Executive summary

Final legislation adopting the Qualified Domestic Minimum Top-up Tax (QDMTT) was approved and published in Israel on 31 December 2025 and has entered into force as part of the Israeli Income Tax Ordinance.

The Israeli Ministry of Finance had released a draft bill and an accompanying explanatory note introducing Israel's QDMTT regime on 5 October 2025. The draft legislation followed the Organisation for Economic Co-operation and Development (OECD) Pillar Two framework and aimed to preserve Israel's taxing rights while ensuring full eligibility for the QDMTT Safe Harbor. (For details, see EY Global Tax Alert, Israeli Ministry of Finance publishes draft legislation for implementing Qualified Domestic Minimum Top-up Tax, dated 20 November 2025.)

Key highlights of the law

Applicability and notification obligations

The law applies to the income of an Israeli Constituent Entity for fiscal years beginning on or after 1 January 2026.

An entity that is an Israeli Constituent Entity subject to the law on the date the law goes into effect must notify the Israeli Tax Authority (ITA) via an online form within one year from that date.

An entity that becomes a Constituent Entity at a later stage must notify the ITA within 90 days following the end of the fiscal year in which it became subject to the law.

Designated Filing Entity

The appointment of a Designated Filing Entity does not require substantive approval but requires notifying the ITA. The identity of the Designated Filing Entity may also be changed by notifying the ITA.

Computation of the Effective Tax Rate and Top-Up taxes under QDMTT

Israeli Constituent Entities may compute their top-up tax liabilities under two alternative methods.

First alternative — Entity-level QDMTT (default option):

• The tax is imposed at the level of each individual Israeli Constituent Entity.
• The computation is performed separately for each Israeli Constituent Entity based on its Global anti-Base Erosion (GloBE) income.
• The Substance-Based Income Exclusion (SBIE) is not taken into account.

Second alternative — Jurisdictional-level QDMTT (election):

• The Israeli Constituent Entity may elect to be liable for its proportional share of the QDMTT applicable to the entire multinational enterprise (MNE) group in Israel.
• The computation is performed on a jurisdictional basis through a Designated Filing Entity.
• The SBIE is taken into account at the group level.

Tax Director's allocation authority

As a default rule, the allocation of the QDMTT among Israeli entities is based on the ratio of each entity's GloBE income to the total GloBE income of the MNE in Israel. The ITA is authorized to approve an alternative allocation ratio upon the pre-ruling request of the Designated Filing Entity.

Accounting standards for tax computation

The computation of the tax shall be carried out in accordance with the OECD rules and based on either Israeli generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS) or United States (US) GAAP, subject to meeting the conditions set forth in the legislation.

If the conditions are not met under any of these frameworks, the computation shall be based on the accounting standards used in the consolidated financial statements of the Ultimate Parent Entity (UPE).

Currency of computation

The QDMTT may be computed in Israeli Shekels, US Dollars, or the currency of the consolidated financial statements of the UPE, subject to the conditions prescribed in the law.

Filing deadlines

The QDMTT return, whether filed on an entity-by-entity basis or through a Designated Filing Entity, must be submitted via an online form no later than 15 months following the end of the relevant fiscal year.

Safe harbors and reliefs

At this stage, safe harbor provisions have not yet been implemented in Israel. However, the law provides that initial regulations on this matter must be submitted for approval by the Finance Committee of the Knesset no later than 1 July 2026.

Next steps

Israeli companies that are members of MNEs should assess the impact of the QDMTT on their financial statements and estimate the potential additional tax exposure arising from this legislation.