What high-tech tax breaks did Justice Minister Levin block at the last minute?

The question of who removed the sections on high-tech taxation reform from the Arrangements Law at midnight last Thursday, and why, remains unanswered. However, Calcalist has obtained the details of the now-delayed proposal. The main goal of the proposed changes is to increase tax certainty for international companies and foreign investors operating in Israel.

According to information received by Calcalist, it was the Ministry of Justice that compelled the Ministry of Finance to withdraw these sections at the last minute, citing insufficient time to complete the necessary work within the given time frame. The Ministry of Finance hinted at this in its response to the disclosure by Calcalist: "Minister Smotrich views the high-tech industry as a critical pillar of Israel's economy. Under his leadership, significant resources and substantial budgets have been allocated to the high-tech sector, even in the context of the war budget, where consolidation measures required expense reductions. The minister’s policy will continue in the upcoming budget, with investments in high-tech budgets and incentives. Unfortunately, due to scheduling constraints, the Ministry of Justice has delayed these efforts, but we intend to push forward with these laws to ensure their approval along with the state budget."

Some in the high-tech industry speculated that this may have been an act of retaliation by Justice Minister Yariv Levin against the sector, which led protests against the judicial reform initiated by him in 2023. The Ministry of Justice refrained from commenting, attributing the delay to the ongoing war in the north. Meanwhile, the Treasury says it will attempt to pass the reforms through regular legislation, a process expected to take far longer than the expedited track of the Arrangements Law.

The high-tech-related sections intended for the Arrangements Law were the result of collaboration between the Ministry of Finance, the Tax Authority, the Chief Economist, the Budget Division, and the Innovation Authority. The team held several meetings with high-tech executives over the past six months, focusing primarily on encouraging foreign investments. This is seen as crucial given the prolonged war and, prior to that, the judicial reform, both of which have deterred many investors, as evidenced by the drop in venture capital investments in 2023 and 2024.

The proposed reforms aim to enhance certainty in Israel’s tax environment, which currently suffers from a lack of clarity, particularly in mergers and acquisitions of local companies. “It emerged during roundtable discussions that Israel’s tax uncertainty deters many companies and investors. The primary goal of the proposed measures is to improve the business environment, particularly regarding tax laws,” the proposal states.

One operative step involves expanding the scope of tax benefits to apply to transactions where the acquired company’s value is at least 5% of the buyer’s (a ratio of 1:19), compared to the current requirement of 10% (1:9). This adjustment reflects the reality of steep valuation declines, making acquisitions of smaller companies less appealing for tax purposes. The change is expected to help save startups and smaller companies by creating a tax incentive for their acquisition.

Another proposal seeks to lower tax barriers for foreign private investors, encouraging them to invest in Israeli companies. Currently, non-residents are exempt from capital gains tax only if the profit is not attributed to a "permanent establishment" in Israel. For example, if a non-resident earns profits through a fund, those profits are subject to capital gains tax. Investors can apply for a spot exemption via a pre-ruling with the Tax Authority, but uncertainty about the tax liability remains until the last moment. The Treasury now proposes granting a permanent exemption, aligning with the tax systems of most other countries.

A further proposed change addresses international companies operating in Israel, which employ around a quarter of the country's high-tech workers, often at salary levels above the industry average. These multinational companies serve as vital incubators for future entrepreneurs, with many alumni from companies like Microsoft, Google, Apple, Intel, and Amazon founding startups. Currently, 515 such companies operate in Israel, employing 90,000 workers. These companies assess their global operations by comparing tax environments across countries.

Given the varying tax methods applied to international development centers, Israel's current tax framework creates uncertainty for global companies, which fear that changes in pricing methods could force them to pay taxes on their global profits, not just local activities. Currently, tax liabilities are determined through pre-ruling processes with the Tax Authority. To mitigate uncertainty, the Treasury proposes that the Tax Authority publish an income tax circular within 60 days outlining a “green route” for companies. This would provide clarity for firms whose primary activities are outside Israel but maintain local R&D centers. This issue is not unique to Israel, as there are global concerns that large companies—particularly software firms without production centers—are avoiding paying full taxes by only operating development centers in multiple countries.