Israel's Global Minimum Tax 2026: A Compliance Guide for Foreign Multinationals

Israel has long competed aggressively for foreign R&D investment. Rates as low as 6% for Special Technology Enterprises and 7.5% for Preferred Enterprises in Development Zone A made Israel one of the most tax-efficient locations globally for technology centers and regional headquarters. For many multinational groups, the Israeli subsidiary was the jewel in the tax planning crown.

That picture has changed, not by repealing the incentives, but by capping how much they can reduce an MNE group's global tax burden. Under the OECD's Pillar Two framework, jurisdictions that allow effective rates below 15% must either impose a domestic top-up themselves or watch partner jurisdictions do it. Israel chose to act first: its DMTT law means the Israeli Tax Authority now collects the difference, not the parent company's home country. For corporate tax managers and in-house counsel at multinationals with Israeli operations, the compliance clock is already running.

1. The OECD GloBE Framework and Israel's DMTT Law

The OECD's Global Anti-Base Erosion (GloBE) rules — known collectively as Pillar Two — set a 15% global minimum effective tax rate for large MNE groups. The framework was designed to end "tax competition" among jurisdictions offering sub-15% rates to attract multinational investment. Over 140 countries have committed to implementation, and the race to legislate began in earnest in 2023.

Israel moved methodically. A draft bill circulated in 2024 and was revised materially before the Knesset enacted the Law for Implementation of the Global Minimum Taxation Rules (2025) on December 31, 2025 — the last day of the tax year. The law entered into force on January 1, 2026 and applies to fiscal years beginning on or after that date.

Israel's approach is selective: the 2025 law implements only the Qualified Domestic Minimum Top-Up Tax (QDMTT) mechanism. The other two Pillar Two instruments — the Income Inclusion Rule (IIR), under which a parent company's home country tops up below-minimum profits of foreign subsidiaries, and the Under-Taxed Profits Rule (UTPR), a backstop for groups whose parent country has not implemented IIR — are not part of the current Israeli legislation. The Israeli Ministry of Finance has indicated these may be considered in future legislative cycles, but they are not yet law.

2. Who Is Affected: The EUR 750 Million Threshold

The QDMTT does not apply to all companies operating in Israel. It is targeted squarely at large multinational groups. Specifically, a constituent entity (subsidiary, branch, or permanent establishment) located in Israel is subject to the QDMTT only if it is part of an MNE group whose annual consolidated revenue reached EUR 750 million or more in at least two of the four fiscal years immediately preceding the current reporting year.

This mirrors the OECD GloBE model rules exactly. In practice, a large share of Israeli subsidiary entities will be in scope. Israel hosts R&D centers and regional headquarters for dozens of the world's largest technology, pharmaceutical, and financial services companies, most of which exceed the EUR 750 million threshold by a wide margin.

Categories of Israeli entities typically in scope:

• Israeli subsidiaries of large US, European, and Asian technology companies (Intel, Google, Microsoft, Amazon, Meta, NVIDIA all maintain major Israeli operations)
• Israeli R&D centers that are wholly owned by a large foreign parent
• Israeli regional headquarters serving the Middle East and Africa region
• Foreign branches of large international banks or financial institutions registered in Israel
• Israeli holding companies within a large international corporate structure

Entities below the threshold — including most Israeli startups and SMEs, even those with foreign shareholders — are unaffected. A wholly Israeli company with no multinational parent, or a subsidiary of a group below EUR 750 million, continues to be taxed solely under domestic Israeli law.

3. How the QDMTT Calculation Works

The QDMTT is not a surcharge on Israel's existing corporate tax. It is calculated under a separate set of rules (the GloBE rules) that apply their own definitions of income and tax. An entity that has already paid Israeli corporate tax may still owe QDMTT; what matters is the ratio of covered taxes to GloBE income.

The calculation runs in five steps:

Step 1: Determine GloBE Income or Loss. Start with the entity's net income or loss per its financial accounts (IFRS or US GAAP as applicable) and apply GloBE adjustments. These exclude dividends from qualifying shareholdings, reverse certain unrealized gains and losses, and exclude international shipping income. The result is the "GloBE Net Income" for the Israeli entity.

