Quick Answer: Israel's Research and Development Encouragement and Incentive Law, passed by the Knesset on April 13, 2026 and effective for the 2026 tax year, gives qualifying foreign multinationals a direct tax credit of 25% to 30% on eligible Israeli R&D expenses. To qualify, a group needs worldwide revenues of at least NIS 100 million and at least 200 full-time employees in Israel. The credit is refundable: any excess over the company's Israeli tax liability comes back as cash. The law was designed to stay compatible with the OECD's Pillar Two global minimum tax, so multinationals subject to the 15% global floor can claim it without triggering a top-up charge in their parent jurisdiction.

For decades, Israel's main tool for attracting and retaining multinational R&D operations was a combination of grant programs run by the Israel Innovation Authority (Rashut HaChidush) and reduced corporate tax rates under the Encouragement of Capital Investments Law. Intel, Microsoft, Google, Apple, and hundreds of other foreign groups built substantial engineering centers in Israel partly on the strength of those incentives. The system worked, but it ran into a problem: the OECD's Base Erosion and Profit Shifting (BEPS) framework, and specifically Pillar Two, threatened to neutralize much of the benefit for large multinationals by subjecting any income taxed below 15% to a top-up charge levied by the parent country.

Israel's legislature responded with the 2026 R&D Encouragement and Incentive Law. It does not cut corporate tax rates. Instead, it gives a credit against taxes already owed, structured so that it counts as a Qualified Refundable Tax Credit under the OECD framework. That distinction is the whole point. If you run a technology R&D operation in Israel as part of a global group, this is the Israeli tax change that matters most for 2026 filings.

1. Why Israel Created This Credit

Israel's pre-existing R&D incentive regime had two main pillars. First, the Israel Innovation Authority provided grants covering a portion of approved R&D budgets — typically 20–50% of qualifying expenditure — in exchange for royalty repayment obligations if the funded IP generated revenues. Second, companies with significant Israeli R&D operations could qualify as Preferred Technological Enterprises under the Encouragement of Capital Investments Law, which reduced the corporate tax rate on qualifying income to 12% (or 7.5% in designated development regions).

The Pillar Two global minimum tax, which began applying to large multinational groups with global revenues exceeding EUR 750 million from January 2024 onward, created a serious complication. A parent company domiciled in the EU, UK, or another Pillar Two jurisdiction would owe a top-up tax on its Israeli subsidiary's income if that subsidiary's effective tax rate fell below 15%. For a Preferred Technological Enterprise paying 7.5–12%, that gap could be substantial — and the top-up tax would be collected by the parent country, not credited back to Israel.

The OECD's design of Pillar Two included one key carve-out: a Qualified Refundable Tax Credit (QRTC). A QRTC is a credit that is both refundable to the extent it exceeds the company's tax liability and not contingent on the group making a particular investment decision or maintaining a particular tax rate. If a tax incentive meets the QRTC test, it does not reduce covered taxes for Pillar Two purposes in the way a rate reduction does, and the parent jurisdiction does not levy a top-up on it.

The 2026 law is Israel's QRTC. Instead of a rate cut that triggers Pillar Two top-up, it delivers the economic equivalent — a credit of 25–30% of eligible spending — through a mechanism the OECD will recognize as a QRTC. For groups already inside the Pillar Two regime, the difference between the two approaches can represent tens or hundreds of millions of shekels in annual tax cost.

2. Which Groups Qualify for the Credit

The law introduces the concept of an Eligible Group (kvutza zkait). A group is eligible when it meets two cumulative thresholds:

  • Revenue threshold: The group's worldwide annual revenues must reach at least NIS 100 million (approximately USD 27 million at mid-2026 exchange rates). The threshold is assessed at the consolidated group level, not just the Israeli entity's revenues. A group with NIS 60 million of Israeli revenues but NIS 150 million of worldwide revenues qualifies.
  • Employment threshold: The group must employ at least 200 full-time employees in Israel on average over the current tax year and the two immediately preceding years. The law also sets a minimum floor: the headcount in each individual year must not fall below 150 Israeli full-time employees. Employees of all Israeli group entities are counted together.

Both thresholds must be met at the same time. A group with 250 Israeli employees but NIS 80 million in worldwide revenues does not qualify. A group with NIS 500 million in worldwide revenues but only 180 Israeli employees on a three-year average does not qualify either.

