On December 31, 2025, Israel passed a law establishing a complementary minimum tax (QDMTT) for multinational groups, applicable to fiscal years beginning on or after January 1, 2026. Under this regime, only the QDMTT (corresponding to OECD Pillar Two) is implemented, and for the time being, neither the Income Inclusion Rule (IIR) nor the Under-Taxed Profits Rule (UTPR) are adopted. The main objective is to ensure that multinational groups with economic activities in Israel are effectively taxed at a rate of at least 15%. In other words, if the effective tax rate (ETR) on income attributed to the country is less than 15%, Israel imposes a “supplementary tax” that raises the tax burden to that minimum. This protects the local tax base from the minimum tax being captured by other lower-tax jurisdictions.
Subjects and scope of application
The Israeli QDMTT applies to large multinational groups that exceed the global revenue threshold of €750 million in at least two of the previous four fiscal years. Only constituent Israeli entities—including legal entities domiciled and financial units (such as branches or permanent establishments) within the consolidation perimeter—fall within the scope of the tax. When the group meets the threshold, each local entity or aggregate set of local entities will be subject to the minimum tax calculation. In practice, two calculation mechanisms are offered:
- Individual (stand-alone) calculation: By default, each Israeli entity in the group calculates its own ETR according to the OECD’s GloBE rules. If this individual rate is less than 15%, each entity generates its corresponding top-up tax. When choosing this method, the law even restricts the substance-based income exclusion to prevent excessive reductions in the minimum tax.
- Aggregate calculation (jurisdictional or blended): Alternatively, the group may choose to calculate a single joint top-up on all Israeli entities. In that case, the global income in Israel is consolidated and offset internally (e.g., losses from some entities with gains from others). The total tax is then distributed among the entities in proportion to their share of Israel’s GloBE income (or according to another alternative formula approved by the tax authority). To enable this approach, the group must designate a Designated Filing Entity to centralize the filing and payment of the tax for the entire local group. This route is often simpler and more common when there are multiple Israeli companies in the group.
Calculation of the effective rate and compliance obligations
The calculation of the ETR and the top-up tax is based on the OECD’s GloBE rules, which are incorporated by reference into Israeli law. Specifically, each entity (or the jurisdictional aggregate) will determine its taxable income based on consolidated financial statements and compare the resulting effective rate with the established 15%. If the ETR is lower, the difference becomes an additional top-up tax payable by the group in Israel. For example, entities under local tax incentives (which apply reduced rates) may also receive a top-up if their overall ETR falls below the minimum threshold.
The legislation provides that this calculation be made using a single uniform accounting framework for all Israeli entities involved. The permitted accounting standards are the local standards (Israeli Financial Accounting Standards) or US GAAP, consistent with each other. In practice, this requires close coordination between the accounting and tax teams so that the QDMTT tax base matches the authorized financial accounting.
Companies subject to the QDMTT must strictly comply with the formal deadlines for notification, reporting, and payment. The general filing deadline is 15 months after the end of the relevant fiscal year. For the first year of application, the identity of the designated representative entity must also be notified within 90 days after the end of the fiscal year. These obligations fall on the group or the designated entity, depending on the approach chosen, and include the submission of a special form via a digital portal to the Israeli Tax Authority. Failure to meet these deadlines may result in significant financial penalties.
Interaction with Transfer Pricing Schemes
The determination of the ETR in Israel depends largely on how intragroup revenues, costs, and expenses are allocated among local entities. In this regard, transfer pricing policies are fundamental to the QDMTT tax base. In practice:
- Impact on local ETR: If a group artificially allocates lower profits to its subsidiaries in Israel (e.g., through aggressively low transfer prices), the effective rate calculated in that country will be lower. An ETR below 15% will trigger the supplementary tax in Israel. Conversely, forced increases in local income (due to price adjustments) may also trigger top-ups if the profit is considered to exceed arm’s length. In both cases, the tax authorities will ensure that the distribution of profits reflects the actual economic substance of the transactions.
- Documentation and defense: In the event of a possible transfer pricing adjustment, technical documentation that is properly aligned with the OECD’s arm’s length principle is crucial. TP reports and studies must justify the allocation of intra-group income and demonstrate that the conditions reflect the underlying economic reality. Solid documentation helps defend to the tax authority why a portion of the profits actually corresponds to the Israeli jurisdiction. Lack of adequate documentation can exacerbate risks, even leading to retroactive adjustments or penalties.
Practical implications and regulatory challenges
The introduction of QDMTT in Israel represents a substantive change in the local obligations of multinational groups. Beyond filing and payment requirements, companies must structurally review how they allocate profits to Israel. This may involve redesigning intra-group flows, reconsidering “bridge” entities, and ensuring that transfer prices withstand scrutiny under Pillar Two rules.
Additionally, the regulatory framework will continue to evolve. For example, work is underway on local incentives compatible with Pillar Two (such as refundable tax credits or safe harbors) that could mitigate the practical effect of the top-up in the future. In the meantime, it is critical to coordinate tax, accounting, and transfer pricing teams to comply with QDMTT in a comprehensive manner. International experience shows that integrating robust TP policies with the calculation of the minimum tax is key to reducing adjustment risks and optimizing the overall tax burden without losing regulatory consistency. Ultimately, companies will need to rethink their global tax strategy considering this new minimum standard in Israel, ensuring consistency between their financial reports and their tax returns under the Pillar Two scheme.
TPC Group provides specialized advice on international taxation and transfer pricing, helping companies identify impacts, structure defensible solutions, and ensure technical compliance with QDMTT obligations in accordance with Pillar Two standards.
Source: https://fs.knesset.gov.il/25/law/25_lsr_10503660.pdf