The Law for the Encouragement and Incentivization of Research and Development, 2026 serves as a key instrument in the Israeli government’s policy to strengthen the technology industry and encourage research and development activity within the economy through a tax credit mechanism for qualifying R&D expenditures.
Who is Eligible?
The law is intended for companies operating as part of significant business groups (“Eligible Group”), which meet cumulative requirements relating to the scale of operations, revenue, and employment in Israel. Among the requirements:
- The group’s aggregate annual revenue must be at least NIS 100 million worldwide.
- At least 55% of the group’s total revenue in Israel must consist of Preferred Income or Technological Income, as defined under the Law for the Encouragement of Capital Investments.
- The group must employ at least 200 full-time employees in Israel or maintain an average of 200 employees during the tax year and the two preceding tax years, provided that in each of those years the number of employees was not less than 150.
How Is the Tax Credit Calculated?
The tax credit is calculated as a percentage of qualifying R&D expenditures. The credit rate varies according to the type of enterprise and its location, as follows:
| Type of Enterprise | Location | Qualifying R&D Expenditures up to the Cap (Approx. NIS 1.05 Billion) | Qualifying R&D Expenditures Above the Cap |
| Special R&D Enterprise / Special Preferred Technological Enterprise | Development Area A | 25% | 30% |
| R&D Enterprise / Technological Enterprise | Development Area A | 25% | 30% |
| R&D Enterprise / Technological Enterprise | Other Areas of Israel (outside Development Area A) | 3% | 4% |
- The tax credit may be utilized against the tax liability of all companies within the group (the credit may be transferred between group companies).
- If the full credit cannot be utilized during the relevant tax year, the unused portion may be carried forward to future tax years in accordance with the law.
- A tax credit that remains unused after three tax years may be converted into a cash grant beginning in the fourth year, subject to the conditions set forth in the law.
Which Expenses Qualify?
The following expenditures may qualify as R&D expenses:
- Salary costs (employer cost) of employees engaged in research and development activities in Israel.
- Depreciation of assets and equipment used for research and development activities.
- Expenses paid to subcontractors in Israel for research and development activities, as well as expenses paid to foreign subcontractors in cases where the activity cannot be performed in Israel (clinical trials or toxicology studies).
- Materials used for research and development activities, consisting exclusively of components, single-use equipment, and consumable materials.
- Overhead expenses linked to research and development, up to 20% of approved salary expenses.
Application Submission Process
The group must apply through the personal area of the Hebrew-language Israel Innovation Authority website within 24 months following the end of the relevant tax year.
The application must include details regarding the R&D expenditures of the group companies and the R&D activities they performed.
Following submission, the reported R&D expenditures will be reviewed by a Technology Evaluator appointed by the Israel Innovation Authority. The purpose of the review is to verify that the submitted expenditure qualifies as R&D expenditures. Eligibility does not depend on the level of technological innovation, provided that genuine R&D activity has been conducted.
Upon completion of the review, the Israel Innovation Authority will issue an approval specifying the total amount of qualifying R&D expenditures incurred by the group in Israel.
This approval must be submitted as part of the group’s tax filings and will entitle the group to a tax credit based on the approved expenditures and the applicable credit rates outlined above.