The law does not restrict eligibility to Israeli companies. A foreign company with a registered branch or permanent establishment in Israel that conducts R&D through that branch can be the claiming entity, provided its parent group meets the group-level thresholds. Israeli subsidiaries of foreign multinationals are the most common applicants in practice.

In Practice: An Israeli subsidiary of a US-based software group that has NIS 90 million of Israeli revenues but belongs to a parent group with USD 400 million of worldwide revenues — well above the NIS 100 million threshold — qualifies, provided the group employs at least 200 people in Israel. Before concluding that your group falls short on the revenue side, verify the figure against the consolidated parent group's financials, not just the Israeli entity's standalone accounts. The Israel Tax Authority (Reshut HaMisim) at Agron Street 32, Jerusalem, requires the applicant to submit audited group financial statements for the three-year look-back period. Groups that have not previously filed consolidated financials with Israeli authorities will need to prepare those documents before the first claim.

3. What Counts as Qualifying R&D Expenses

The law defines qualifying R&D expenses by reference to the Israeli Research and Development Law 5744-1984 (Chok L'Idud Mechkar V'Pitua), which has governed grant applications to the Israel Innovation Authority for over four decades. Under that framework, qualifying activities are those aimed at creating or substantially improving a product, process, or technology in a way that involves technological or scientific uncertainty — meaning the outcome cannot be determined in advance by a skilled practitioner applying known methods.

Qualifying expenses generally cover:

  • Gross salaries, employer Bituach Leumi contributions, pension contributions, and benefits for employees whose primary role is R&D. Employees who split time between R&D and other functions need documented time allocations.
  • Materials and consumables used during R&D and not incorporated into products sold to customers.
  • Payments to Israeli or foreign subcontractors for R&D services performed for the claiming entity. Payments to related-party subcontractors across borders require arm's-length transfer pricing documentation.
  • Depreciation on machinery, computers, and laboratory equipment used mainly for R&D.
  • Facility costs, utilities, and shared services allocated to R&D under a documented cost allocation methodology signed off by the company's auditors.

What does not qualify:

  • Routine product testing or quality assurance not involving technological uncertainty
  • Market research, consumer surveys, or competitive analysis
  • Ordinary software maintenance and bug-fixing on existing production systems
  • Management consulting, legal, and administrative costs
  • Expenses already reimbursed under an IIA grant for the same tax year (no double-claiming)
In Practice: The boundary between qualifying R&D and non-qualifying maintenance is the single most contested classification question in practice. Under the Israeli R&D Law, a software team adding a capability that did not previously exist and that required resolving genuine technical uncertainty — say, a new machine-learning inference pipeline — qualifies. A team refactoring code for performance or fixing a known compatibility bug does not. The Israel Innovation Authority (IIA, located at 29 HaMered Street, Tel Aviv, and reachable at iia.gov.il) conducts technical audits of claimed activities and can retroactively reclassify expenditure as non-qualifying up to seven years after the relevant tax year. Companies that have not previously dealt with the IIA should request a preliminary technical opinion before their first year's claim — the IIA provides this free of charge and responds within approximately 60 days of a complete application.

4. The Credit Rates: 25% and 30%

The credit structure has two tiers:

  • 25% on qualifying R&D expenses up to NIS 1.05 billion per year
  • 30% on qualifying R&D expenses exceeding NIS 1.05 billion per year

The NIS 1.05 billion threshold is assessed at the claiming entity level, not the group level. An Israeli subsidiary with NIS 300 million of qualifying R&D expenditure receives a credit of NIS 75 million (25% of NIS 300 million) and has not yet reached the threshold at which the higher 30% rate kicks in. A group that structures its Israeli R&D across two Israeli subsidiaries receives the 25% rate separately for each, up to NIS 1.05 billion per entity.

The credit is applied against the entity's Israeli corporate income tax liability for the tax year. Israel's headline corporate tax rate is 23%. The credit can reduce that liability to zero. For R&D-intensive companies whose spending outpaces their taxable income, the excess is refunded in cash by the Israel Tax Authority within 90 days of the annual return being filed and accepted.

The refundable character is what makes this a QRTC rather than a non-refundable tax incentive. Companies with temporary losses or low taxable income do not lose the benefit; they receive the refund instead.

