New Israeli Government Faces Critical High-Tech Policy Decisions
The incoming Israeli government faces critical decisions on taxation, AI infrastructure, and quantum programs to maintain the high-tech sector's global standing amid rising competition.
The upcoming Israeli government will inherit critical decisions regarding the future of the high-tech sector, spanning taxation, AI infrastructure, quantum computing, and foreign investments, as global competition intensifies.
According to the Israel High-Tech Association at the Manufacturers Association, the sector accounts for approximately 18% of GDP, around 58% of exports, and employs about 400,000 workers. Ahead of the new government's formation, the association mapped out pending issues, including the national quantum program, the national chip initiative, and AI and Innovation Authority budgets.
Taxation and Budget Deficits
One of the government's first major tests will be shaping the 2027 state budget, which requires identifying roughly 40 billion shekels through spending cuts and tax hikes. Proposals include reforming employee stock options by raising capital gains tax from 25% to 30% or capping credits. Conversely, officials are reviewing capital gains tax exemptions of up to 45 million shekels for founders and investors to incentivize local company formation and intellectual property retention.
While the High-Tech Association supports incentives for founders, it strongly opposes funding them by increasing taxes on employee options, emphasizing that options remain a vital compensation tool for startups unable to compete with massive salaries. Additional tax issues awaiting resolution include venture capital taxation, extending high-tech investment incentives expiring in 2027, and finalizing regulations for multinational corporations.
AI Infrastructure and Data Centers
Another critical infrastructural challenge involves building massive data centers for artificial intelligence, which require vast land areas, high power capacity, and advanced cooling systems. The Prime Minister's Office is drafting legislation to classify these facilities as national infrastructure, enabling expedited planning through the National Infrastructure Committee.
Under the proposal, data centers consuming 50 megawatts or more would qualify, capped at ten approvals annually, while facilities exceeding 200 megawatts in high-demand areas would be required to generate all their own electricity. The High-Tech Association argues the quota is arbitrary and that approvals should depend strictly on electrical grid availability.
Chips, Quantum, and Exports
The incoming administration must also decide on long-term technological roadmaps, including launching a domestic semiconductor strategy and continuing the national quantum program. Following the conclusion of its first five-year term, a 1.5 billion shekel continuation plan focusing on quantum software and error correction is pending approval, alongside a 200 million shekel tender for quantum computing infrastructure.
Furthermore, the industry faces external trade threats, including potential European trade restrictions and the lack of a domestic foreign investment screening mechanism coordinated with Washington. Avvi Traub, director of the Israel High-Tech Association, emphasized the urgency: "The advantages that made Israel a tech powerhouse cannot stand on their own. In a world of growing competition, a long-term national policy is required to secure Israel's economic future."
