Tax Authority seeks tighter grip on offshore startup exits
Bill aims to attribute foreign IP gains to Israel under expanded residency rules.
The Ministry of Finance only learned about it from the media, but the Tax Authority already has a draft bill aimed at increasing Israel’s tax revenue from intellectual property registered outside the country. The Ministry of Finance says it cannot comment on the details of the proposal, as it has not yet received the draft, but it criticizes the way the process is being handled. In its view, the proposal is not sufficiently developed and was not preceded by structured inter-ministerial work.
Despite tensions between the two bodies, there is some agreement in principle. The Tax Authority also acknowledges that comprehensive economic analysis will be conducted before legislation is advanced, and the Ministry of Finance similarly agrees that the issue of taxing intellectual property developed with the state’s contribution merits discussion.
The Tax Authority’s draft proposal focuses on graduates of IDF technological units who register intellectual property abroad within ten years of completing their military service. Under the proposal, such graduates, or companies founded by them, could be classified as “Israeli residents” for tax purposes, even if the company is incorporated abroad and even if the individual has relocated overseas.
The Authority argues that the measure could generate billions of shekels in additional tax revenue over time, particularly from major exits, by attributing capital gains from intellectual property sales to Israel. It also notes that recent exits worth tens of billions of shekels have generated limited tax revenue for the state. In addition, the proposal is expected to reduce ongoing disputes between the Tax Authority and taxpayers over company and entrepreneur residency status.
The Authority emphasizes that the intention is to tax only intellectual property developed as a result of knowledge acquired during military service. According to this approach, an IDF technological unit graduate who moves abroad and becomes an employee would not be required to pay additional tax in Israel. The Authority argues that while both cases could be linked to knowledge gained in state service, it is easier to incorporate a company abroad than to emigrate, and the resulting loss of tax revenue is significantly greater. It describes the military service context as a “unique anomaly.”
The Tax Authority believes the bill is unlikely to face legal obstacles, although it acknowledges that in some cases it may be constrained by existing tax treaties, and stresses that double taxation would be avoided. If passed, the Authority says it may be necessary to update existing treaties or negotiate new agreements.
The Tax Authority is optimistic that the bill could advance in the current Knesset, despite its imminent dissolution. The Ministry of Finance, however, considers this scenario unrealistic.
