Israel’s revamped high-tech tax plan puts foreign investors and global companies in the spotlight

A series of measures aimed at providing tax certainty in the high-tech industry are returning to the Arrangements Law, with a new draft expected to be published on Sunday. This comes after the high-tech chapter was initially removed from the Arrangements Law due to pressure from the Ministry of Justice, which argued that it was not technically feasible to prepare for the proposed changes.

Some in the high-tech industry speculated that the removal was linked to the Minister of Justice's desire to retaliate against the industry, which had been one of the main leaders of protests against the judicial overhaul.

High-tech office.

In the month since the high-tech chapter was removed from the draft, several meetings were held between representatives from the Ministry of Finance and the Ministry of Justice to facilitate its return. While the Treasury had considered pushing the changes through regular legislation, this would have been a lengthy process with uncertain success.

The main goal of the proposed changes is to increase tax certainty for international companies and foreign investors operating in Israel. The high-tech chapter, originally part of the Arrangements Law, was developed through a collaborative effort involving the Ministry of Finance, the Tax Authority, the Chief Economist, the Budget Division, and the Innovation Authority. Over the past six months, this team met with high-tech industry leaders and held several "round table" discussions, primarily focusing on encouraging foreign investment. This effort was driven by the recognition that the ongoing war, along with the judicial overhaul, has deterred many from investing in Israel, as evidenced by the sharp decline in venture capital investments in 2023 and 2024.

The proposed measures aim to improve certainty in Israel's tax environment, which is currently a disadvantage, especially in the context of mergers and acquisitions of local companies. "During the round table discussions, it became clear that tax certainty in Israel is low and deters many companies and investors. The main goal of the proposed measures is to strengthen the business environment, particularly in relation to tax laws," the draft chapter states.

One of the proposed steps is to expand the scope of tax benefits to cover transactions where the value ratio between the acquired company and the buyer is up to 1:19, meaning that the value of the acquired company is at least 5% of the buyer’s value. Previously, tax benefits were only granted for transactions where the ratio was 1:9, meaning the acquired company had to be at least 10% of the buyer’s value. This change aims to account for the sharp decline in company valuations, making acquisitions of smaller companies more attractive for tax purposes. The goal is to prevent the closure of startups and relatively small companies by creating tax incentives for their acquisition.

Another key provision addresses the reduction of tax barriers for private foreign investors to encourage them to invest in local companies. Currently, non-residents are exempt from capital gains tax only if the profit is not attributed to a "permanent establishment" they maintain in Israel. For example, if the profit comes from a fund in which the non-resident is invested, it is subject to capital gains tax. While investors can apply for a one-time exemption from the Tax Authority based on a pre-ruling, there remains uncertainty about the final tax amount. The new proposal seeks to grant a permanent exemption, similar to what is offered in most countries, providing greater clarity and confidence for investors.

Another significant change is aimed at international companies operating in Israel, which employ about a quarter of the country’s high-tech workforce at salary levels above the industry average. These multinational companies, such as Microsoft, Google, Apple, Intel, and Amazon, play a crucial role in fostering future entrepreneurs, as many of their employees go on to found startups. Currently, 515 such companies operate in Israel, employing 90,000 workers. These companies frequently compare the tax environments in different countries to assess the viability of their activities.

Due to the existence of multiple taxation methods for international development centers, there is currently a degree of uncertainty in Israel. Global companies are wary of changes to the pricing methods that might require them to pay taxes on their entire global profits, rather than just their local activities. Currently, tax amounts are determined through pre-ruling processes with the Tax Authority. To reduce uncertainty, it is proposed that the Tax Authority publish, within 60 days, an income tax circular detailing a "green route" for companies, providing certainty for those whose main activities are outside of Israel but who maintain R&D centers or make acquisitions in the country.

This issue is not unique to Israel, as there are global concerns that large companies, particularly software firms without production centers, evade full tax liability by only operating development centers in multiple countries.