Israel is introducing a tax reform intended to reverse the tech brain drain and encourage local and foreign fund investments in the high-tech sector, as the country seeks to catalyze the economy’s largest and fastest growth engine following the two-year war with the Hamas terror group.
The Finance Ministry, together with the Israel Tax Authority and the Israel Innovation Authority, on Sunday presented a set of tax benefits for investors in Israeli high-tech companies, as well as regulatory incentives for acquiring or merging with startups.
The reform is intended to provide tax certainty for multinational companies, remove investment barriers for foreign investors, incentivize a rapid return of Israeli entrepreneurs and high-skilled tech workers from abroad, and foster growth of the Israeli high-tech industry.
“Israel is already one of the most attractive countries in the world for high-tech investment, due to its tax rates and high-quality human capital,” said Finance Minister Bezalel Smotrich. “From now on, it will also be a country known for the simplicity of its tax processes and its regulatory certainty.”
“We understand that Israeli founders and entrepreneurs need to be close to their customers and are relocating, but with the end of the war, we are calling on Israelis to return home and are preparing an environment so that they will not think twice about whether it is worthwhile,” said Smotrich.
Israel is ranked as the fifth-largest hub in the world for startup fundraising after San Francisco, New York, London, and Boston. However, investments in Israeli startups this year continue to be concentrated in two sectors — cybersecurity and enterprise software — signaling a lack of dispersion across new technology areas and a decline in innovation diversity.
Finance Minister Bezalel Smotrich (right) speaks at a press conference in Jerusalem on November 2, 2025. (Courtesy of Finance Ministry)
The tax reform comes as the Israel Innovation Authority has been warning about alarming indicators, questioning whether the local tech sector will be able to maintain its status as a competitive growth engine in the country’s economy.
The tech sector is facing stagnation in employment growth and output, a decline in the formation of new startups, and a sharp drop in fundraising by Israeli venture capital funds. From the outbreak of war on October 7, 2023, and until July 2024, the number of high-tech employees who departed Israel for long-term relocation increased and stood at about 8,300 people, or about 2.1 percent of the local high-tech workforce.
High-tech output, accounting for about 17% of the country’s GDP and more than half its exports, has remained unchanged for two years, according to the Israel Innovation Authority. The high-tech sector’s main contribution to the Israeli economy stems in large part from taxes collected from the workers in the sector.
Tech employees pay more than a third of all tax income collected, which underpins the vital importance of the industry as a key catalyst for growth of the country’s war-battered economy.
“Israel is renowned for its innovation capabilities; however, in order to maintain its status as a global high-tech power, it must be not only creative and technologically advanced, but rather also a place where it is easy, predictable, and worthwhile to do business,” said Israel Innovation Authority CEO Dror Bin.
“The reform is a deep structural change that continues to establish Israel as a strategic target for multinational companies, investment funds, and entrepreneurs,” Bin noted.
Avi Noiman, senior tax partner at PwC Israel. (Courtesy)
As part of the reform, both Israeli and foreign venture capital and private equity funds, as well as hedge funds, will be subject to a uniform income tax rate of around 27% on so-called carried interest, down from the current rate of about 50%. Carried interest is a fund manager’s share of profits realized from the fund’s investments.
Other benefits are exemption from VAT payments on carried interest in Israeli funds for both foreign and Israeli investors.
In addition, foreign investing bodies, including venture capital and hedge funds, will be exempt from capital gains tax on their direct high-tech investments. Until now, the exemption hinged on certain conditions of not having a so-called “permanent establishment” in Israel. For example, if a foreign resident’s investment is managed from or made by a representative in Israel, the capital gains tax exemption would not apply.
“The reform removes a lot of regulatory and other tax barriers for foreign funds, especially hedge funds, which have been a deal breaker for investments in Israel or having representatives in the country,” said Avi Noiman, a senior tax partner at PwC. “Different types of investors from pension funds, family offices, high-net-worth individuals, and international corporations were often avoiding investing due to the uncertainty and exposure to tax assessments.”
As part of the reform, Israeli employees returning from relocation abroad will be granted an exemption from paying taxes on income earned and accrued outside Israel. There will also be a mechanism to offset taxes paid abroad against taxes due on income in Israel, as well as guidelines for the taxation of options-based compensation.
