The Knesset Finance Committee on Sunday okayed a bill to grant tax credits for corporate research and development (R&D) expenses, in a bid to keep multinational tech firms in Israel.

The “Research and Development Law,” which can now be held to a full plenum vote, comes as over two years of war and uncertainty about Israeli democracy have fueled concerns of stagnation and brain drain in the tech sector, which remains the main driver of the country’s economy.

The bill also seeks to offset an OECD-brokered tax hike on large companies, and comes as a strong shekel has raised payroll and other expenses for firms based abroad that have R&D centers in Israel.

The legislation introduces a direct tax credit for R&D expenses, letting companies keep a larger share of their revenue than they would under the current practice of deducting the costs from taxable income. The tax credit amounts to billions of shekels.

Under the legislation, companies operating in Israel’s socio-economic periphery will also enjoy additional benefits, including expanded eligibility for the tax credit.

If passed, the bill will apply retroactively to qualifying companies’ R&D expenses from January 1, 2026.

The bill is part of the government’s Arrangements Law, a key part of the legislative package that makes up the state budget. The Arrangements Law passed its first reading in the Knesset in January, and is set to return to the Knesset for its second and third readings.

The government has a March 31 legal deadline to pass the 2026 state budget. Failure to pass the budget in time dissolves the government and triggers new elections.

The R&D tax reform was proposed by the Finance Ministry to help offset the impact of a 15 percent global minimum tax that takes effect this year on companies making over €750 million ($859,762,500) — including tech giants like Amazon, Google and Apple that have paid taxes as low as 5%.

The tax hike follows a commitment Israel made in 2024 to comply with new OECD standards.

Israel’s tech sector accounts for about 11% of the Israeli workforce, nearly a fifth of the country’s gross domestic product, and some 30% of payroll taxes collected by the government.

But Israeli university graduates have moved abroad in growing numbers since the government introduced its bid to weaken the judiciary in early 2023, and amid the war sparked in Gaza by the Hamas-led onslaught on October 7 that year.

STEM graduates have moved abroad at roughly double the rate of their peers, according to findings published by the Central Bureau of Statistics in December.

Sharon Wrobel and Zev Stub contributed to this report.

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Knesset Finance Committee

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