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Can an Israeli company deduct research and development expenses from its taxable income?

Yes. Section 20A of the Income Tax Ordinance [New Version] 5721-1961 allows a company to deduct expenditure on scientific research and development connected to its own field of business. Where the program has been approved by the relevant government body, in most industrial cases the Israel Innovation Authority, the full cost is deductible in the year it is incurred rather than capitalized. Without that approval the expenditure is generally spread and deducted in three equal annual installments. The deduction is separate from, and sits on top of, the reduced corporate rates available under the Encouragement of Capital Investments Law.

Section 20A treats research as a current expense rather than as the creation of a lasting asset, which reverses the default rule for spending that produces long-term value. To qualify, the research must relate to the company’s own business and be directed at developing the enterprise, and any government grant received toward the same project reduces the deductible amount. Approval is what changes the timing: an approved program is written off immediately, while an unapproved one is written off over three years. Salaries of research staff, subcontracted development work, materials and an allocated share of overhead form the usual components of a claim, and the same cost base often supports a wider R&D incentive package.

For a foreign group with an Israeli subsidiary, the interaction with transfer pricing is where disputes begin. If the Israeli entity performs research for the parent on a cost-plus basis, the Israel Tax Authority expects the intercompany margin to be supported by a study, and it will test whether the resulting intellectual property genuinely sits outside Israel. Keep contemporaneous project documentation, timesheets and board approvals, because an assessing officer will ask for them years after the fact. Companies claiming the accelerated deduction should also confirm that Innovation Authority grant conditions, including the restrictions on transferring know-how abroad, do not conflict with the group’s intellectual property plan.

⚖ In Practice
  • Governing law: Section 20A, Income Tax Ordinance [New Version] 5721-1961; Encouragement of Industrial Research and Development Law 5744-1984
  • Competent authorities: Israel Tax Authority (Rashut HaMisim); Israel Innovation Authority (Rashut HaChadshanut) for program approval
  • Deduction timing: full deduction in the year incurred for an approved program, otherwise three equal annual installments
  • Corporate tax rate: 23 percent standard for 2026, against 12 percent (or 7.5 percent in a development area) for a Preferred Technological Enterprise
  • Grant offset: government grants toward the same research reduce the expenditure that can be deducted
  • Records: keep project documentation and payroll allocations for at least seven years, matching the standard Israeli assessment window

From the full guide: Israel R&D Tax Credit 2026: A Complete Guide for Foreign Multinationals

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Get a Free Consultation with Adv. Eli ShimonyPrepared under the direction of Adv. Eli Shimony, Eli Shimony Law Office · Editorial policy

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