Israel Tax Telegraph - New Year 2025/26 - Harris Consulting @ Tax Ltd

Israel Tax Telegraph – New Year 2025/26

Dear Clients and Friends,

Please find below the New Year edition of our Israeli Tax Telegraph. Please contact us if you wish to discuss any Israeli / international matter.

Tax Telegraph topics:

Israel’s R&D Edge Over Other OECD Countries
Negotiating a Wartime M&A Deal – lessons from $32bn Google-Wiz deal apply to small deals too.
Gas Superpower Israel – Nearly Final
US: How the One Big Beautiful Bill Impacts Americans in Israel.
UK Rayner Affair: Avoidance vs. Evasion – Was important for UK ex-Deputy Prime Minister.
Court Rejects Tax Authority Catch 22 – justice for the taxpayer prevailed.

As always, consult professional advisors in each country at an early stage in specific cases.

Wishing you a Happy New Year in peaceful circumstances soon.

HCAT – Harris Consulting & Tax Ltd,

Email: [email protected] Tel/WhatsApp: +972-54-644-9398

1. Israel’s R&D Edge Over Other OECD Countries

The OECD issued earlier this year its 2025 review of R&D tax incentives across its member countries. How does Israel as the start-up nation compare?

Background
According to the OECD, tax incentives are a widely used and economically significant innovation support policy instrument in most OECD member countries and several other major economies.

Thirty-four out of 38 OECD countries granted tax relief for R&D expenditures in 2024. Israel is one of the 4 countries that don’t – why is that? Read on.

Tax Credits for R&D:

Take the UK which is keen to catch up with Silicon Valley and the start-up Nation. The UK currently allows an R&D credit of 20% of approved R&D expenditure. So if a UK company pays 25% corporation tax, but claims a 20% tax credit, that leaves only 5% corporation tax on profits up to the amount of approved R&D expenditure.

The OECD says SMEs (small and medium size enterprises) receive a more favorable tax treatment for R&D expenditure in several OECD countries. For example, Australia and Iceland provide enhanced tax credit rates, while Canada and the United States restrict refund provisions to eligible SMEs. In 2024, profitable SMEs in the OECD area can, on average, expect to receive a 19% tax subsidy on R&D expenditures, more than large profitable firms (16%).

The OECD reports that Israel, Costa Rica, Latvia and Luxembourg were the only four OECD countries that did not provide expenditure-based R&D tax incentives in 2024.

The problem:

The problem is that start-ups don’t need R&D tax breaks. In the first few years, before sales begin, start-ups use investors’ money mainly to pay salaries to R&D techies, thereby making losses. Unfortunately, around 80% of startups fail to get their technology to the sales stage. The other 20% or so do start selling and can set off initial losses against any resulting profits for the next few years.

So the real challenge is to get a startup to the selling stage.

The Israeli approach:

Israel supports start-ups by providing R&D cash grants through the Israel Innovations’ Authority (IIA) which supplement investors’ money regardless of profitability. The grants are repayable by way of a royalty out of sales if sales materialize. Repayment of 3-6 times is required if ownership of the technology is transferred out of Israel.

The Israeli R&D grant rate is typically 50% of approved R&D expenditure (see below). There also special R&D support programs. By contrast, the OECD reports that the average subsidy for SMEs with no profits is 16% on average and 13% for large firms. More recently, the IIA has introduced the Israel Startup Fund program

The Israel Startup Fund Program

The fund provides non-dilutive investment and requires matching funds from private investors. By investing in companies selected to receive funding from the Innovation Authority, the fund aims to mitigate the private investors’ inherent risk.

Which Israeli companies?

The incentive program assists Israeli startup companies in their PRE-SEED, SEED, and ROUND A stages.

Companies that submit their applications to one of the Fund’s three programs will undergo a due diligence process conducted by the IIA’s team of technology experts. This process aims to provide private investors considering investing matching funds with both risk mitigation for their investment and assurance of the selected companies’ technology quality and leadership team’s capability to successfully execute their proposed ventures.

How big are the grants?

Pre-Seed companies – The IIA may participate in the Pre-Seed investment round with a grant covering 60% of the investment round amount, up to a total grant of NIS 1.5 million.

Seed companies – The IIA may participate in the Seed investment round with a grant covering 50% of the investment round amount, up to a total grant of NIS 5 million.

