Israel launches major high-tech tax reform to boost competitiveness
New rules slash taxes on success fees, clarify policies for returning Israelis, and streamline M&A taxation.
The Ministry of Finance, the Tax Authority, and the Innovation Authority announced on Sunday a comprehensive reform of Israel’s tax policy for the high-tech sector. The reform introduces legislative changes and procedural updates in several key areas, including venture capital funds, mergers and acquisitions, and tax rules for employees returning from relocation.
One of the major changes provides clarity on the taxation of success fees, payments that investors receive when their investments generate returns, such as during a company sale. Until now, the theoretical tax rate on these fees was about 50%, as they were categorized as income from labor. In practice, the Tax Authority had reached individual settlements with fund managers after lengthy negotiations, creating uncertainty about the applicable rate.
Under the new framework, venture capital and hedge fund managers residing in Israel will pay a reduced tax rate of 27% on success fees, while those residing abroad will pay just 10%. Fund managers will also receive additional benefits, including VAT exemption on success fees and a 25% tax rate on capital they are required to invest in their own funds (the so-called “seriousness fee”).
The reform also grants benefits to investors in venture capital funds. Previously, individuals investing in multiple funds were often classified as earning “personal income,” meaning their investments were treated as active rather than passive. Now, such investments will be treated as passive, requiring only capital gains tax, regardless of the investor’s profile. This clarification does not require new legislation.
Another key group to benefit are Israeli employees returning from abroad. Until now, returnees were required to pay full income tax, around 50%, on stock options granted abroad that vested after their return. The Tax Authority and Ministry of Finance determined that this policy discouraged Israelis from coming back to the country.
Under the reform, returning Israelis will be able to classify such options as capital gains rather than salary, lowering the tax rate to 25%, under Section 102 of the Income Tax Ordinance.
Additionally, employees who relocate back to Israel will be able to pay tax only on the appreciation that accrued after they returned. For example, an employee who received an option from a U.S. company that vested over six years but moved back after five will pay full tax only on the value gained during the final year in Israel.
Finance Minister Bezalel Smotrich hailed the reform as a “tremendous tax reform, a dramatic day for the Israeli economy.” Innovation Authority CEO Dror Bin struck a more measured tone, calling it “a good and necessary reform that will lead to greater success for Israeli high-tech.”
The reform also includes new guidelines for multinational companies operating R&D centers in Israel. Until now, the share of profits Israel could tax from locally developed software and IP was unclear, often left to company declarations that the Tax Authority did not challenge. Now, clear rules will be established to ensure transparency and consistency.
When Israeli high-tech companies are sold to foreign firms, the valuation of intellectual property (IP), such as patents, code, and technology, has often been a point of dispute, as IP-related gains are taxed at a lower rate. The new framework sets a fixed valuation benchmark, allowing companies to value their IP at 85% of the total sale price. In the past, some firms claimed their IP accounted for more than 85% of company value; the new rule represents a compromise.
Dror Bin added in an interview with Calcalist: “The days when human capital alone was enough are over. The world has changed, there are many innovation centers now competing for startup capital. Our tax policy is good, but it lacks transparency, certainty, and speed. This reform is about creating clarity, not spending money.”
He also noted that many Israelis working abroad terminate residency to avoid taxes. Going forward, tax residency will be determined solely by days spent in Israel, and returning Israelis will be exempt from paying taxes on foreign income for their first two years back in the country.
Venture capitalists also welcomed the changes. Arik Kleinstein, founding partner at Glilot Capital, said: “We’ve been waiting for this reform for a long time. It finally creates certainty and fairness for investors. Until now, there was discrimination against Israeli investors, this reform fixes that.”