In Practice: To model the annual economic benefit, multiply your Israeli entity's qualifying R&D headcount cost plus other qualifying expenses by 25% (or 30% above the NIS 1.05 billion tier). A team of 300 Israeli engineers with an average fully-loaded cost of NIS 600,000 per employee produces NIS 180 million of qualifying salary expense alone. The 25% credit on that amount is NIS 45 million — against a 23% corporate tax on profits that may be significantly lower than the R&D spend itself. Many R&D cost centers that are loss-making at the entity level will still receive the refund, because the credit is not capped at the entity's tax liability. The ITA issues the refund through the same channel as a standard tax overpayment — it appears in the company's tax account held at the ITA's Tel Aviv District Office and is transferred to the company's designated bank account automatically once the return is accepted.

5. Pillar Two Compatibility: Why the QRTC Structure Matters

The OECD Pillar Two rules impose a global minimum effective tax rate of 15% on the income of multinational groups with global revenues exceeding EUR 750 million per year. For groups below that threshold, Pillar Two is currently not relevant — though a number of countries are considering extending minimum tax rules to smaller groups over time.

Two types of tax incentives exist in the Pillar Two world, and they behave very differently. A rate reduction — lowering the statutory rate from 23% to, say, 10% — directly cuts covered taxes and reduces the entity's effective tax rate for Pillar Two purposes. Once the effective rate drops below 15%, the parent jurisdiction's supplementary charge (the Income Inclusion Rule or the Undertaxed Payments Rule) fills the gap. The benefit of the Israeli incentive is partly or fully offset by a new charge levied abroad.

A Qualified Refundable Tax Credit is treated differently under the OECD rules. A credit that is refundable and not contingent on investment decisions counts as a subsidy, not a reduction in tax. It adds to the company's economic returns without cutting covered taxes for Pillar Two purposes, because the refund comes back as income rather than as a tax abatement. The parent jurisdiction's top-up mechanism does not fire.

Israel's 2026 law was written after dialogue between the Israeli Ministry of Finance and the OECD Secretariat specifically to meet the QRTC criteria. The credit is unconditionally refundable. There is no condition that the company maintain a minimum headcount, hit a technology milestone, or commit to future investment spending. Those are the structural features the OECD requires to grant QRTC treatment.

In Practice: Groups subject to Pillar Two that have existing Israeli Preferred Technological Enterprise status face a choice for the 2026 tax year and beyond: continue under the reduced-rate regime or switch to the new R&D tax credit. The two regimes cannot be combined for the same income and the same expenses. The economic comparison depends heavily on the group's Pillar Two position. A group whose parent country fully implements Pillar Two and applies the Income Inclusion Rule may find that the R&D credit, as a QRTC, delivers a better net outcome than the Preferred Technological Enterprise rate, because the former is Pillar Two-neutral while the latter is not. Groups whose ultimate parent country has not yet implemented Pillar Two (certain jurisdictions have delayed), or which fall below the EUR 750 million revenue threshold, may still prefer the reduced-rate regime for as long as it remains available. This decision requires Pillar Two modeling specific to the group's ownership structure and the parent jurisdiction's implementation rules — and should be made in consultation with both Israeli and home-country tax advisers before the 2026 return is filed.

6. Interaction With Other Israeli Tax Incentives

IIA grant funding and the R&D credit do not stack. An expense funded by an IIA grant cannot also enter the credit base — the law bars double benefit outright. Companies receiving IIA grants must segregate grant-funded and self-funded projects and apply the credit only to the latter. Since IIA grants typically cover 20–40% of approved budgets, the remaining 60–80% of those projects can still feed into the credit base, but the accounting needs to be clean and project-level.

The Preferred Technological Enterprise regime (12% corporate tax, or 7.5% in Development Region A) is still available to qualifying companies, but income taxed at the reduced rate and the R&D expenses that generated it cannot simultaneously benefit from the 25–30% credit. A company has to pick one regime per project or entity. The common approach is to put manufacturing and commercialization entities under the Preferred Technological Enterprise track and run pure R&D cost centers under the new credit law.

Transfer pricing is the other trap. The company claiming the credit must actually bear the economic risk of the R&D and hold the right to benefit from its output. A subsidiary that is fully reimbursed by a foreign parent for all R&D costs and receives a cost-plus markup — the classic contract-R&D structure — probably cannot claim the credit, because economic risk sits at the parent level, not with the Israeli entity. Groups may need to revise their intercompany arrangements before filing the first claim. Israeli transfer pricing rules follow the OECD Guidelines, and the ITA has been active in auditing R&D entity characterizations.