Round A companies – The IIA may participate in the Round A investment round with a grant covering 30% of the investment round amount, up to a total grant of NIS 15 million.

Companies meeting the conditions of a preferred company (where at least one of the main entrepreneurs is from an underrepresented population in high-tech, such as Arabs, Ultra-Orthodox, and women, or whose main activity is based in Israel’s periphery) will receive an additional 10% on the grant, raising the maximum grant amount to NIS 1.65 million, NIS 5.5 million, NIS 16.5 million (in Israel’s periphery) respectively.

For more information on criteria and conditions of the IIA Startup Fund see: https://innovationisrael.org.il/en/programs/startup-fund/#route_conditions

Concluding remarks:

The October 7 war is stimulating the Israeli tech sector to innovate even more. Techies are called up to reserve duty but many still work part of each day (or night). The IIA is to be commended for its support of the Israeli tech start-up sector.

As always, consult professional advisors in each country at an early stage in specific cases.

2. Negotiating a Wartime M&A Deal

The war has dampened M&A (exit) activity in Israel a bit, but deals are still being done. The recent Wiz acquisition by Google for $32 billion confirms that.

We discuss a few points based on recent experience. Our remarks are potentially relevant to international M&A deals of all sizes in hitech and low tech.

Every negotiator has their own style. Here are a few tips to consider incorporating in your style.

First, decide who are your negotiators.
Second decide your valuation (price) range.
Third, a letter of intent / term sheet and a non-disclosure agreement are needed when things get serious, before the main agreement.
Fourth, prepare everything else and everyone on the M&A team and in the due diligence data room – financial, contractual and business items.

War Issues:

Typically, agreeing the price valuation is the main sticking point.

In Israel there is the added complication of the October 7 war. Is it business as usual in Israel? What do potential sellers and buyers need to consider?

For hitech start-ups the motive in an M&A deal is generally to develop something good and sell it to a multinational group with better marketing abilities. For the multinational group, the motive in an M&A deal is often to avoid falling behind its competitors with least risk.

The October 7 war is problematic because the war represents a risk factor. Even if the buyer intends to acquire Israeli technology and lay off the Israeli work force, that is not the end of the story.

Technological development and supplies from Israel may become doubtful for an unknown time period. Some Israelis are still evacuated, many are drafted as reservists to the IDF, not all airlines are flying to and from Ben Gurion airport. The war has already lasted over 600 days, so the 6 Day War of 1967 is a distant memory.

On the other hand, not all start-up personnel are drafted to the IDF. And some are able to work remotely or part time at different hours of the day. Working nights is fine if you work with others in the US which is 7-10 hours behind Israel.

The art of the wartime deal:

So how is an Israeli start-up ripe for exit (M&A) valued and how does the war affect the price valuation?

What we are seeing at present is extensive use of earn-out clauses in Israeli M&A deals. That means part of the agreed purchase price is conditional on business as usual and isn’t paid if something goes wrong. That way all sides may be satisfied. Israeli sellers may assume nothing will go wrong and that the war will soon end. The buyer knows the purchase price may be adjusted downwards if there is a period of instability due to the war. Moreover, if this is a cash deal using borrowed money, the buyer’s source of finance might be reassured by an earn-out clause to limit the war risk.

In practice, the war presents greater inducement to pay for an M&A deal with share consideration rather than cash, i.e. shares/stock of the buyer. This is more likely if the buyer’s shares are publicly traded on a stock exchange. The share consideration may of course be combined with an earn-out clause. This way, the seller shareholders lose less in tax, the buyer doesn’t need to find cash.

Also, inventories, other assets, personnel, development and production may all be partly or entirely shifted abroad – the extent depending on individual circumstances.

The tax side:

The tax side is complex in any M&A deal. There are several common problems. First, if part of the consideration is variable depending on an earnout clause, it is necessary to request a tax ruling from the Israeli Tax Authority allowing part of the capital gains tax to be postponed. Normally Israel collects capital gains tax within 30 days after the deal is done, even if the price is paid installments (unlike the US). However, if part of the consideration may never be paid, the Israeli Tax Authority has said that is different, but a tax ruling is highly advisable.

