Israel’s elite military units built a tech powerhouse. Now the state wants a share.
A proposal targeting startup founders with intelligence backgrounds is igniting concerns over government overreach.
It all began with the near-mythical story of Gil Shwed leaving the Unit 8200 base in Glilot in the mid-1990s carrying a floppy disk that allegedly contained the foundations of what would become the firewall technology behind Check Point, one of the world’s largest cybersecurity companies and a cornerstone of Israel’s high-tech industry.
Since then, graduates of elite military intelligence and technology units have founded startups, listed companies on Nasdaq, sold businesses to global giants and amassed enormous fortunes, while helping build the outsized reputation of Israeli tech. That reputation has continued to attract investment even during two and a half years of war.
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Palo Alto Networks founder Nir Zuk and Wiz founder Assaf Rappaport.
(Photos: Reyan Preuss and Omer Hacohen)
Senior partners at leading American venture capital firms can recite the names and internal hierarchies of IDF technology units with remarkable fluency. They know the differences between the various divisions inside Unit 8200, understand what makes Unit 81 distinct, and can distinguish between Matzov and Mamram far better than most Israelis. In many cases, they invest millions in startups before the companies have a product or business direction, based largely on the founders’ military backgrounds. The first core of employees often comes from the same units as well. The role played in the U.S. by universities such as Stanford University or Massachusetts Institute of Technology is, in Israel, effectively played by the army.
The enormous wealth generated by graduates of military technology units has long captured the imagination of politicians, Defense Ministry officials and, naturally, the Tax Authority. Over the years, various proposals have surfaced to impose special royalties on startups founded by IDF veterans or require companies to allocate equity stakes to the state. The argument was that such companies are not fundamentally different from university spinouts, which are often obligated to pay royalties to academic institutions.
Yet companies commercializing university research pay royalties only when the technology was developed within the institution itself, not retroactively. Previous attempts to impose military-related royalties were rejected, rightly so, largely because it is nearly impossible to determine exactly when a startup idea was conceived or developed, how such rules could be enforced, and because of fears that government intervention would deter private investors.
That is before considering another reality: the IDF already benefits from some of the country’s brightest minds at minimal cost for years, as many soldiers in advanced technological roles serve extended mandatory and career service.
Now, however, the Tax Authority is considering what may be its most controversial proposal yet: taxing startups founded by graduates of elite technological units for up to a decade after their military service, even if the companies are incorporated abroad.
The idea reflects growing anxiety within the government over a trend that has accelerated sharply since 2023: startups leaving Israel.
After three years of deep political and security instability, not only are entrepreneurs relocating abroad, many of their companies are as well. At the beginning of the year, data revealed to Calcalist showed that only about half of the startups founded in 2025 were incorporated in Israel. The remainder were registered in the U.S.
Between 2018 and 2022, roughly 75%-80% of Israeli-founded startups were incorporated domestically, while only around 20% chose the U.S. Since the judicial overhaul crisis erupted in early 2023, followed by war, that pattern has shifted dramatically.
According to data from Meitar Law Offices and valuation firm S Cube, the share of startups incorporated in Israel fell to 65% in 2023, down from 74% in 2022. In 2024, the figure dropped further, with half of all startups registering abroad. A modest recovery began toward the end of 2025, with 52% of new startups once again choosing Israel.
Where a startup is incorporated has enormous implications for tax revenues, particularly during acquisitions. When companies registered abroad are sold, Israel loses out on substantial tax income from major exits such as those involving Wiz, CyberArk and Armis.
The Treasury and Tax Authority clearly understand the problem. Critics argue, however, that instead of making Israel more attractive for entrepreneurs, policymakers are considering measures that resemble punitive capital controls.
“Since when do you tax a person based on what they did in the past rather than what they do today?” Yair Benjamini, a veteran lawyer specializing in Israeli and international taxation, told Calcalist. “Instead of thinking about how to make Israel a more attractive place from a tax perspective in order to bring startups back, they are thinking about how to make things even harder.”
The proposal under consideration appears fraught with legal and practical complications. It could conflict with existing tax treaties between Israel and the United States, as well as with principles of freedom of occupation. If a startup is already incorporated and taxed in the U.S., imposing additional Israeli tax residency could violate bilateral agreements. If applied prospectively, critics argue it could amount to government interference in entrepreneurs’ choice of where to establish a company.
There are also obvious enforcement questions. Which military units would qualify? Would the law apply only to elite intelligence graduates, or to anyone who served in those units, including administrative staff, drivers or cooks?
Critics warn the proposal could also create unintended incentives. High school students pursuing STEM tracks that traditionally lead to elite technology units may choose shorter military service elsewhere if they fear future restrictions on entrepreneurship.
For now, no formal bill has been published. The issue surfaced publicly during a recent panel discussion at Bar-Ilan University attended by Tax Authority Director Shai Aharonovitch.
It is possible that, at this stage, the proposal is intended more as a warning shot, an attempt to discourage entrepreneurs from incorporating abroad or at least force them to reconsider.
Still, few dispute the underlying concern. Policymakers are increasingly alarmed by the gradual migration of Israeli high-tech activity overseas, a trend that could intensify further as the shekel continues strengthening against the dollar, making Israeli labor significantly more expensive.
The question is whether pressure and taxation are the right tools.
As Benjamini put it: “It is always better to work with the carrot than with the stick.”
