The Israeli government has presented a major tax reform intended to stabilize its high-tech ecosystem, weakened since the start of the war in Gaza and by the growing drain of its talents. The challenge is both to bring back expatriate workers and to offer investors the regulatory clarity that was lacking in the “Startup Nation”.
Since 2023, the Israeli technology sector, which represents around a sixth of GDP and more than half of exports, has been going through a zone of turbulence. The Israel Innovation Authority estimates that more than 800 tech specialists leave the country each month for long-term relocations. Political tensions, war and regulatory instability have pushed many entrepreneurs to structure their companies around American rather than Israeli holding companies.
Faced with this erosion, the Ministry of Finance, the Tax Authority and the Israel Innovation Authority have developed a reform covering the entire innovation chain: from venture capital funds to employees returning from expatriation, to multinationals operating R&D centers in the territory.
For expatriate Israeli talents, the new rules provide a tax exemption on income earned abroad, the possibility of deducting taxes already paid outside Israel and an overhaul of the regime applicable to stock-based compensation. Stock options acquired before returning home can now be taxed as capital gains at 25% rather than as salaries at 50%, taxing only the appreciation made after the relocation. The objective is to neutralize the “tax penalty” which has until now dissuaded people from returning.
The government has also clarified the treatment of performance fees paid to fund managers. These “success fees” will now be taxed at 27% for Israeli tax residents. Managers will benefit from a VAT exemption on this income, as well as a reduced rate of 25% on the capital that they themselves invest in their funds. The measure aims to put an end to years of uncertainty and individual negotiations with the tax administration, which fueled legal uncertainty unfavorable to local investment.
Another structuring development is the clarification of the treatment of capital gains for individual investors in venture capital funds. Their income will now be considered passive, and no longer as derived from an activity, eliminating the double taxation to which they were subject.
The reform also regulates the taxation of mergers and acquisitions, by setting a standardized valuation rule. Thus when selling an innovative company, the portion attributable to intellectual property (patents, code, technologies) will now be capped at 85% of the total price. This measure aims to limit aggressive tax optimization practices and to guarantee a consistent tax base for locally generated income.
Dror Bin, general director of the Israel Innovation Authority, said of this reform that “The days when human capital alone was sufficient are over. Global competition requires clarity, transparency and speed. This reform is not an expense, it is an upgrade.”
This update of the tax framework responds to the reality that Israel is no longer the only global innovation hub and that its ecosystem faces the rise of new technology hubs, which offer stable tax conditions and more fluid administrative frameworks. An approach that resonates with the debates and the vote on the 2026 budget in France, and could inspire our parliamentarians.