Second, if the buyer buys the shares of the Israeli seller only to shift the technology and business out of Israel (because of the war or anyway), that can trigger double capital gains tax and dividend withholding tax. The result can be 70%-90% Israeli tax if no action is taken). So advance tax planning is legitimate and absolutely vital.

Third, don’t overlook other taxes in such situations – VAT, real estate taxation, employee taxes on an ESOP (employee share option plan) etc.

As always, consult experienced advisors in each country at an early stage in specific cases.

[email protected] The writer is a certified public accountant at Harris Consulting & Tax Ltd

3. Gas Superpower Israel – Nearly Final

A draft bill to sort out Israel’s exclusive zone (EEZ) was presented to the Knesset on December 30, 2024, and seems to be stalled . The EEZ stretches 200 nautical miles from the Israeli coast on the Mediterranean Sea and contains Israel’s all-important gas fields.

Size of the issue:

The Israeli economy stands on two legs – hitech and gas. The gas part is thanks to the Leviathan, Karish and Tanin gas fields in the Mediterranean Sea. Israel apparently has natural gas reserves of around 1087 BCM (Billion Cubic Meters) and extracted around 27 BCM of gas in 2024. Also notable is the Israeli sovereign wealth fund, formally called the Israeli Citizens Fund which held around $2 billion at the end of 2024 according to Bank of Israel data presented to the Knesset Committee for Oversight Over The Citizens’ Fund on July 1, 2025.

(https://main.knesset.gov.il/Activity/committees/GasFund/News/Pages/reports_1.7.2025.aspx).

The issue:

Does all that gas really belong to Israel? Israeli territorial waters extend 12 nautical miles from the Israeli coast and Israel’s gas fields extend well belong that. There are two perspectives to consider – the Israeli international. Both are complex. The draft Maritime Waters bill is needed to ratify and clarify things.

Israeli perspective:

Currently, Israel exercises full sovereignty in the Mediterranean strip extending up to 12 nautical miles from the coast, under the Coastal Waters Law, 1956. Beyond the 12 miles, Israel claims sovereign rights under the Submarine Territories Law, 1953, to exploit natural resources “in the seabed and below the ground of areas under the sea next to Israeli shores, and those outside Israeli territorial waters as far as the depth of the water above them enables the exploitation of natural resources in those areas”. So Israeli law lays claim to the seabed beyond the 12 nautical miles but what about the water column above the seabed where Israel has gas rigs – fixed and floating?

International perspective:

Israel signed up to the UN Convention on the Continental Shelf, 1958, but that apparently doesn’t deal with gas rigs. Moreover, it was largely superseded by the United Nations Convention on the Law of the Sea (UNCLOS) which was first implemented in 1994. UNCLOS contains the concept of an Exclusive Economic Zone (EEZ) extending up to 200 nautical miles from a coast, including the water column and any gas rigs above the seabed.

Israel had to object to UNCLOS because of comments by Iraq, Yemen, Kuwait and Qatar, when signing up, that they do not recognize Israel – according to the UN website. Instead, Israel said it would apply the substance of UNCLOS if other countries reciprocate. Israel then declared its own EEZ in 2011 and struck maritime border deals with Cyprus and Lebanon.

The draft Maritime Areas Bill:

The Israeli government’s reported position is that the above is enough to lay claim to Israel’s gas fields and gas rigs. It resembles President Donald Trump’s use of Presidential orders to impose higher US tariffs.

Nevertheless, moves are afoot to reinforce the Israeli government’s claims regarding the gas fields and gas rigs. The draft Maritime Areas Bill took years to prepare and it was submitted to the Knesset on December 30, 2025.

The bill proposes to consolidate earlier Israeli law and actions. The bill sets forth how Israel proposes to exercise its sovereign rights and jurisdiction in the Israeli EEZ. Among other things, it is proposed that Israel’s tax and immigration laws would apply in the EEZ to income and assets just as if they would on dry land. The same would apply to many other laws listed in the bill, including environmental monitoring rules.

As for Israel’s windfall levy (up to 62% according to a formula) enacted back in 2011 following reports of the Sheshinski Commission, it seems little is needed. Companies that obtained a license to exploit Israeli gas committed to paying the windfall levy as part of the package. We know they are paying the levy because part of it is transferred to the abovementioned sovereign wealth fund worth around $2bn.

