Israel's 2026 R&D Tax Credit for Foreign Groups

The first thing to understand about Israel's newest research incentive is who it was written for, because that decides whether it is worth your attention at all. It was not written for a lean startup with a handful of engineers. It was written because the OECD global minimum tax quietly stripped much of the value out of Israel's older, rate-based incentives for the large multinationals that run serious engineering centres here, and the state needed a benefit that survives a fifteen percent floor. If your group operates at that scale, the numbers are large. If it does not, the headline rate everyone quotes is not the one you get.

For a foreign parent weighing whether to expand its Israeli development activity, that distinction is the entire analysis. The law rewards size, and it rewards it deliberately.

What the Law Does

The Law for the Encouragement and Incentivisation of Research and Development received final Knesset approval on 13 April 2026 and applies to qualifying research and development expenditure incurred in tax years beginning on or after 1 January 2026.

It works as a credit against tax rather than a reduced rate, and that design choice is the point rather than an accident of drafting. A reduced statutory rate is exactly what the Pillar Two rules recapture when a group's effective rate in a jurisdiction falls below the global minimum. A well-constructed credit is treated more generously in that computation, so the value stays with the group instead of being handed to another country as top-up tax.

The rates are tiered by how the operation is classified. A special R&D enterprise, and an industrial plant located in Development Area A, is entitled to a credit of 25 percent of qualifying R&D expenses up to NIS 1.05 billion, roughly USD 280 million, and 30 percent on expenses above that threshold. An ordinary R&D enterprise receives 3 percent up to the same threshold and 4 percent above it. The gap between the two tracks is enormous, which is why the classification question is worth more than almost any other decision in the claim.

In Practice: The Law for the Encouragement and Incentivisation of Research and Development was approved by the Knesset on 13 April 2026 and applies to qualifying R&D expenses in tax years beginning on or after 1 January 2026. A special R&D enterprise or an industrial plant in Development Area A claims 25% of qualifying expenses up to NIS 1.05 billion and 30% above; an ordinary R&D enterprise claims 3% and 4%. Eligibility depends on membership of an eligible group with aggregate worldwide revenue of at least NIS 100 million. The claim is made on the annual return to the Israel Tax Authority, and an assessment cycle on a first-year claim of this size commonly runs 12 to 24 months.

The Gate Is a Group Test, Not a Company Test

Sitting behind the rates is the eligibility gate, and this is where a foreign group either qualifies or does not. The benefit is aimed at companies forming part of a significant business group, an eligible group, meeting cumulative requirements on the scale of operations, on revenue, and on employment in Israel, with aggregate annual group revenue worldwide of at least NIS 100 million.

Two features of that gate matter for a non-resident parent. There is no Israeli-ownership condition, so the Israeli subsidiary of a foreign group is exactly the intended beneficiary, not an afterthought grudgingly admitted. And the revenue test looks at the whole group worldwide, not at the Israeli entity in isolation, which means a modest Israeli development centre inside a large foreign group can qualify on the strength of the parent's global figures while a large standalone Israeli company in a small group might not.

The practical consequence is that the classification and the group figures have to be assembled from information that lives outside Israel, in the parent's consolidated accounts, and produced to the Israel Tax Authority in a form it will accept. For a group whose financial year, reporting language, and audit timetable are all foreign, that is a coordination exercise that needs to start well before the Israeli return is due, not after the assessing officer asks.

The Numbers, Worked Through

The scale of what is at stake is easiest to see with a figure. Take an Israeli development centre inside a qualifying foreign group, classified as a special R&D enterprise, with NIS 400 million of qualifying R&D spend in a year.

In Practice: On NIS 400 million of qualifying R&D expenditure, a special R&D enterprise in Development Area A claims a credit of 25%, which is NIS 100 million against the tax otherwise payable, assessed by the Israel Tax Authority on the annual return. The same NIS 400 million of spend in an ordinary R&D enterprise yields only 3%, or NIS 12 million. The credit interacts with the preferred technological enterprise regime under the Encouragement of Capital Investments Law 5719-1959, and because the group's Pillar Two position is recomputed at group level, the net benefit is confirmed only once that top-up calculation is redone, a modelling step that on a first claim runs alongside the 12 to 24 month assessment cycle.

That NIS 88 million difference between the two tracks, on identical spend, is why the eligible-group and special-enterprise classifications are litigated harder than almost anything else in an incentive file. It is also why a foreign group should not assume the 25 or 30 percent figure until the classification is actually secured.

Where the Claim Meets the Rest of Your Tax Position

A credit of this size does not sit in isolation, and for a foreign group two interactions decide whether it delivers what it looks like on paper.

The first is the older incentive regime. The credit sits alongside, not instead of, the preferred technological enterprise regime under the Encouragement of Capital Investments Law 5719-1959, and the two have to be modelled together. A group already enjoying a low effective Israeli rate under that regime may find the credit adds less than expected, because once the Pillar Two top-up is recalculated at group level, part of what the credit gives back can be offset by a higher top-up elsewhere. The interaction is set out in more detail in our guide to the preferred technological enterprise for a foreign-owned Israeli company, and the wider suite of Israeli research incentives is covered in our overview of Israel's R&D grants and tax benefits.

The second is documentation, and this is where foreign groups most often lose. A credit of this magnitude is assessed by the Israel Tax Authority, and what the assessing officer wants is contemporaneous evidence that the expense was genuinely research and development performed in Israel: project records, headcount allocation, and above all a transfer pricing position that holds together.

What Often Goes Wrong

The recurring failure is not aggression on the numbers. It is inconsistency between two documents a foreign group keeps for two different purposes.

Common Mistake: Claiming the R&D credit while the intercompany transfer pricing agreement describes the Israeli entity as a low-risk, cost-plus service provider that bears no research risk for the parent. The credit claim says the Israeli company performs and bears the risk of genuine R&D; the intercompany agreement says the opposite. An assessing officer at the Israel Tax Authority tests that consistency first, and where the two documents contradict each other the claim is denied. On NIS 400 million of spend, that is a NIS 100 million credit lost, after a 12 to 24 month assessment, purely because the paperwork the parent signed abroad told a different story from the paperwork the subsidiary filed in Israel.

Two related errors compound it. The first is assuming the 30 percent headline rate applies without confirming the special-enterprise classification, when the ordinary track at 3 or 4 percent is the realistic outcome for many groups. The second is leaving the group-revenue and employment thresholds to chance, when they are figures that can be planned for before year end and are difficult or impossible to fix afterwards.

Practical Checklist

• Confirm first whether the group meets the eligible group test, using worldwide consolidated revenue of at least NIS 100 million, before relying on any rate.
• Settle the classification, special or ordinary R&D enterprise, because the difference between 25 and 3 percent on the same spend dwarfs every other variable.
• Align the intercompany transfer pricing agreement with the credit claim so both describe the Israeli entity's R&D risk the same way.
• Assemble the parent's group financial data on a timetable that lets the Israeli subsidiary file its return and support the claim to the Israel Tax Authority.
• Model the credit together with any preferred technological enterprise status and recompute the group Pillar Two position, rather than treating the credit as free money.
• Keep contemporaneous project records and headcount allocation from the start of the year, since the assessing officer tests whether the work was genuinely done in Israel.

Speak With an Israeli Attorney

We assess whether a foreign group's Israeli operation falls inside the eligible group definition, align the intercompany agreements with the credit claim, model the interaction with the Encouragement of Capital Investments Law and Pillar Two, and handle the Israel Tax Authority assessment when the first claim is examined. For a group of the right size, the difference between the two tracks is worth planning for deliberately.

Contact us for a confidential initial consultation.