Israel’s Finance Ministry is preparing a dual support package for its high-tech sector, combining direct startup grants with a novel corporate tax mechanism that would allow multinational firms to pay taxes in U.S. dollars, Finance Minister Bezalel Smotrich announced this week. The initiative addresses mounting pressure on Israel’s largest exporters, whose profitability has eroded as the shekel strengthened to historic highs against the dollar.
The currency headwind has become acute for Israeli technology companies that earn revenue in dollars while incurring most operating expenses in shekels. When the exchange rate briefly dipped below 2.9 shekels per dollar in recent months, before recovering toward 3 per dollar, it triggered alarm among software firms, chip designers, and venture-backed startups facing margin compression and reduced competitiveness relative to peers in dollar-denominated markets.
Smotrich confirmed that the government is finalizing two distinct initiatives to reverse that trend. The first targets small and emerging startups through expanded Israel Innovation Authority grant programs, which convert public funding into loans if recipients achieve revenue growth and profitability. The second aims at established growth-stage companies facing stalled expansion decisions or internal corporate pressure to relocate development centers abroad.
Addressing Multinational Flight Risk
The tax mechanism represents a more experimental approach. The Finance Ministry is evaluating three competing models to incentivize multinational corporations to maintain or expand Israeli operations despite rising local labor costs and the shekel’s strength. The core problem is straightforward: foreign corporate boards, when deciding where to locate new research centers or consolidate existing ones, increasingly factor in Israel’s elevated employment expenses relative to peers in other developed economies.
Allowing multinationals to pay a portion of corporate taxes in dollars would reduce exposure to currency volatility and lower the effective cost of Israeli operations in dollar-denominated budget terms. It represents a form of currency-matched liability matching that could shift the calculus for multinational finance teams weighing expansion in Tel Aviv against alternative locations like London, Toronto, or Singapore.
Smotrich indicated that the final design would result from dialogue between the Finance Ministry, the Innovation Authority, industry bodies, and the multinational corporations themselves. The government expects to publish a comprehensive plan within days, suggesting the framework has cleared internal review and is approaching external announcement.
Timing and Market Context
The shekel’s recent strength is a structural challenge with political dimensions. Unlike temporary currency moves, the strengthening reflects deeper shifts in capital flows, central bank policy, and geopolitical risk assessments. For an economy dependent on technology exports and foreign venture capital inflows, a strong currency creates a durable headwind that policy alone cannot offset. Yet the government has leverage over tax code, grant programs, and regulatory incentives to partially neutralize the effect.
Israeli startups have faced fundraising pressure in recent quarters as growth-stage venture capitalists globally tighten deployment and demand stronger unit economics. A weaker dollar relative to shekel costs, combined with cheaper local talent in nominal terms, would make Israeli companies more attractive acquisition targets and later-stage funding candidates. Conversely, a strong shekel makes Israeli margins appear worse in dollar terms and can trigger negative sentiment among international investors evaluating Israeli tech on a global scale.
Startup Support Through Existing Channels
The smaller startups component leverages existing institutional capacity. The Israel Innovation Authority already operates grant and quasi-loan programs with proven track records and administrative infrastructure. By reopening or expanding those tracks, the government can deploy capital quickly without designing new bureaucracy. The conversion feature, where grants become loans upon achieving profitability, aligns public sector incentives with company success and ensures capital recycling as earlier cohorts mature.
This structure mirrors crisis-response playbooks used in prior periods of external shock. The advantage is speed and lower administrative friction; the limitation is that it primarily benefits companies already positioned to scale, not those facing existential cash crunches.
Open Questions on Implementation
Several mechanics remain unresolved. The dollar tax provision raises legal and accounting questions: would it apply to all corporate taxes or only certain categories, would it be permanent or time-limited, and what exchange rate mechanism would apply on payment date. For startups receiving grants-turned-loans, the maturity profiles and interest rates have not been detailed.
The success of both initiatives also hinges on execution speed. Technology companies make location and hiring decisions on monthly and quarterly cycles; if the government framework takes months to formalize, the practical impact may be blunted. Conversely, if the policy is announced but implementation is slow, companies may hedge by accelerating internal discussions about relocation before the benefits crystallize.
The broader lesson is that currency policy and corporate tax design are now intertwined with tech talent retention and venture ecosystem health. Israel’s technology sector generated roughly 10 percent of the country’s GDP and employs tens of thousands of workers. A sustained shekel strength scenario could spark gradual talent dispersion and delayed hiring by multinationals, outcomes that tax incentives and grants can slow but not fully prevent if the underlying currency imbalance persists.
Smotrich’s dual-track approach acknowledges this reality: early-stage support cushions startups through volatility while multinational incentives address the structural competitive challenge. Neither alone solves the shekel problem, but together they signal that the government is aware of the threat and willing to deploy multiple policy levers to contain it.
