeli and foreign
• Exemption from VAT on carried interest in Israeli funds for both foreign and Israeli investors.
• Exemption from capital gains tax for foreign investing bodies and corporations on their direct high-tech investments, without limitation on investment volume and regardless of whether or not they operate in Israel.
• A fixed formula for calculation of VAT on management fees, based on the ratio between foreign and Israeli investors in venture funds.
• Classification of Israeli investors’ investment in venture capital funds as passive investments.

Merger and acquisition of Israeli companies:

• A series of reliefs in the process of acquiring companies and merging companies – which have already been approved and entered into force.

Acquisition of an Israeli company by a multinational company: 

• Establishing guiding principles for determining the value of intellectual property.
• Establishing guiding principles for determining the pricing method of R&D centers, and focusing on the treatment by senior staff officials.
• Establishing 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.
• Adopting the OECD’s Pillar 2 rules and establishing an incentive mechanism aligned with international standards.
• Adopting the unified global minimum tax model (QDMTT).

Return of employees from relocation:

• Setting guiding rules regarding the manner of allocation  of income from equity-based  compensation between Israel and abroad
• Granting an exemption from tax on income generated and accrued outside Israel.
• Establishing a credit mechanism for foreign taxes paid on income that is also taxable in Israel.
• Creating a green track for the transition from taxation of capital compensation pursuant to section 3I of taxation under section 102 of the Ordinance.
• At the same time, legislation is promoted to increase the certainty in determining residency for tax purposes – based on the number of days spent in Israel only.