What about the international angle? The bill proposes to say that “nothing in the provisions of the law shall derogate from the rights and powers of the State of Israel under international law in the maritime areas” (Section 37).

To Sum Up:

The bill hasn’t moved in the Knesset since the end of 2024 according to its website. When enacted, the Maritime Areas Bill, should help further secure Israel’s crown jewels in the Mediterranean offshore gas fields.

As always, consult experienced legal and tax advisors in each country at an early stage in specific cases

4. US: How the One Big Beautiful Bill Impacts Americans in Israel

Yaacov Jacob

If you’re an American living in Israel, the new US One Big Beautiful Bill (OBBB) could bring meaningful and wide-reaching changes to your tax situation.

Before we dive into what will change, though, the most significant benefit of the new bill is how much it keeps the same. If this bill had not passed, the old changes from 2017 would have lapsed, and we would have had major changes. OBBB makes most of those old 2017 changes, like the increased child tax credit, permanent.

1. Bigger Refunds, If You Don’t Use FEIE

The Child Tax Credit rises to $2,200 per child in 2025, with the refundable portion (previously capped at $1,400) indexed for inflation. For many families in Israel, this can be a substantial refund, unless you exclude your income under the Foreign Earned Income Exclusion (FEIE).

Income excluded under FEIE doesn’t count as earned income when calculating the refundable portion. That means you could lose out entirely. Using the Foreign Tax Credit (FTC) instead keeps your income in play and wipes out U.S. tax liability thanks to high Israeli taxes while unlocking refundable credits.

Also, one of the parents and the children must have valid Social Security numbers to claim the credit. Don’t delay filing for your newborn’s SSN.

For 2024, the inflated refundable amount was $1,700 per child. For 2025 onwards, it will continue to be $1,700 or higher based on inflationary adjustments.

2. $1,000 Trump Accounts for Newborns

Each U.S. citizen child born between 2025 and 2028 is eligible for a one-time $1,000 deposit into a Trump Account. Parents must elect this on their tax return and secure a valid SSN for the child. You can also contribute further amounts to grow tax-free, like a Roth-IRA plan.

These accounts grow tax-free in the U.S. and may eventually be rolled into an IRA or ABLE account. However, the Israeli tax side will need checking out.

It’s free money, but it only stresses how important it will be for your kids to get an SSN quickly.

3. New Benefits for Charitable Giving

The OBBB restores a $2,000 above-the-line deduction (married filing jointly) for charitable giving if you don’t itemize. This is a welcome change for expats who don’t usually have enough deductions to itemize.

A new rule for everyone is a 0.5% AGI (Adjusted Gross Income) floor on all charitable contributions. You only deduct amounts above that threshold. For example, with $100,000 AGI, the first $500 of giving isn’t deductible unless it qualifies for the above-the-line treatment.

For large or regular givers, it’s time to consider bunching donations or using donor-advised funds.

4. $6,000 Deduction for Seniors

Seniors 65+ can now claim a $6,000 deduction in addition to the regular senior add-on. A married couple over 65 could see their standard deduction increase to over $42,000.

This deduction has a phase-out. For joint filers, the deduction starts reducing once Modified AGI exceeds $150,000. Seniors with pensions and part-time income can now pay lower taxes in the U.S.

5. $15M Estate Exemption = Less Stress, Still Reporting

Starting in 2026, the estate and gift tax exemption rises to $15M and continues to be indexed for inflation. This change removes estate tax concerns for most U.S. citizens in Israel.

Without the passing of The OBBB, this amount was set to go back down to ~$7.5M, so this change is a nice reprieve for many.

Also, you must continue to report gifts and inheritances over $100,000 from foreign persons, using Forms 3520 and 3520-A. Penalties for non-compliance can be steep, even if no tax is owed.

6. GILTI Gets Tougher, Especially for Low-Tax Entities

Warning: Heavy tax jargon ahead!

The OBBB eliminates the 10% QBAI exclusion and lowers the Section 250 deduction from 50% to 40%. However, the FTC cap on GILTI income rises from 80% to 90%, which softens the blow.

If your Israeli company pays the full 23% corporate tax rate, you likely won’t owe additional U.S. tax.

Before the OBBB, your Israeli company had to pay at least 13.125% in Israeli taxes to avoid GILTI. The new necessary Israeli tax rate will be 14% with all these changes.

