Israel Enacts its DMTT Law with Significant Changes from the Previous Draft law

On December 31, 2025, Israel enacted the Law on the Minimum Corporate Tax for Corporate Groups (5776-2025) to provide for a domestic minimum tax (intended to be a Qualified Domestic Minimum Top-Up Tax or ‘QDMTT’) from January 1, 2026. This follows a previous consultation on a draft law issued on October 5, 2025.

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

The enacted law contains a number of differences from the original draft law as permitted in the OECD Administrative Guidance, including:

-Use of a Local Financial Accounting Standard (Israeli Financial Accounting Standards or US GAAP)

-A local currency election (Israeli Shekels or USD)

-Inclusion of the mandatory pushdown restriction for taxes of PEs, CFCs, Hybrids and certain taxes on distributions. 

All of these are subject to certain conditions (explained below). 

The law also includes a new notification requirement and amends the top-up tax calculation to provide that if the DMTT is calculated on an entity basis (as opposed to a proportionate share of the groups top-up tax liability in Israel), no substance-based income exclusion is deducted.

The 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 and 3. The OECD Model Rules (translated to Hebrew) are provided as an appendix to the 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 1 of the law provides that the purpose of the law is to ensure a global minimum tax applies for MNEs in accordance with the OECD rules.

The Explanatory Notes to the original draft law stated 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.