What happened?
On March 15, 2026, the Knesset Finance Committee approved the Bill to Encourage and Incentivize Research and Development, as part of the legislative process leading up to the approval of the 2026 State Budget and the Economic Plan.
What is the purpose of the Bill?
The Bill establishes a tax incentive framework intended to preserve Israel’s attractiveness as a destination for investment and business activity by high-tech companies that make a significant contribution to the Israeli economy.
The incentive framework is designed to strengthen Israel’s position as one of the world’s most attractive jurisdictions for technological activity and, alongside its high-quality human capital and innovative technology ecosystem, to reinforce Israel’s ability to compete in the global technology arena. This is particularly relevant in light of Israel’s adoption of the OECD Pillar Two model and of the domestic minimum top-up tax mechanism (QDMTT) under the Minimum Tax for a Multinational Group Law, 5785-2025, which was published in the Official Gazette on December 31, 2025.
What does the new law provide?
Under the Bill, eligible companies will be entitled to a tax credit in respect of their research and development expenses. The applicable credit rate increases as R&D expenditure rises, thereby encouraging companies to expand their operations in Israel, increase technological employment and deepen their investments in Israel.
Companies that are unable to utilize the tax credit within three years may, in certain circumstances, be entitled to receive the unused amount as a cash grant.
To whom does the new legislation apply?
The Bill applies to an Israeli-resident company that has an “industrial enterprise” (as defined in the Law for the Encouragement of Capital Investments) and qualifies as an “eligible company” within an “eligible group”, namely a group in which, throughout the relevant tax year, the eligible companies meet all of the following cumulative conditions:
- The aggregate preferred/technological income of all companies in the group is at least NIS 100 million.
- At least 55% of the total income of the Israeli companies consists of preferred/technological income, including income from a marketing intangible.
- The group employs at least 200 full-time employees, or an average of 200 employees over the preceding three years, provided that in each of those years at least 150 employees were employed.
What is the amount of the tax credit?
The amount of the tax credit depends on the location of the company, as follows:
- For a company located in Development Area A or a Special R&D Enterprise: 25% of qualifying R&D expenses up to NIS 1.05 billion (the “Threshold”), and 30% of qualifying R&D expenses above the Threshold.
- For a company located in another area (an “R&D Enterprise”): 3% of qualifying R&D expenses up to the Threshold, and 4% of qualifying R&D expenses above the Threshold.
Importantly, the credit will not be treated as part of the consideration for VAT purposes. As a result, no indirect tax will be imposed on this benefit.
What are qualifying R&D expenses?
The credit is available in respect of “qualifying R&D expenses”. In general, these include, among other things:
- Salary expenses for R&D employees (excluding equity compensation), including related social benefits.
- Depreciation expenses in respect of productive assets used for R&D.
- R&D expenses relating to equipment and consumable materials.
- 65% of R&D expenses paid to an Israeli subcontractor that is not a “related party”.
- 65% of R&D expenses paid to a foreign subcontractor for clinical and toxicological trials performed abroad that could not be conducted in Israel, as well as other activities of a type to be prescribed by the Minister of Finance that could not be carried out in Israel.
- R&D expenses paid to an Israeli subcontractor that is a related party, provided that such expenses themselves qualify as qualifying R&D expenses and the group to which the subcontractor belongs did not claim a credit in respect of those expenses under the law.
- Overhead expenses (other than rent or depreciation of buildings) up to a ceiling of 20% of the salary cost of R&D employees, including the salary cost of a related-party subcontractor.
- Additional categories of R&D expenses incurred in Israel, as may be prescribed by the Minister of Finance with the approval of the Knesset Finance Committee.
How can a grant be obtained instead of a tax credit?
An eligible company that is entitled to a tax credit but has not utilized the credit by the end of the third tax year following the year in which the R&D activity took place may be entitled, instead of the unused credit, to receive the full unused amount as a cash grant, as follows:
- The company must file a notice with the Israel Tax Authority (the “ITA”), on a prescribed form, during the fourth year following the year of the R&D activity.
- The grant will be paid within 90 days from the date the notice is filed.
- The grant will be paid by the ITA by crediting the bank account designated by the company.
- The company may notify in advance that it wishes to receive a grant instead of a tax credit.
- The grant will not be subject to VAT.
What is the procedure for obtaining the tax credit?
To realize eligibility for the tax credit, the group and the company should proceed through the following stages:
- Appointment of a representative company: all companies in the group must authorize one company to submit the reports and act as the taxpayer on behalf of all of them (the “Representative Company”).
- Approval by the Israel Innovation Authority (the “IIA”): the Representative Company should file an application for classification of the R&D expenses within 24 months after the end of the year in which the R&D activity took place. The IIA should respond within 150 days.
- Filing of a central report: the Representative Company must file a dedicated report with the ITA setting out the group’s details, the qualifying R&D expenses incurred by each company during the tax year, the amount of the tax credit to which the group is entitled, and the manner in which the credit is allocated among the group companies. The report must be accompanied by the power of attorney and the approval of the IIA described above.
- The tax credit may be claimed under either of the following alternatives: (i) against income tax, in respect of income derived in the tax year following the tax year after the year of the R&D activity; or (ii) against the domestic minimum top-up tax (QDMTT), namely the tax imposed under the Minimum Tax for a Multinational Group Law (Pillar Two), in respect of income derived in the year of the R&D activity.
- The ITA will review the filings and issue a notice specifying the final amount of tax credit due to each company.
- This notice is deemed to be an assessment and may therefore be challenged or appealed in accordance with the ordinary tax procedures.
Amendment to the Angels Law
As part of the Bill, an amendment is made to the Angels Law (the Law for the Encouragement of High-Tech Industry (Temporary Provision), 5783-2023). The amendment authorizes the Minister of Finance to prescribe regulations under which, with respect to an amount paid by an acquiring company for the purchase of means of control in a qualifying company during the 2023-2026 tax years, the acquiring company may elect to receive a tax credit instead of the deduction otherwise available under Section 5 of the Angels Law.
The first regulations on this matter are to be enacted by June 30, 2026.
When will the law enter into force?
The law will apply to qualifying R&D expenses incurred from the tax year beginning on February 1, 2026 onwards.
How can we assist?
Our Tax Department is available to assist in analyzing the implications of the new law and in helping companies assess whether they satisfy the relevant conditions for eligibility for the incentives.
Disclaimer
The above content is a summary provided for informational purposes only and does not constitute legal advice. It should not be relied upon without obtaining further professional legal counsel.
