On October 28, 2026, the Israel Tax Authority issued a notice extending the validity of certain tax legislation under Section 38 of Basic Law: The Knesset, which provides for legislation to remain in force during an election period.
The extension applies, among other things, to the period for which the Law for the Encouragement of Knowledge-Intensive Industry (Temporary Order), 5783-2023 (the “Law”), remains in effect. That period has been extended to February 10, 2027, with implications for the exemption under Section 6 of the Law for interest paid to foreign financial institutions.
Section 6 provides a tax exemption for interest that a qualifying company pays to a nonresident financial institution on a loan from that institution, subject to the conditions set out in the Law. The borrowing company is therefore not required to withhold tax on those interest payments.
Eligibility Requirements for the Interest Tax Exemption
- The borrower must be a “qualifying company” as defined in the Law: a Preferred Company with a Technological Enterprise.
- The borrower’s technological income for the tax year preceding the loan term must exceed NIS 30 million.
- The lender must fall within the statutory definition of a “Non-Resident Financial Institution,” which includes banks, institutional investors and licensed credit providers, among others. A foreign lender, such as a bank or debt fund, may qualify if it carries on activities comparable to those of a financial institution listed in the Law; is resident in a country with which Israel has a tax treaty, and neither it nor any related party has a corporation or permanent establishment in Israel; and is in the business of making loans in substantial amounts.
- The loan amount advanced in cash must be at least US$10 million.
- The loan proceeds must be used to finance the borrower’s business activities, including acquisitions. No “Special Relationship” may exist between the borrower and the lender during the loan term or in the four years preceding it.
- The parties must approve the loan terms, and the loan must be disbursed in full to the borrower, while the temporary legislation remains in effect.
- The exemption is also subject to the Law’s other conditions and requirements, including those relating to employees and payroll costs in Israel, notification to the assessing officer and certifications by a certified public accountant.
Practical Implications
The extension gives companies considering financing from foreign financial institutions additional time to explore whether their interest payments could qualify for the exemption under Section 6 of the Law.
Companies should assess, among other things, whether both they and their prospective lenders meet the statutory requirements. They should also ensure that the loan terms are approved and the loan proceeds are disbursed to them in full by February 10, 2027.
Our firm has extensive experience assisting Israeli companies and foreign financial institutions in obtaining advance tax rulings from the Israel Tax Authority confirming their eligibility for this tax benefit.
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.
