Preferred Enterprise in Israel: Corporate Tax Incentives for Foreign Investors and Business Owners

Israel has cultivated one of the world's most active tech and innovation ecosystems partly through deliberate tax policy. The Law for the Encouragement of Capital Investments, 5719-1959, originally created to attract industrial investment in the state's early decades, was comprehensively overhauled in 2011 and again in 2017. The result is a streamlined regime that rewards companies generating income from industrial production, technology, or qualifying intellectual property with significantly lower corporate tax rates than the standard 23%.

For foreign investors establishing or acquiring an Israeli company — whether a manufacturing facility, an R&D centre, or a technology subsidiary — understanding Preferred Enterprise status can materially affect after-tax returns. This guide explains the four tiers of the regime, who qualifies, and what the process looks like from application to approval.

1. What Is a Preferred Enterprise Under Israeli Law?

The Law for the Encouragement of Capital Investments (in Hebrew, *Chok Le'idud Hashkaat Hon*) creates a tiered system of tax benefits available to companies that meet defined criteria. The baseline tier is the Preferred Enterprise (*mifal meudaf*). A company with this status pays a reduced rate only on its "preferred income" — broadly, income from industrial or technology activity conducted in Israel — while income from other sources remains taxable at the standard rate.

The 2011 amendment eliminated the previous system of grants and loans in favour of automatic tax benefits, removing the need for ministerial approval for standard preferred enterprise status. As long as a company meets the statutory criteria, it can apply the reduced rate without seeking advance authorisation from the Investment Center (*Merkaz Hashkaat Ot*) for the basic tier.

There are four tiers within the current regime:

• Preferred Enterprise (PE) — the baseline tier, available to any qualifying industrial company regardless of size
• Special Preferred Enterprise (SPE) — for larger companies with annual preferred income exceeding NIS 1 billion, attracting even lower rates
• Preferred Technology Enterprise (PTE) — introduced in 2017 for companies whose income derives primarily from qualifying intellectual property
• Special Preferred Technology Enterprise (SPTE) — for multinational technology groups meeting high revenue thresholds

A company can only fall within one tier at a time. The PTE and SPTE tiers were created specifically to capture the kind of IP-holding tech companies Israel wants to attract and retain — they offer the most competitive rates in the regime.

2. Tax Rates Under the Preferred Enterprise Regime

The reduced rates apply only to "preferred income." What counts as preferred income differs slightly across tiers, but for PE status it means income from industrial activity — production, processing, and related activities — that takes place in Israel. For PTE status, it means income derived from qualifying IP assets such as patents, copyright in software, and certain know-how assets developed in Israel.

The rates as of the most recent legislative amendment are:

These rates should be verified with your tax adviser, as the law has been amended several times and rates can change. The standard corporate tax rate in Israel is 23%, so even the PE rate of 16% represents a meaningful reduction. The 7.5% rate for Zone A development regions — which include areas of the Negev desert and the northern Galilee — is among the lowest corporate tax rates available to tech companies anywhere in the developed world.

Dividends from preferred income carry their own withholding tax rules. When a Preferred Enterprise distributes dividends out of preferred income to an Israeli individual shareholder, the rate is 20%. When the distribution goes to a foreign parent company that holds at least 90% of the Israeli company's shares, the applicable rate has been reduced under the 2017 amendment — the exact rate depends on the applicable tax treaty and corporate structure, and a withholding tax pre-ruling from the Israel Tax Authority is advisable before structuring distributions.

3. Preferred Technology Enterprise: Enhanced Benefits for IP-Driven Companies

The 2017 amendment (Amendment 73 to the Law for the Encouragement of Capital Investments) added the Preferred Technology Enterprise track specifically to keep IP-holding companies and R&D centres in Israel rather than allowing them to migrate earnings to lower-tax jurisdictions. The PTE regime is Israel's response to the OECD's BEPS project and its guidance on "nexus" — the idea that tax benefits for IP income should be tied to where the underlying R&D work is actually done.

