On November 2, 2025, the Minister of Finance announced a new tax policy framework for the high-tech sector in Israel. This reform comprises a comprehensive set of legislative measures and amendments to the Tax Authority’s administrative procedures, aimed at eliminating obstacles and introducing incentives to foster the growth of Israeli high-tech enterprises, facilitate the operations of multinational high-tech corporations in Israel, and encourage the acquisition of Israeli high-tech companies. Notably, the reform also introduces regulatory provisions governing the activities of both Israeli and foreign venture capital funds, as well as their respective investors. Implementation of the reform is subject to the enactment of specific legislation by the Israeli Parliament or promulgation of regulations by the Government of Israel. With respect to venture capital funds the tax reform addresses the following principal matters:
- Exemption from capital gains tax for foreign investors, whether directly or indirectly investing in the high-tech sector, irrespective of the extent of their activities in Israel.
- In addition to the capital gains tax exemption, certain qualifying funds may be eligible for exemptions from tax on dividend and interest income.
- Classification of investments made by Israeli investors in venture capital funds as passive investments for tax purposes (qualifying for capital gains tax and not ordinary income).
- Imposition of a reduced, fixed income tax rate on carried interest received by general partners of venture capital funds.
- Exemption from Value Added Tax (VAT) on carried interest received general partners of venture capital funds (applicable to both foreign and Israeli investments).
- Establishment of a fixed formula for calculating VAT on management fees, based on the proportional interests of foreign and Israeli investors in the relevant funds.
For further clarification regarding the proposed tax reform, please refer to the following Q&A addressing venture capital tax relief provisions.
1. What was the taxation model for venture capital funds until now and what is Section 16A of the Income Tax Ordinance?
Historically (since the mid 1990s), foreign venture capital funds with operations or representatives in Israel faced uncertainty regarding the risk of being deemed to have a permanent establishment (“PE”) in Israel, which could preclude the application of tax exemptions for non-Israeli investors, particularly those relating to capital gains. Such funds typically sought advance tax rulings from the Israel Tax Authority pursuant to Section 16A of the Income Tax Ordinance, which confirmed that, notwithstanding the existence of a PE, non-Israeli resident investors would remain exempt from Israeli tax (“16A Tax Ruling”). Under the proposed tax reform, funds that satisfy the new statutory criteria will no longer be required to obtain a 16A Tax Ruling and may instead rely on the statutory tax exemptions which will be provided under the new legislation, including exemptions from tax on dividend and interest income.
2. Are there funds or investors that previously could not obtain a tax ruling and now can?
Yes. The 16A Tax Ruling was subject to specific terms and conditions that not all funds could satisfy (for example at least ten investors, over 30% of commitments coming from non Israeli investors and no investor investing over 35% of the total commitments of the fund). Under the new tax reform, non-Israeli investors and funds may qualify for exemptions under the revised legislative framework, without the need to comply with the former requirements set forth in the current 16A Rulings. For example, foreign corporate funds, special purpose vehicles (SPVs), family offices, and smaller funds may now benefit from capital gains tax relief, irrespective of the existence of a PE in Israel.
3. How has the taxation of the General Partner’s carried interest in Israel changed?
The taxation of carried interest has been a subject of longstanding debate, particularly regarding whether such income should be characterized as business income or as capital gains eligible for a preferential tax rate. The 16A Tax Ruling classified carried interest as business income but permitted the Israel Tax Authority to approve a formula under which Israeli resident recipients would be taxed on carried interest income according to the relative proportions of Israeli and non-Israeli resident investors in the fund. This could result in an effective tax rate on carried interest ranging from 25% to 50% (depending on the mix of Israeli and Non-Israeli investors). Non-Israeli recipients of carried interest attributable to gains from Israeli or Israel-related companies were subject to a 15% tax rate. Pursuant to the tax reform, carried interest will be subject to a fixed tax rate of 27% plus any applicable surtax, regardless of the residency status of the fund’s investors, while the tax rate for non-Israeli residents receiving carried interest is reduced to 10%.
4. Is there VAT on carried interest?
Prior to the reform, there were numerous disputes with the Israel Tax Authority concerning the VAT treatment of carried interest. The reform clarifies that carried interest is not subject to VAT.
5. Is there VAT on management fees?
Management fees are subject to VAT. Previously, venture capital funds that obtained a 16A Tax Ruling often secured separate approval from the VAT Authority for a zero VAT rate on management fees allocated to non-Israeli investors. The reform codifies these rules in legislation, thereby obviating the need for separate VAT Authority approval.
6. What happens when there is an Israeli resident Partner who is also entitled to carried interest?
Carried interest payable to an Israeli resident partner, or to an employee or office holder participating in a fund that satisfies certain criteria, will be subject to a fixed tax rate of 27% plus any applicable surtax.
7. What is the situation regarding a General Partner who is a foreign resident?
A general partner who is a foreign resident is subject to a 10% tax rate on carried interest derived from investments in Israeli or Israel-related companies and is exempt from Israeli tax on carried interest derived from investments in non-Israeli portfolio companies.
8. What is the situation regarding the general partner’s profits from its own capital investments in the fund (as distinct from the carried interest it receives)?
Following the reform, a non-Israeli general partner will be exempt from Israeli tax on capital gains arising from its investment in the fund, provided that such investment does not exceed 10% of the fund’s aggregate commitments.
9. What are the transitional provisions for funds that already have a 16A Tax Ruling?
Funds holding a 16A Tax Ruling may continue to rely on such ruling for income derived from investments made up to December 31, 2032, provided that the fund has made the requisite election and filed it with the Israel Tax Authority. If such election is made, the 16A Tax Ruling will govern all income with respect to investments made prior to the specified date, and the new regulations will not apply to such income.
10. When will the legislation come into effect?
Upon approval and publication of the regulations (the “Effective Date”), the new rules will apply to all income derived from investments made on or after the Effective Date.
11. What are the transitional provisions for carried interest income?
Carried interest attributable to investments made by a fund prior to the Effective Date will be taxed according to a formula, such that certain carried interest will remain subject to the former tax regime, including the 16A Tax Ruling (if applicable), while other carried interest will be subject to the provisions of the new reform (27% plus surtax for Israeli and 10% for non-Israeli carry recipients), or the 16A Tax Ruling if the fund has made the relevant election.
The content in this update is provided for informational purposes only and is not intended to be comprehensive. It does not serve to replace professional legal advice required on a case by case basis.