In Practice: The IIA and the ITA share data on R&D activities registered under grant programs and on corporate tax filings. An expense claimed as IIA-funded in one filing and then included in the R&D credit base in another will be flagged automatically under the ITA's cross-check systems, which were expanded in January 2026 as part of the implementation of the new law. Companies with mixed-funded R&D portfolios should maintain a project-level expense ledger that maps each cost item to either the IIA-funded or self-funded category, supported by time-tracking systems for employees working across both types of projects. The ITA can request this documentation at any point during a six-year audit window from the tax year-end.

7. How to Claim the Credit: Procedure and Timeline

Claiming the Israel R&D tax credit for the first time involves two authorities and two processes running in parallel: a technical qualification process with the Israel Innovation Authority and a tax credit computation process with the Israel Tax Authority.

Step 1: IIA notification of qualifying activities. The claiming company must notify the IIA of its qualifying R&D activities for each tax year. For 2026, this notification must be filed with the IIA no later than March 31, 2027. The notification form, available on the IIA's online portal at iia.gov.il, requires a description of qualifying projects, a list of Israeli R&D employees by project, and a summary expense schedule. First-time applicants must also submit an overview of the group's global R&D strategy and the Israeli entity's role within it.

Step 2: IIA technical review. The IIA reviews the notification to confirm that the described activities constitute qualifying R&D under the R&D Law 5744-1984. The IIA has 90 days from the notification date to issue a qualification confirmation or raise objections. No response within 90 days is treated as approval. Companies can expedite the review by requesting a pre-filing meeting with an IIA sector specialist.

Step 3: Annual corporate tax return with credit schedule. The credit is claimed by attaching the IIA qualification confirmation to the annual corporate tax return (Form 1214, doch mas hachnasa shnatit), filed with the ITA no later than May 31 of the following year. The credit schedule must itemize total qualifying R&D expenses by category, the IIA confirmation reference number, the credit computation (25% or 30% as applicable), the portion applied against the tax liability, and the portion claimed as a cash refund.

Step 4: ITA review and refund issuance. The ITA reviews the credit claim as part of its standard return review. Refunds go out within 90 days of return acceptance for companies with no outstanding tax disputes. Companies subject to an ITA audit hold may experience delays; a formal ITA clearance letter is available for entities with clean compliance records.

In Practice: The March 31 IIA notification deadline is the most common administrative failure point. Unlike the corporate tax return, which can be extended by the ITA upon request, the IIA notification deadline is statutory and does not accommodate extensions in most cases — a late notification disqualifies that year's R&D expenditure from the credit regardless of how clearly the activities qualify. Companies planning to claim the credit for the 2026 tax year should assign responsibility for the IIA notification to a named team member no later than January 2027, to allow time to gather the project descriptions and employee lists across the R&D organization. For Israeli R&D centers with 100 or more employees, the data collection alone typically takes 6–8 weeks once all project leads and HR systems have been engaged.

Frequently Asked Questions

The credit is available to companies forming part of an Eligible Group with worldwide revenues of at least NIS 100 million and at least 200 full-time Israeli employees averaged over three years (minimum 150 per individual year). It targets established international groups with significant Israeli R&D operations; standalone startups with no qualifying foreign parent generally do not qualify.
Eligible groups receive a 25% credit on qualifying R&D expenses up to NIS 1.05 billion per year, and a 30% credit above that threshold. The credit is applied against Israeli corporate income tax, and any excess over the tax liability is refunded in cash by the ITA within 90 days of return acceptance.
Yes. The law was designed to qualify as a Qualified Refundable Tax Credit (QRTC) under the OECD Pillar Two rules, meaning it does not reduce covered taxes for Pillar Two calculation purposes and should not trigger a top-up charge in a parent jurisdiction that has implemented Pillar Two. Groups should verify QRTC treatment in their specific parent jurisdiction before relying on this conclusion.
Not on the same expenditure. Expenses covered by an IIA grant must be excluded from the credit base. Companies can structure projects so some receive IIA grant support and others are self-funded — the self-funded portion qualifies for the 25–30% credit while the grant-funded portion does not. Proper allocation requires project-level expense tracking.
An IIA notification of qualifying activities must be filed by March 31, 2027. The credit is then claimed through the annual corporate tax return (Form 1214) due May 31, 2027. Missing the IIA notification deadline disqualifies that year's expenditure from the credit, even if the underlying activities otherwise qualify.