Israel’s High-Tech Tax Reform: Restoring certainty for funds, companies, and returning talent

Important Corporate Tax Update

Israel’s High-Tech Tax Reform: Restoring certainty for funds, companies, and returning talent

Context
In early November, the Ministry of Finance, the Tax Authority and the Innovation Authority unveiled a reform package meant to reduce friction and shorten decision cycles in fundraising, M&A and mobility of tech talent.

Core measures

Funds and carried interest
A flat 27% rate for Israel-resident GPs, VAT relief on carry, and a lighter 10% rate for non-resident GPs. The aim is to harmonize treatment across investor pools and end perennial “employment-type” disputes on carry.
Investor treatment
Investors allocating to multiple VC funds are clarified as passive investors, taxed under capital-gains rules rather than employment-like income. That aligns market practice with predictable outcomes.
Returning employees and equity
Employees returning to Israel may split the tax on stock options so that Israel taxes only the value accrued after their return. In qualifying cases, equity is treated as capital gains rather than salary, easing double-tax risks and removing a practical barrier to relocation back to Israel. Residency tests are also clarified, with targeted relief in the re-entry period.
M&A and IP
An 85% safe-harbor for allocating enterprise value to Israeli IP on exits, plus faster liquidity procedures for shareholders. This cuts diligence noise, sets clearer expectations with the authority, and accelerates time-to-close.

Practical implications

Boards/CFOs: Update tax models, PPA templates, and term sheets to reflect the safe-harbor and quicker ruling pathways.
HR/Legal: Map grants and vesting, align payroll, and communicate re-entry planning to returning employees.
GP/LPs: Re-price carry waterfalls and side-letters to the new rates and VAT position.