Step 2: Calculate Covered Taxes. Identify taxes paid or accrued that qualify as "covered taxes" under the GloBE rules. This broadly captures income taxes and taxes measured by reference to retained earnings, but excludes indirect taxes, VAT, customs duties, and payroll taxes. Both current and deferred tax expense enter the calculation, with specific adjustments for deferred tax assets and liabilities.

Step 3: Compute the Effective Tax Rate (ETR). Divide covered taxes by GloBE Net Income: ETR = Covered Taxes ÷ GloBE Net Income. If the ETR is 15% or above, no QDMTT is payable for that entity in that year.

Step 4: Apply the Substance-Based Income Exclusion (SBIE). Carve out from GloBE Net Income a portion tied to tangible assets and payroll in Israel. The rationale is that income traceable to physical substance should not face a top-up. During the transitional period (2026–2032) the exclusion is 5% of eligible payroll costs plus 5% of the carrying value of eligible tangible assets. Both percentages decrease after 2032 per the OECD transitional rules. Only assets physically located in Israel and payroll attributable to Israeli employees count.

Step 5: Calculate the Top-Up Tax. If the ETR is below 15%, the top-up rate is (15% minus ETR). Apply this rate to (GloBE Net Income minus the SBIE carve-out) to get the QDMTT liability for the year.

4. Impact on Israel's Corporate Tax Incentive Regimes

The question most multinationals ask first: do Israeli tax incentives still have value after Pillar Two? They do, but the mechanics have changed.

The incentives are not repealed. The Law for the Encouragement of Capital Investments remains fully in force. Preferred Enterprise, Preferred Technology Enterprise, and Special Technology Enterprise status can still be obtained and applied to qualifying income. The eligibility criteria and headline rates are unchanged.

What changes is who collects the tax below 15%. Before the QDMTT, if an Israeli PTE paid 12% to Israel and the parent company was in a country that had enacted an IIR at 15%, the parent country would top up the 3% gap. Now Israel tops up the 3% first via the QDMTT. Because Israel's QDMTT meets the OECD's quality standard, it is credited against any IIR liability in the parent's home country. The total tax burden is the same, but Israel collects more and the parent country collects less.

The continuing value of Israeli incentive regimes for in-scope MNE groups lies in several areas:

• Access to Israel Innovation Authority (IIA) grants: IIA grants (typically 20–50% of approved R&D budgets, administered under the Law for the Encouragement of Research, Development and Technological Innovation, 5744-1984) are available only to companies with qualifying Israeli operations. QDMTT does not affect grant eligibility.
• Employer brand and talent pool: Israel's tech ecosystem, universities, and military-tech alumni base are independent of the tax regime.
• Substance-Based Income Exclusion benefit: A large Israeli workforce and significant tangible assets reduce the QDMTT base, preserving real tax savings.
• Rates between 15% and 23%: Entities paying the regular 23% rate are not affected by QDMTT at all — it only triggers for sub-15% rates. For entities on the 16% Zone B rate or any rate above 15%, there is no QDMTT exposure.

5. Reporting and Compliance Obligations

The DMTT Law adds a new compliance layer on top of existing Israeli corporate tax reporting. The four main obligations are set out below.

Initial Notification to the Israeli Tax Authority. Constituent entities in Israel that are part of an in-scope MNE group must notify the ITA of their Pillar Two status. For calendar-year 2026 filers, the deadline is 90 days from the start of the fiscal year — March 31, 2026. Entities that have not yet filed should do so without further delay. The notification goes to the ITA's International Tax Division (Machlek Misui Beinleumi), accessible through the ITA online portal (shaam.gov.il) and at the ITA's offices at 5 Agron Street, Jerusalem and 7 Kaplan Street, Tel Aviv.

QDMTT Annual Return. The QDMTT liability for each Israeli constituent entity is reported as part of the annual corporate income tax return (Form 1214 and GloBE supplemental schedules, to be published by the ITA in Q3 2026). The filing deadline follows the standard Israeli corporate tax timeline: five months after fiscal year end, extendable to May 31 for calendar-year taxpayers using an authorized tax agent. Payment of any balance due follows the same deadline.

