A ruling was recently rendered by Judge Yardena Seroussi in connection with an appeal filed by Mr. Haim Tzach, an Israeli citizen and businessman who had conducted business in Nigeria for many years. At the heart of the legal dispute lay the appellant’s argument that his centre of life falls outside Israel and that he should be perceived, at least, as a veteran returning resident. The tax assessor, on the other hand, argued that despite the appellant’s extensive business activity in Nigeria, he remained an Israeli resident throughout all the disputed tax years. The court accepted the tax assessor’s position and ruled that the appellant was an Israeli resident for tax purposes during the relevant period.
The aforementioned ruling highlights two important messages. First, the mere existence of significant business activity outside Israel, even if highly extensive, is not, in and of itself, necessarily sufficient to bring about the severance of Israeli residency for tax purposes. In the Tzach case, the court accepted the appellant’s position that most of his business and economic ties were located outside Israel. It nonetheless held that this was insufficient. The court clarified that the “centre of life” test as stipulated in the Income Tax Ordinance does not depend on a mere business test, but rather on the entirety of the relevant ties—first and foremost the permanent home, place of residence, family ties, economic and social interests, as well as the days actually spent by the taxpayer in Israel. These ties must be examined as a single unit. Thus, in the Tzach case, the court attributed decisive weight to the fact that the appellant resided in Israel during the relevant years for protracted periods of time, so that in all the tax years covered in the appeal, the presumption of days to his detriment was met, and in a considerable part of the years he even resided in Israel for more than 183 days a year. In addition, it was held that the appellant had at his disposal a permanent and available residence in Israel, where he lived while staying in Israel, that he managed various aspects of his life from it, and that he maintained significant ongoing family and social ties in Israel. In these circumstances, it was held that the appellant was unable to contradict the presumption of Israeli residency, even though most of his economic and business ties were outside Israel.
Second, the court considered the possible existence of “two separate centres of life” in the various countries. In so doing, the court stated that in this modern world there may be, in exceptional cases, situations where a person will have substantial and strong ties to two countries in parallel. In these circumstances, increased importance is placed on the question of the existence of a double tax treaty between the relevant countries, for the purpose of determining the question of tax residency, in accordance with the equalization tests enumerated in the treaty.
It should be clarified that, in our view, this speaks of a relatively extreme situation, where the appellant resided in Israel for extended periods, lived in Israel in a residence that was available to him, and most of his personal and family ties remained in Israel. Moreover, the taxpayer’s core business was conducted in Nigeria, a country with which Israel has no double tax treaty. Therefore, the court was requested to decide the dispute based only on Israeli domestic law, leaving the taxpayer without treaty protection. Therefore, in our opinion, this ruling should not be perceived as a reality changer, or as hardening the existing “rules of the game”. Nevertheless, there is no doubt that this is an important reminder for businesspersons who are in the process of relocating or who live on the line between Israel and abroad, to re-examine their status and take into account that the existence of economic ties outside Israel, does not, in and of itself, guarantee the severance of Israeli tax residency. This speaks of a complex process that requires advance and intelligent planning and takes into account, among other things, all the parameters and criteria established both in legislation and extensive case law on the subject over the years, while implementing the necessary actions to ensure the severance of residency in real time.
Section 5 of the Encouragement of Knowledge-Intensive Industry (Temporary Order) Law, 5783-2023 (the Encouragement of Industry Law), establishes a unique tax benefit permitting a deduction for an investment in the purchase of shares as a tax expense, the foregoing where a technology company acquires control of another technology company—Israeli or foreign. It should be recalled that, as a rule, an investment in shares is not deductible and finds expression only when they are sold, by reducing the capital gain deriving from the sale. Nonetheless, according to section 5 of the Encouragement of Industry Law, where a purchase satisfies the provisions of the section, the cost of purchasing the share over 5 tax years can be deducted against the technological income generated by the acquiring company.
Nevertheless, since enactment of the Encouragement of Industry Law, there have been significant changes in the international tax rules, including Pillar 2, which have resulted in erosion of the attractiveness of deduction-based tax incentives, since such incentives impact the group’s effective tax rate in Israel, and expose it to tax payable in other countries.
In response to this reality, and within the ambit of the Economic Efficiency Law (Legislative Amendments for Attaining Budgetary Objectives for the 2026 Budget Year), section 11 of the Encouragement and Incentive of Research and Development Law, 5786-2026, was enacted, which has brought with it significant and welcoming news for the Israeli high-tech sector. This section confers on the Minister of Finance the authority to enact regulations that replace the traditional tax deduction benefit with a Qualified Refundable Tax Credit (QRTC). Thus, on June 3, 2026, draft Regulations for the Encouragement of Knowledge-Intensive Industry (Temporary Order), 5786-2026, were published, detailing the operative mechanism for realizing this benefit.
