The Knesset gave final approval this week to the 2026 state budget, including a measure aimed at strengthening tax incentives for research and development as the government tries to keep the country attractive to high-tech investors amid global tax changes. The budget passed in second and third readings early Monday after earlier clearing the Knesset Finance Committee.
The legislation, known as the Research and Development Encouragement and Incentive Law, is part of the government’s broader economic package for 2026.
A draft published by the Finance Ministry in December said the measure was designed to preserve Israel’s status as a destination for investment and business activity by high-tech companies, particularly as OECD-led international tax reforms reshape incentive regimes worldwide.
Under the measure, eligible companies would receive a direct tax credit for research and development expenses rather than relying only on standard tax deductions, with the benefit increasing as qualifying R&D spending rises.
The government and outside summaries of the bill said the goal is to encourage companies to expand operations in Israel, hire more technology workers and deepen local investment. The bill was expected to apply retroactively to qualifying R&D expenses from Jan. 1, 2026.
Companies operating in Israel’s periphery, along with exceptionally large firms classified as special preferred technological enterprises, are expected to receive enhanced benefits under the framework, while other eligible high-tech companies would qualify for lower-rate credits. A committee summary and legal analyses of the bill said companies unable to use the credit within three years could, in some cases, convert unused amounts into a cash grant.
Israeli officials have argued that the new framework is needed to protect the country’s competitive edge as multinational tax rules tighten and other countries adjust their own incentive systems. The Finance Ministry said when it published the draft that the proposal was intended to support innovation and knowledge-intensive activity in light of Pillar Two reforms.
The Israel Innovation Authority has described the change as part of a wider tax overhaul meant to increase certainty, reduce barriers to investment and streamline procedures for multinational companies operating R&D centers in Israel.
The reform follows other recent steps by Israeli authorities to clarify the tax treatment of multinational research centers and intellectual property. The Innovation Authority said those steps include clearer rules for valuing intellectual property, guidance on transfer pricing for R&D centers and an advance-ruling track intended to give companies more certainty about their expected tax exposure in Israel.