GloBE Information Return (GIR). The GIR is a group-level document covering the entire MNE group's Pillar Two position: jurisdictional ETRs, constituent entity data, and the QDMTT calculations for each jurisdiction. Under OECD transitional guidance, the GIR deadline for fiscal year 2026 is June 30, 2028 (18 months after fiscal year end). The GIR may be filed by the ultimate parent entity in its home jurisdiction; Israeli constituent entities are then relieved of filing locally, provided the ITA has a qualifying competent authority agreement with the parent's jurisdiction.

Advance Tax Payments. QDMTT exposure feeds into Israel's existing advance payment framework. Companies make monthly advance payments to the ITA based on a percentage of monthly turnover. In-scope entities must include estimated QDMTT liability in those payments from January 2026 onward. Underpayment of advances carries interest and linkage under Sections 185–195 of the Income Tax Ordinance.

6. Safe Harbors: When the QDMTT May Not Apply

The OECD GloBE rules include several safe harbors that can simplify compliance or eliminate QDMTT exposure entirely. Israel's DMTT Law adopts each of these.

Transitional CbCR Safe Harbor (2024–2026). During the transitional period, in-scope entities can avoid a full GloBE computation if they meet simplified tests based on Country-by-Country Report (CbCR) data. There are three alternative tests: (a) a de minimis revenue and income test; (b) a simplified ETR test using CbCR data showing an ETR of at least 15% for Israel; or (c) a routine profits test. If any one of the three tests is satisfied for Israel, the QDMTT is deemed to be zero for that year without a full GloBE calculation. This safe harbor is available for fiscal years starting before January 1, 2027 — making it applicable to fiscal year 2026.

Substance-Based Income Exclusion (SBIE). As described in Section 3, the payroll and tangible asset carve-out reduces the income base subject to QDMTT. Israeli entities with substantial physical operations — large R&D centers, manufacturing facilities, significant headcount — can materially reduce or in some cases eliminate their QDMTT liability through the SBIE alone.

De Minimis Exclusion. Constituent entities with average GloBE revenue below EUR 10 million and average GloBE income or loss below EUR 1 million over the current and two prior fiscal years in Israel are excluded from the QDMTT computation. This exclusion is of limited practical relevance for Israeli subsidiaries of large MNEs, which typically exceed these thresholds comfortably.

Investment Fund Exclusion. Constituent entities that qualify as "investment entities" under the GloBE rules may be excluded from QDMTT. Israeli private equity fund structures and certain regulated investment vehicles may benefit here, but the application is fact-specific and should be reviewed with Israeli counsel.

7. Practical Steps for Israeli Entities in 2026

The DMTT Law has been in force since January 1, 2026 with no grace period on the substantive obligation. Here is what Israeli entities in in-scope groups should be doing now.

Confirm in-scope status. Check whether the MNE group's consolidated revenue exceeded EUR 750 million in at least two of the four fiscal years from 2022 to 2025 (the look-back period for 2026 applicability). Groups near the threshold should review their consolidated accounts before assuming they are outside the rules.

Calculate the Israeli ETR under GloBE rules. This is not the same as the Israeli statutory tax rate or the effective rate on taxable income under domestic law. GloBE income and covered taxes have their own definitions. Many Israeli subsidiaries will find their GloBE ETR differs from what internal tax reporting shows.

Assess the transitional CbCR safe harbor. For fiscal year 2026, check whether Israel qualifies for the simplified safe harbor using existing CbCR data. If Israel's CbCR ETR is at or above 15%, the safe harbor can be claimed and full GloBE computation deferred to 2027.

Review transfer pricing arrangements. Intercompany pricing that shifts income out of Israel (cost-plus arrangements, buy-sell structures) lowers the Israeli GloBE ETR and can increase QDMTT exposure. Existing transfer pricing studies should be re-examined against GloBE income definitions.

Set up GloBE data collection. GloBE compliance requires data that Israeli subsidiaries may not currently extract from their accounting systems: entity-level covered taxes split into current and deferred components, eligible payroll costs by category, tangible asset carrying values by asset class and location. Finance and tax teams should build this into existing month-end close processes rather than treating it as a separate year-end exercise.

Engage Israeli tax counsel early. The interaction of the QDMTT with Preferred Enterprise status, IIA grant structures, and existing ruling arrangements is fact-specific. Companies with advance pricing agreements or private rulings from the ITA are already re-engaging with the authority to confirm how those rulings interact with the QDMTT framework.