Israel: Highlights of high-tech tax reform proposals
Preferential tax treatment for investment funds, R&D centers, and returning residents
The Israeli Ministry of Finance—together with the Israel Tax Authority (ITA) and the Israel Innovation Authority (IIA)—on November 2, 2025, introduced a comprehensive high-tech tax reform (“Reform”) aimed at revitalizing Israel’s high-tech sector, encouraging both foreign and domestic investment, and facilitating the return of Israeli professionals from abroad. A central objective of the Reform is to introduce clear rules, tax certainty, and targeted incentives, resulting in greater attractiveness for key players across the Israeli high-tech ecosystem.
The principal highlights of the Reform proposals, as announced, are described in further detail below.
Preferential tax treatment for investment funds
To attract greater investments to the Israeli high-tech sector, the Reform proposes tax benefits for Israeli and foreign fund managers in venture capital, private equity, and hedge funds, including:
- Reduced tax rate of 27% (plus up to 5% surtax) on carried interest for Israeli fund managers
- Value added tax (VAT) exemption for carried interest and reduced effective VAT rate for management fees
- Capital gains exemption for foreign investors on qualifying investments on Israeli high-tech companies, which would apply irrespective of whether the investor’s Israeli activity gives rise to a permanent establishment (PE), thereby significantly broadening the scope of existing exemption
Download the draft regulations (Hebrew) released for public comment.
Post-M&A integration and taxation of local R&D centers
The ITA has published Income Tax Circular 8/2025, which covers two primary areas:
- Local research and development (R&D) centers compensated with a cost-plus margin
- Sale of intellectual property (IP) post-acquisition and subsequent conversion to contract R&D
For a more detailed summary, read TaxNewsFlash.
Returning residents and relocated professionals
The Reform proposes favorable tax treatment and enhanced clarity for employees returning from abroad, including:
- Granting a tax exemption for income generated and accrued outside of Israel
- Establishing guiding principles for the allocation of income derived from equity-based compensation between Israel and abroad
- Establishing a credit mechanism for foreign taxes paid on income that is also taxable in Israel
- Publishing a “green track” pre-ruling allowing the transition to favorable Section 102 treatment for equity granted outside of Israel
Concurrently, legislation is being advanced to enhance certainty in determining tax residency, based solely on the number of days the individual is present in Israel.
KPMG observation
As the high-tech industry continues to serve as a cornerstone of Israel’s economic growth, the Reform represents a meaningful step toward enhancing the country’s global competitiveness in this area.
For more information or to provide input and comment to the draft regulations, contact a tax professional with the KPMG member firm in Israel:
Itay Falb | itayfalb@kpmg.com
Roni Sherman | rsherman1@kpmg.com
Ben Aronson | benaronson@kpmg.com