The proposed regulations establish a selection mechanism enabling a purchasing company to convert the deduction permitted under section 5 of the Encouragement of Industry Law into a tax credit. The level of the credit is calculated by multiplying the deduction that should have been received under section 5 of the Encouragement of Industry Law by a “qualifying rate” (12%, 7.5% or 6%, depending on classification of the technological income). The tax credit can be used against the current tax liability, and any credit balance that is not used within three years from the date of acquisition, will be granted to the company as a financial grant in the fourth year. Moreover, the proposed mechanism ensures that even companies that have yet to attain the profitability threshold will be able to enjoy a real economic benefit, by receiving the grant before the end of the fourth year.
In our opinion, this is a strategic and necessary step, intended to preserve the attractiveness of the “growth engine of the Israeli economy”. The choice of a refundable credit (QRTC) mechanism is the acceptable point of view that is currently being adopted in the international arena for addressing the global minimum tax requirements, and the proposed regulations display impressive “regulatory flexibility” in this regard. For high-tech companies, the move sends out an important message: the State understands the complexity of the new tax rules and is actively working to preserve their attractiveness, while creating a cash flow safety net for growing companies.
On May 5, 2026, the Ministry of Finance published draft VAT Regulations aimed at encouraging investments in investment partnerships in Israel and improving the tax environment for the high-tech sector. The draft regulations include two key arrangements that will apply solely to a “beneficiary private investment fund”, and seek to adapt the existing VAT laws to suit the unique characteristics of the activity of private investment funds. This draft is intertwined with a broader legislative process designed to increase tax certainty in Israel and improve the business environment for both high-tech companies and investors. It is important to emphasize that the relevant arrangements in this regard have yet to be completed in primary legislation.
A beneficiary private investment fund is defined as a limited partnership with a permanent establishment in Israel, that engages in the investment in stocks, and satisfies a series of conditions, including maintaining a minimum percentage of foreign investors and a minimum number of limited partners, as well as restrictions on the concentration of investments. These conditions are intended to ensure that the benefits apply to funds with a clear investment nature and having an appropriate scope of activity.
According to the draft regulations, management services for a beneficiary private investment fund will be charged zero-rated VAT only with respect to the portion attributable to foreign resident partners, pro rata to their scope of investment in the fund. The implication of this is that the benefit will apply only partially, and will not encompass the full management fee. The arrangement will not apply to assets originating from land or natural resources in Israel. From a legislative perspective, this arrangement is intended to complement a proposed amendment to the Value Added Tax Law, whereby section 30(a)(20) will be added in order to facilitate the application of zero-rated VAT on management fees attributable to investments by foreign residents in a partnership—even where, in practice, the service is also provided to an Israeli resident in Israel. This, as distinct from the current situation under section 30(a)(5) of the Law, which does not permit the relief in such cases. The draft regulations are therefore intended to establish the implementation mechanism: how the share of foreign residents will be calculated, and to which partnerships the benefit will apply.
In addition, the draft regulations stipulate that success fees payable to a partner in the fund in consideration for the management services will be fully exempt from VAT, regardless of the identity of the investors. The draft thus also seeks to alleviate the variable remuneration component that is customary within the realm of activity of private investment funds. However, this exemption too will not apply to assets originating from land or natural resources in Israel. This arrangement similarly relies on an amendment to legislation that has yet to be completed, within the framework of which it has been proposed to authorize the Minister of Finance, with the approval of the Finance Committee, to stipulate in regulations the conditions for granting the VAT exemption on success fees, as an addition to the exemptions array set forth in section 31 of the VAT Law. Accordingly, the draft regulations are designed to determine the practical conditions for granting the exemption to the manager of a beneficiary private investment fund.
The distinction between zero-rated VAT and a VAT exemption has practical significance, since in a zero-rated transaction there is an entitlement for the deduction of input tax, while in a VAT-exempt transaction no such entitlement exists. Therefore, even though both arrangements are intended to alleviate things, the economic outcome for the service provider may differ.
The draft regulations and associated proposed bill, reflect an attempt on the legislator’s part to strengthen Israel’s attractiveness for private investment funds, through VAT reliefs designed to encourage an infusion of capital and support activity in the domestic high-tech sector. However, at this juncture, it speaks of a preliminary regulatory process, whose completion depends on advancement of the primary legislation. If the arrangement is ultimately adopted, it may contribute to increasing tax certainty and improving the conditions for organized investment activity in the Israeli market.
* The newsflash is intended to provide subscribers with general information only and should not in any way be regarded as firm professional advice and/or a definitive legal opinion.