7. Qualified Small Business Stock (1202) – More Flexibility, Higher Cap

You can now exclude 50% of gain after 3 years, 75% after 4 years, and 100% after 5 years. The lifetime cap increases to $15M per issuer, indexed from 2027.

Israel’s 25% capital gains tax still applies, so coordinate your exit strategy.

As always, consult experienced professional advisors in each country at an early stage in specific cases.

[email protected]

The writer is Director of the Individual & Partnership Department at Philip Stein & Associates, US Certified Public Accountants, Jerusalem.

5. UK Rayner Affair – Avoidance vs. Evasion

Leon Harris and James Cohen

Angela Rayner resigned on Sep 5, 2025 from the post of UK Deputy Prime Minister due to a tax problem!

When she purchased a seaside home, it seems she paid a lower rate of UK Stamp Duty Land Tax applicable to principal private residences, overlooking a second home apparently held through a family trust.

In her Sep 5 resignation later, Rayner wrote: “I deeply regret my decision not to seek additional specialist advice…I take full responsibility for this error”.

This followed an adverse report from Sir Laurie Magnus, Independent Adviser on Ministerial Standards, to UK Prime Minister Sir Keir Starmer. He wrote: “…she cannot be considered to have met the highest possible standards of proper conduct” as envisaged in the UK Ministerial Code.

Israel has a similar rule imposing lower rates of purchase tax on the purchase of a single home. Other Israeli tax principles are also derived from the UK.

So was there tax avoidance or tax evasion in either or both countries?

The UK side:

Few topics in tax law provoke as much public debate as the distinction between tax avoidance and tax evasion. Politicians, business leaders, and ordinary taxpayers alike are often accused of blurring the two. Yet under UK law, the difference is clear: one is legal (if contentious), the other criminal.

Tax evasion is the unlawful act of deliberately concealing income, misrepresenting financial affairs, or otherwise deceiving HM Revenue & Customs (HMRC). It is a criminal offence, punishable by prosecution, fines, and potentially imprisonment. Examples include hiding income offshore, falsifying records, or underreporting cash sales.

Tax avoidance, by contrast, is technically legal. It involves exploiting gaps or ambiguities in the tax code to reduce liability—for example, structuring a business through offshore subsidiaries, or arranging personal finances to minimise inheritance tax. Such arrangements may comply with the letter of the law, but often breach its spirit.

UK law has grown increasingly intolerant of aggressive avoidance. The General Anti-Abuse Rule (GAAR), introduced in 2013, allows HMRC to strike down arrangements it deems “abusive,” levy penalties of up to 60%, and demand immediate repayment. The message is clear: legality alone does not guarantee safety from challenge.

Why the Distinction Matters

The distinction between avoidance and evasion has practical, political, and ethical consequences. A business leader who engages in aggressive avoidance may face public criticism and civil penalties but is unlikely to be prosecuted. Someone who commits evasion, however, is subject to the criminal law.

This line matters because it protects the integrity of the tax system. A legal framework that confuses error, avoidance, and evasion risks either over-criminalising genuine mistakes or under-punishing deliberate fraud.

Contemporary Illustration:

The Rayner case has drawn public attention to these boundaries. Rayner admitted to underpaying stamp duty when purchasing a property, citing reliance on poor legal advice. The sum involved could exceed £40,000.

While politically damaging, her case illustrates the nuances: there is currently no evidence of deliberate concealment (evasion), nor of carefully engineered tax loopholes (avoidance). Instead, it highlights a third category—mistake or misadvice—which, though embarrassing for a senior official, is treated differently under UK law.

The Broader Picture

Rayner’s controversy is far from unique. From celebrities using offshore trusts to multinational corporations engaging in “profit shifting,” tax behavior sits on a spectrum. At one end lies outright fraud; at the other, entirely legitimate tax planning (such as using UK ISA savings or pension contributions).

So we must distinguish carefully between: (1) Evasion: always illegal, always punishable; (2) Avoidance: legal but contestable, increasingly disfavored; (3) Error: unintentional misreporting, often corrected with interest and penalties but without criminal stigma.

Distinguishing avoidance from evasion—and both from honest mistakes—remains essential to preserving trust in the tax system.

