Israel passed a new R&D tax credit in 2026. Can my foreign group's Israeli development centre actually claim it?

The short version is that this law was not written for a twelve-person development team in Herzliya. It was written because the OECD global minimum tax made Israel's older incentive regime much less useful to the multinationals that run large engineering centres here, and the state needed something that survives a fifteen percent floor. If your group is at that scale the numbers are substantial. If it is not, the headline 30% rate is not yours and the ordinary track pays 3%.

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Detailed Answer

The Law for the Encouragement and Incentivisation of Research and Development was given final approval by the Knesset on 13 April 2026 and applies to qualifying R&D expenditure incurred in tax years commencing on or after 1 January 2026. It works as a credit against tax rather than a reduced rate, which is the point: a reduced statutory rate is what the OECD Pillar Two rules claw back, whereas a properly designed refundable credit is treated more favourably in the global minimum tax calculation. The rates are tiered by classification. A special R&D enterprise, and an industrial plant located in Development Area A, is entitled to a credit of 25% of qualifying R&D expenses up to NIS 1.05 billion, roughly USD 280 million, and 30% on expenses above that threshold. An ordinary R&D enterprise receives 3% up to the same threshold and 4% above it. Sitting behind the rates is the eligibility gate, which is a group test rather than a company test: the benefit is aimed at companies forming part of a significant business group, an eligible group, meeting cumulative requirements on the scale of operations, revenue and employment in Israel, with aggregate annual group revenue worldwide of at least NIS 100 million. The Israeli subsidiary of a foreign parent is squarely within the intended population, and there is no Israeli-ownership condition.

Two things matter for a non-resident group deciding whether this changes anything. The first is that the credit sits alongside, not instead of, the existing preferred technological enterprise regime under the Encouragement of Capital Investments Law 5719-1959, and the interaction has to be modelled rather than assumed; a group already paying a low effective Israeli rate under that regime may find the credit adds less than expected once the Pillar Two top-up is recalculated at group level. The second is documentation. A credit of this size is claimed on the Israeli company's annual return and assessed by the Israel Tax Authority, and what the assessing officer looks for 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 does not simultaneously describe the Israeli entity as a low-risk cost-plus service provider to the parent while claiming it bears R&D risk for credit purposes. That inconsistency is the most common way a foreign group loses an Israeli incentive claim. The underlying corporate rate that the credit is set against is covered in our answer on the Israeli corporate tax rate for a foreign-owned company.

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 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.

When to Consult a Lawyer

• Your Israeli entity is contracted to the parent on a cost-plus basis. The transfer pricing characterisation and the incentive claim have to tell the same story about who bears R&D risk, and an inconsistency between the intercompany agreement and the credit claim is the first thing an assessing officer tests.
• The group is close to the revenue or employment thresholds. Whether the group qualifies as an eligible group, and whether the Israeli operation is a special or an ordinary R&D enterprise, is worth thousands of basis points, and the classification is decided on figures that can be planned for before the year end rather than argued about after it.
• You already hold preferred technological enterprise status. Stacking the new credit on an existing regime changes the Pillar Two computation for the whole group, and the answer can be that the credit is worth less to you than to a competitor with the same Israeli spend.

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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, and handle the Israel Tax Authority assessment when the first claim is examined.

Contact us for a confidential initial consultation.