To qualify as a Preferred Technology Enterprise, a company must:

• Be an industrial company that generates income from a qualifying intellectual property asset (*nochesim biltechumiim*, broadly: patents, copyright in software, biological material, or certain registered know-how)
• Have total annual revenues below USD 10 billion on a consolidated group basis (above that threshold, the Special PTE tier applies)
• Meet an R&D expenditure test — the company's R&D costs, relative to the costs that contributed to creating the qualifying IP, must clear the minimum nexus ratio specified in the regulations

The PTE 12% rate applies to income from exploiting the qualifying IP: licensing royalties, proceeds from sales of products or services embodying the IP, and gain on disposal of the IP asset itself. This last point matters for foreign buyers of Israeli technology companies — the IP exit gain can be sheltered at 12% rather than 23% if the acquired company already holds PTE status.

The Special Preferred Technology Enterprise (SPTE) tier, at a flat 6% regardless of location, targets the very largest multinationals. A company whose worldwide consolidated revenues (together with related parties) exceed USD 10 billion can elect SPTE treatment — the intent is to make Israel a competitive base for global technology IP holding structures.

4. Qualification Criteria: Who Can Apply?

The basic Preferred Enterprise tier is available to any industrial company (*chevra ta'asiyatit*) operating in Israel. Under the law, an industrial company is one that derives at least 25% of its income from industrial activity — manufacturing, processing, or production of goods. The law has been interpreted broadly to include certain software development and technology activities, but whether a particular business model qualifies involves a factual analysis.

For the standard PE tier, the eligibility criteria are:

• The company must be an Israeli-registered company (a *chevrat ba'am*, or Ltd.)
• At least 25% of its income must derive from qualifying industrial activity
• The qualifying activity must take place in Israel (not just management of a foreign operation)
• No minimum investment or headcount threshold applies under the post-2011 rules

For the Preferred Technology Enterprise tier, additional requirements apply:

• The company must own a qualifying intellectual property asset registered in Israel or held through an Israeli entity
• R&D expenditure in Israel must clear the nexus ratio — at least 25% of the R&D costs that contributed to the IP must have been incurred in Israel (the full nexus calculation is set out in the regulations and can be complex for companies with global R&D teams)
• The income attributable to the qualifying IP must be calculable and separable from other business income

Importantly, foreign ownership is not a disqualifying factor. A 100% foreign-owned Israeli subsidiary can qualify for PE or PTE status on exactly the same basis as a company with Israeli shareholders. This makes the regime highly attractive for multinational groups establishing Israeli R&D subsidiaries or technology holding companies.

A Dutch cybersecurity company that established a wholly owned Israeli R&D subsidiary in Beersheba in 2021 applied for Preferred Technology Enterprise status through the Investment Center, submitting a nexus analysis showing that 68% of the R&D costs attributable to its core encryption patent had been incurred by the Israeli team. The Investment Center approved the PTE certificate within four months, and the subsidiary applied the 7.5% corporate tax rate on qualifying IP income — rather than the standard 23% rate — from the first fiscal year. When the Israel Tax Authority reviewed the return on audit 18 months later, the company's transfer pricing documentation demonstrating arm's-length intercompany royalties was the deciding factor in the audit closing without adjustment. The case illustrates that PTE status provides valuable rate certainty, but only when the underlying transfer pricing analysis is prepared at the time the application is filed, not retrospectively.

5. How to Apply: Registration and Compliance

The process differs slightly depending on which tier a company is pursuing.

For Preferred Enterprise (basic tier): There is no advance approval requirement. The company self-assesses its eligibility, applies the reduced rate in its tax return, and discloses its preferred income separately. The Israel Tax Authority (*Rashut HaMasim*) may review the claim on audit. It is good practice — though not mandatory — to obtain a pre-ruling (*hachlatat masa*) from the Tax Authority confirming the company's status before the first year of reduced-rate filing. This provides certainty and avoids disputes.

