Israeli Ministry of Finance publishes draft legislation for QDMTT

• On 5 October 2025, Israel published draft legislation for the Qualified Domestic Minimum Top-up Tax (QDMTT) aligned with Organisation for Economic Co-operation and Development (OECD) Pillar Two, effective for income from 1 January 2026.
• The QDMTT applies to multinational enterprise groups with consolidated revenue exceeding €750m in at least two of the four preceding fiscal years, incorporating OECD Global Anti-Base Erosion Rules and Guidance.
• The draft legislation adopts an entity-level default calculation, allowing groups to elect jurisdictional blending for all Israeli entities.
• Affected entities should prepare for the new reporting requirements and potential penalties for late filings, while also considering the forthcoming Qualified Refundable Tax Credit regime for research and development in Israel.

Executive summary

On 5 October 2025, the Israeli Ministry of Finance released a draft bill and an accompanying explanatory note introducing Israel's Qualified Domestic Minimum Top-up Tax (QDMTT) regime. The draft legislation follows the Organisation for Economic Co-operation and Development (OECD) Pillar Two framework and aims to preserve Israel's taxing rights while ensuring full eligibility for the QDMTT Safe Harbor.

Key highlights of the Draft legislation

Scope and effective date

The draft provides that the Israeli QDMTT will apply to income derived from 1 January 2026 onward, with no option for early adoption.

The regime applies to multinational enterprise (MNE) groups with annual consolidated revenues exceeding €750m in at least two of the four preceding fiscal years.

Legislative reference and QDMTT Safe Harbor eligibility

The draft legislation expressly incorporates the OECD's Global Anti-Base Erosion (GloBE) Model Rules, Commentary and Administrative Guidance (as updated periodically) for determining the effective tax rate (ETR) and top-up tax.

In cases of uncertainty, interpretation shall follow the OECD framework to ensure international consistency and eligibility for the QDMTT Safe Harbor.

Computation of top-up tax

Under the OECD Pillar Two framework, the default computation of the ETR and top-up tax is performed on a jurisdictional basis, aggregating all constituent entities located in the same jurisdiction.

However, the Israeli draft legislation deviates from this standard. According to Section 4(a) of the draft, the default calculation of the Israeli QDMTT will be performed at the entity level for each Israeli constituent entity of an in-scope MNE group.

The legislation further allows MNE groups to elect to apply a jurisdictional blending approach for all their Israeli entities, aligning with the OECD's standard methodology.

This inversion of the OECD default approach is intended to simplify compliance, particularly in cases involving mixed ownership structures, private/public subsidiaries or differences in financial year-ends between Israeli group entities.

Reporting and assessment

Under Section 5(a) of the draft, the QDMTT annual return must be filed within 15 months after the end of the relevant fiscal year, or within 18 months for the first reporting year.

Administrative penalties

The draft introduces a new monetary penalty regime under Section 12, providing for a penalty of 150,000 Israeli new shekels (ILS150k) for each full month of delay in filing the required QDMTT return.

This amount exceeds the penalties currently applicable under the Income Tax Ordinance for late filings.

Future incentive framework (QRTC)

Israel is planning to introduce a Qualified Refundable Tax Credit (QRTC) under its upcoming Pillar Two legislation, intended to complement the QDMTT regime set to begin in 2026. This proposed mechanism would provide refundable tax credits specifically for research and development expenditures in Israel, helping multinationals align with the new global minimum tax rules while preserving the country's innovation competitiveness.

Next steps

Although relatively initial, the publication of the draft legislation represents a key milestone in Israel's Pillar Two implementation. An updated draft legislation will likely be issued soon with more clarity on the final bill.

Stakeholders and in-scope MNEs should:

• Review the proposed legislative framework and assess its operational and reporting implications
• Prepare for compliance and data collection in advance of the 2026 effective date
• Consider engaging with the Ministry of Finance and the Israel Tax Authority to provide input on administrative simplifications and transitional aspects