Israel Issues a Draft QDMTT Law

On October 5, 2025, Israel published a consultation on a draft law for a domestic minimum tax (intended to be a Qualified Domestic Minimum Top-Up Tax or ‘QDMTT’) from January 1, 2026.

Neither the Income Inclusion Rule (IIR) or Under-Taxed Profits Rule (UTPR) are currently proposed to be enacted in Israel.

The draft law does not attempt to redraft the OECD Model Rules, instead it transposes the OECD Model Rules into Israeli law by way of a direct static reference in Sections 2, 3 and 4. The OECD Model Rules (translated to Hebrew) are provided as an appendix to the draft law.

The implementation of the Pillar Two rules via a static reference to the OECD Model Rules means that if the OECD Model Rules were to change, the law may need to be amended.

Section 3 of the draft law also provides that the OECD Commentary and Administrative Guidance must be taken into account as part of the interpretation. The Explanatory Notes to the draft law state that this is intended to ensure that the implementation of the law in Israel will be carried out in full uniformity with the other countries that have chosen to implement the rules, while creating a uniform standard that allows for easy implementation of the rules by multinational groups.

This makes the Israel Pillar Two law much shorter than the EU legislation and other jurisdictions that apply full-form legislation.

Section 4(d) of the draft law provides that the Minister of Finance may issue further rules relating to:

-Specific deviations from the OECD Model Rules, as permitted under the OECD Administrative Guidance;

-Safe Harbours;

-Currency conversion rules; and

-Further guidance on the QDMTT calculation.

QDMTT Design

As the draft law applies the OECD Model Rules and Administrative Guidance, the application of the domestic minimum tax and it’s specific calculation features will be in accordance with the OECD rules.

However, the only specific amendment of the OECD Model Rules relates to the exclusion of the QDMTT from the calculation of the top-up tax in Section 2 of the draft law. This is required to avoid circularity (as the OECD Model Rules applies the top-up tax calculation for IIR/UTPR purposes and deducts QDMTT from the tax amount, this is not required for the QDMTT calculation). Other mandatory and optional deviations in the OECD Administrative Guidance are not yet included (eg there are no rules for CFC pushdowns). However, Section 4(d) of the draft law provides that the Minister of Finance is to issue further guidance on the deviations from the OECD Model Rules.

Given the draft law applies the OECD Model Rules for the QDMTT calculation, it is expected that the accounting standard used for the Israeli QDMTT will be based on the default GloBE rules (ie the UPEs accounting standard unless this is not reasonably practicable) unless otherwise stated in forthcoming Ministry of Finance guidance. 

Section 4(b) of the draft law provides that instead of the QDMTT being calculated on an entity basis, a jurisdictional blending approach can apply with individual Israeli entities being liable for the QDMTT on a proportional basis calculated at the level of the MNE group in Israel.

Where this method is applied, where there are multiple Israeli entities of the MNE group in Israel, jurisdictional blending will apply to consolidate the ETR to offset entities with a higher ETR against entities with a lower ETR. 

The top-up tax will be attributed to each of the entities in the group based on the the ratio of the GloBE income of the Israeli entities to the group GloBE income. Note that top-up tax will not be attributed to loss-making entities.

The Explanatory Notes to the draft Law state that they expect the vast majority of groups operating in Israel that consist of multiple entities will choose this approach.

This approach is conditional on a designated entity being selected and the designated entity submitting a consolidated report to the Tax Authority.

Filing

Section 5(a) of the draft law requires the submission of a QDMTT return (and payment of the top-up tax) within 15 months following the end of the fiscal year (18 months in the first year).

However, Section 5(b) of the draft law provides that where there are multiple Israeli entities of an MNE group subject to the QDMTT, they can nominate a designated entity for filing and payment purposes. The QDMTT return will detail the method of calculating the top-up tax for the MNE group in Israel and the tax for each Israeli entity.