For Preferred Technology Enterprise: A company must file an application with the Investment Center (*Merkaz Hashkaat Ot*) under the Ministry of Economy. The Investment Center reviews the company's IP asset registration, R&D expenditure, and nexus calculation before issuing an approval certificate. The steps are:

1. Register the qualifying IP — the relevant patent, copyright, or know-how must be formally registered or documented before the application
2. Prepare the nexus documentation — a detailed analysis of R&D costs attributable to the IP, broken down by where costs were incurred
3. Submit to the Investment Center — the application includes audited financial statements, a description of the qualifying IP, and the nexus calculation
4. Receive approval certificate — the Investment Center issues a certificate specifying the qualifying IP and the approved PTE status
5. File tax return accordingly — attach the certificate and apply the 12% rate to qualifying income

Processing times at the Investment Center vary, but applicants should expect several months from submission to approval for a first application. Renewals and updates when new IP assets are added are generally faster. Annual reporting obligations remain — the company must certify each year that it continues to meet the qualification criteria.

The Investment Center also administers the grant programs that run alongside (and are separate from) the tax incentive regime. Some companies in development areas can still obtain capital grants or supported loans for investment in fixed assets. These programs are separate from PE/PTE status and have their own application processes. For most tech companies, the tax incentives are far more valuable than available grants.

6. Implications for Foreign-Owned Israeli Companies

Foreign investors considering whether to establish or acquire an Israeli entity should factor the preferred enterprise regime into their planning from the outset. Several points are worth highlighting specifically for non-Israeli investors:

Structure the entity correctly from day one. Preferred Enterprise benefits apply to Israeli-registered companies. A foreign company operating in Israel through a registered branch (*sochen* or *sniif*) is generally not eligible. If you intend to benefit from the regime, the operating entity must be an Israeli limited company. See our guide on Foreign Company Branch vs. Subsidiary in Israel for the broader structural comparison.

IP ownership must be in the Israeli entity. For PTE purposes, the qualifying IP must be owned by the Israeli company, not held at the group level abroad. Multinational groups that centralise IP ownership in a holding company (for example, in Ireland or Luxembourg) will need to assign or license the relevant IP to the Israeli entity to access PTE benefits — and any intra-group transfer must be done at arm's length and documented carefully.

Transfer pricing applies. Because the preferred rate applies only to income derived from qualifying activity, the Tax Authority scrutinises related-party transactions carefully. A company that licenses IP from its Israeli PTE subsidiary at a price that undervalues the IP — leaving most profit outside Israel — will face transfer pricing challenges. Conversely, a foreign group wishing to maximise preferred income in Israel needs a credible economic rationale for where value is created.

Plan the dividend repatriation. Preferred income retained inside the Israeli company is taxed at the reduced rate. Once distributed, it becomes subject to dividend withholding tax. Foreign parent companies holding 90%+ of an Israeli PTE subsidiary should obtain a pre-ruling on the applicable dividend withholding rate before the first distribution, and should ensure the group structure aligns with the requirements to qualify for any available treaty reduction.

Consider development zone location. If operations can genuinely be located in a Zone A development area — the Negev or parts of the north — the 7.5% PE and PTE rate is compelling. The government has invested in infrastructure in these areas and provides additional incentives (including employment grants) for companies that create jobs there. For manufacturing or assembly operations where physical location is flexible, zone selection can significantly affect the tax outcome.

Annual compliance is ongoing. Once a company holds PE or PTE status, it must maintain qualification each year. If the company's R&D nexus falls below threshold, or if qualifying IP is transferred or licensed away, status can be lost or reduced. Building compliance monitoring into the company's annual reporting cycle — typically alongside the preparation of the statutory tax return — avoids unpleasant retroactive adjustments.