Israeli Tax Law Stalemate Leaves Tech Giants in Regulatory Fog

The implementation of "Pillar Two," a global minimum tax mechanism developed by the OECD, is stalled in the Israeli Knesset's Finance Committee. This tax imposes a 15% effective corporate tax rate on multinational corporations with revenues exceeding 750 million euros. Although the law was approved by the Knesset a year ago and is set to take effect in 2026, the necessary supplementary regulations for its practical application have not yet been passed due to opposition from lawmakers.

Opposition members are reportedly conditioning their approval of the regulations on the release of approvals for Section 46 tax credits for approximately 300 to 40 non-profit organizations. These approvals have been delayed in the committee due to opposition from ultra-Orthodox parties. Professionals at the Ministry of Finance warn that this delay creates regulatory uncertainty for technology companies operating in Israel and could harm Israel's standing with the OECD and its attractiveness for high-tech investments. The ministry estimates that around 150 multinational companies are affected by this legislation.

Finance Ministry officials have indicated that a delay in obtaining "qualified" status by the end of 2026 could force companies to make accounting provisions in their financial statements, potentially signaling to investors that there is a risk the tax breaks may not be approved. They also noted that late passage of the regulations could lead to unnecessary complexity and retroactive corrections to financial reports in 2027. Last year, the Ministry of Finance advanced the adaptation of Israel's tax system to global standards and the adoption of the OECD's minimum tax mechanism, part of the OECD's BEPS initiative aimed at ending tax competition between countries.

The current tax standard in Israel is 23%, but many multinational corporations have benefited from reduced rates of 6% to 12% under the Law for the Encouragement of Capital Investments. Under the new Pillar Two mechanism, if a multinational company pays less than a 15% effective tax rate in Israel, the Israel Tax Authority will collect a "supplementary tax" to bring the total to 15%. If Israel does not collect this difference, the corporation's home country would collect it. The adoption of this rule ensures that tax revenues remain in Israel.

Ministry of Finance officials emphasize that finalizing the legislation through regulations is crucial for business certainty and warn that prolonged delays in the Finance Committee could significantly impair Israel's ability to compete for technology investments globally. A primary concern among professionals is the timing, as Israeli legislation needs OECD approval, a process that takes months. Any further delay could prevent Israel from receiving international recognition in time, leaving international companies uncertain about tax payments and reporting for the upcoming tax year. This could result in costly bureaucracy, reduced attractiveness for R&D investments, and short-term revenue losses for Israel.