Israel Comments:

Israel has a general anti-avoidance rule (GAAR) which targets artificial or fictitious acts.

The Israeli tax Authority typically invokes the Israeli GAAR if an act or series of acts appear to lack commercial rationale i.e. they amount to tax evasion not legitimate antiavoidance.

Also, Israeli banks generally block remittances to and from Israel until tax compliance in each country concerned is proven.

The Rayner affair ended swiftly a few days after the tax problem surfaced. Many Israeli cases are settled without reaching court. A tax amnesty procedure also exists in Israel.

When hiring professionals, check what the engagement agreement says they are engaged to do.

As always, consult experienced tax and professional advisors in each country at an early stage in specific cases.

Co-authored by Leon Harris and James Cohen, Partner & Head of Private Client at Seddons GSC, a London law firm. [email protected], [email protected]

6. Court Rejects Tax Authority Catch 22

The Israeli District Court has reportedly ruled against the Israeli Tax Authority for failure to honor an earlier court order (Cyviak Case, Tel-Aviv District Court, Judgement of Y. Saroussi, June 3, 2025). Anyone following the Israeli judicial reform process should note what can happen if an executive authority simply ignores the Courts and uses a Catch 22 excuse when caught out.
Main facts:
The taxpayer asked the Real Estate Taxation Tribunal to allow a capital loss to be offset against a real estate capital gain (appreciation). The Tribunal instructed the taxpayer to ask the Holon income tax assessing officer to determine the amount of capital loss from another transaction dating back to 2006.
The taxpayer duly asked, but the Assessing Officer turned this down in December 2024. The taxpayer appealed to the District Court on January 15, 2025 but the Holon Assessing Officer didn’t respond, so the District Court (Judge M. Altuvia) ruled in favor of the taxpayer on March 24, 2025.
Three days later the Holon Assessing Officer (i.e. the ITA) swung into action and applied to the Court to cancel the March 24 ruling.
The ITA apologized for the failure but claimed it meant no dishonor to the Court. But it could not agree to “grant” a tax refund of around NIS 1 million due to a variety of reasons (excuses). In particular, the loss was agreed but the taxpayer had not yet filed a 2023 tax return so it could not be sure if the loss had been utilized as of the end of 2023.
In other words, there was a Catch 22 situation – the taxpayer couldn’t use the loss without confirmation it existed, the ITA said the loss can’t be confirmed in case it had already been used. Fortunately, the Judge (a different one, Y. Saroussi) realized this was a Catch 22 case and would not stand for it. How? Read on…
The No-Nonsense Judgement:
The Court said it is necessary to distinguish between two grounds for cancelling a Court judgement: (1) to do justice, for example if a lawsuit is not properly served, (2) at the Court’s discretion, as in this case.
In the latter instance (applying discretion) the Court needs to weigh up two more things: (a) reason for any failure – does it stem from a good faith error or does it stem from deliberate dishonor of the Court? (b) What are the chances of a successful defense for the party requesting the cancellation?
As for (a) the Court ruled there was no good faith error nor were there extenuating circumstances as the ITA “decided by itself that it didn’t need to respond, nor provide even a minimal explanation that the procedure was wrong…in the best case, there is no justification for the delay, and in the worst case , it amounts to dishonor of the process and the Court..”
As for (b) the chances of the ITA’s case succeeding were not high and certainly not good enough to overcome its dishonor of the Court. In this particular case, the amount of the loss had already been determined so there was no need to file a tax return to ascertain the loss. As for whether the loss had already been utilized, the Court said that the ITA “is supposed to know anyway whether the loss had been used or not. If the loss wasn’t used in income tax or land appreciation tax filings, it wasn’t used…”
Therefore, the Court ruled that if the ITA found that the loss hadn’t yet been used, it must issue the loss confirmation as requested. End of Catch 22.
Comments:
At the micro level, the ITA failed to honor the taxpayer to whom it owed a tax refund of NIS 1 million. Then the ITA dishonored the Court by not responding when required to do so. At the 91st minute the ITA rolled out an excuse which the Court saw through.
Hopefully, the taxpayer promptly received their million shekel tax refund.

As always, consult experienced tax advisors in each country at an early stage in specific cases.
[email protected]
© Leon Harris 21.9.25

September 21, 2025