Leading international tech companies, led by Nvidia, are currently in advanced talks with Israel's Ministry of Finance on innovative tax arrangements in Israel, "Globes" has learned. In the talks, chip giant Nvidia has proposed a unique arrangement - raising the tax rate in Israel to 9% on activity, a move that could bring in about NIS 10 billion a year to the state's coffers.
The proposal is based on the Subject to Tax Rule - a mechanism established as part of the OECD's Pillar Two Model Reforms. This mechanism is designed to prevent a situation in which international companies use complex tax structures to transfer profits to countries with low or zero taxation, and allows countries (mainly in Europe) to collect a "top-up tax" of up to 9% when a company pays low tax in another country. In Nvidia's case, the company is proposing, through its own initiative, to pay this 9% directly to Israel, instead of the money being dispersed among different countries. The move appears to be beneficial to both parties: Israel would receive significant tax revenues that would otherwise go to other countries, and Nvidia would pay the tax in Israel, where it already has significant operations. Nvidia is estimated to pay a current tax rate of 5% - the minimum threshold under the Encouragement of Capital Investment Law.
The talks with Nvidia - critical timing
Negotiations between international companies and the state over tax benefits and grants that it will receive in exchange for operating in the country are not new. In 2023 Intel, for example, one of the first major international tech companies to build a major presence in Israel, decided to double the size of its Kiryat Gat plant. In return, the state announced that it would grant Intel NIS 11.1 billion, while the chip giant, for its part, agreed to increase its corporate tax from 5% to 7.5%, which will apply only to its plants and not its development centers, (which will continue to pay 12%).
Nvidia's second largest development center outside the US is in Israel, and is one of the country's largest employers with over 3,300 employees at development centers in Yokneam, Tel Aviv, Raanana, Jerusalem, Beersheva, Kiryat Gat and Tel Hai.
The talks are taking place at a critical time - in the coming days, a professional team at the Ministry of Finance is expected to submit recommendations to Minister of Finance Bezalel Smotrich on how Israel can deal with global corporate tax. In other words, the transition to a minimum tax of 15% on multinational companies. The professional team includes representatives from the Tax Authority, the State Revenue Director, and the Budget Division, and is required to formulate solutions that will allow Israel to remain attractive to international companies, even when they can no longer benefit from reduced tax rates of sometimes less than 10%, as part of the Encouragement of Capital Investment Law.
A senior tax expert tells "Globes," "While the normal corporate tax rate in Israel is 23%, companies that operate under the Encouragement of Capital Investment Law can benefit from reduced tax rates of between 5% and 16%. But in recent years, new laws have been enacted in many countries that require companies to supplement the tax with a minimum 15% - if not in one country, then in another."
At the same time, to ensure that large companies pay fair tax rates, there are two complementary laws - the 15% law that guarantees a minimum tax on all company profits, and the 9% law that applies to specific payments between countries such as interest, royalties and service fees. The second law is activated when a company transfers such payments to a country with a tax rate lower than 9%, and the country that sent the payment can collect additional tax to make it up to 9%. The two laws work together to prevent a situation in which companies exploit tax gaps to reduce tax liability, either by transferring profits to low-tax countries or by transferring special payments between branches of the same company.
Why would companies want to pay the minimum tax in Israel in particular? This, the tax expert explains is for several fundamental reasons. Firstly, because they will have to supplement the tax to a minimum of 15% in some country anyway, and "It is better for them to pay in the country where they develop the technologies and conduct significant activity. Secondly, in many cases the initiative comes from Israel's Ministry of Finance, which approaches companies and offers them a 'package deal' - minimum tax, and in return they will receive other benefits." Nvidia is even seeking to anchor this in a special agreement that includes protection against future changes in tax rates in Europe. "This is a request that reflects the uncertainty in the market," a source familiar with the details explains to Globes. "Nvidia wants to ensure that it does not find itself paying double taxes."
Many countries have adopted the reform, and what about the US?
The current situation is complex for multinational companies, especially due to uncertainty in the US, where legislation on global minimum tax is stalled due to political disputes. While many countries, including the EU, UK, South Korea, Japan, Canada and Norway, have already adopted the reform and began implementing it last year, the situation in the US is different. Without a significant political change, full implementation of the reform in the US is not expected before 2026, with Republicans tending to oppose the introduction of global rules that would limit US ability to set its own tax policy.
According to Smotrich's decision, Israel is expected to implement the minimum tax regime on multinational companies with group turnover of €750 million or more from 2026. This is a dramatic change for companies such as Intel, which enjoy tax rates lower than 10% for building factories in the periphery. However, Israel's economic potential from the proposed arrangement is enormous, according to market sources, amounting to billions of shekels revenue per year, which could flow into the state coffers, instead of the coffers of other countries.
"Everybody is waiting to see what Trump will do"
The team currently working at the Ministry of Finance is supposed to formulate a package of benefits that will keep Israel attractive for these companies, so that they do not move the centers they have set up in Israel to other countries where labor costs and expenses are lower. In any case, Nvidia is not alone. In recent months, business figures and representatives of multinational companies operating in Israel have appeared before the team, presenting their conditions for continuing operations in Israel once they can no longer benefit from the low tax rates they received under the Encouragement of Capital Investment Law.
Meanwhile US and multinational companies around the world are waiting to see what Donald Trump will do with the flat corporate tax rates once he is sworn in as US president next week. "Everyone is waiting to see what he will do, because there was talk that he would cancel the requirement for a flat corporate tax - an initiative promoted by President Biden. We are in contact with the US Internal Revenue Service and there too we are waiting to see what Trump will do," says a senior official at the Ministry of Finance.
Published by Globes, Israel business news - en.globes.co.il - on January 13, 2025.
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