A Knesset bill currently being formulated by the Israel Tax Authority is set to affect all veterans of the IDF's technological units, and tie them, and any tech company they found, to Israel for tax purposes, for 10 years after their discharge.

The bill, a draft of which is being reported here for the first time, will require IDF tech unit veterans, to register any company they found in the first decade after their release, as an Israel domiciled company, which would also need to be dissolved in Israel. It is also proposed that tech unit veterans will be considered Israeli residents for a decade, even if they have relocated overseas.

Tax and tech experts call the proposal "draconian" and "unconstitutional" and are preparing to fight the idea that is taking shape in the Israel Tax Authority corridors.

The Israel Tax Authority's intention to formulate a bill that will restrict tech units veterans was revealed, casually, by Tax Authority director Adv. Shay Aharonovich last week, at a conference held at Bar-Ilan University's Faculty of Law.

He said, "We are examining the possibility of promoting legislation in which, for 10 years after discharge, a company founded by someone who was released from a technological unit will be considered an Israeli domiciled company, with the tax implications arising from this."

Aharonovich explained that the justification for the move is based on the fact that the knowledge and tools that the state provides to those veterans during their military service are used by them later to found ventures, but the state does not always benefit from the success.

By law, Israeli residents are required to pay income tax on all their income from anywhere in the world, while non-residents are required to pay tax only on income produced in Israel. In deciding whether the "center of life" is in Israel for tax purposes, factors such as the location of the individual's home and workplace and the location of their center of economic interests are examined. There are also quantitative criteria on the number of days spent in Israel.

According to the new bill, these criteria will not apply to army tech unit veterans. In other words, even if the veteran relocates, they will not be able to terminate their residency and will be required to pay tax on income in Israel and outside of Israel.

The planned law will apply to anyone who has undertaken military service, for 24 months or more, in a unit whose main activity is technological research and development, cybersecurity, or technological intelligence.

Numerous units in the IDF meet this definition, including elite units operating in the Intelligence Branch, the ICT Branch, and the Technology and Maintenance Corps (TNA) that deal with software development, cybersecurity, computing, electronic warfare, and intelligence. Unit 8200 is among the best-known, and many of its graduates later founded leading tech companies such as Wiz, founded by Assaf Rapaport and other 8200 veterans, which made the biggest exit in Israel when it was sold to Google for $32 billion. Veterans of Lotem and Ma'ram units will also be affected, as will many other units.

Supporters of the bill say the move is necessary so that the state can benefit from its investment in those who serve in the tech units. The Tax Authority explains that the state invests enormous resources in training soldiers in these elite units, but instead of enjoying the fruits of the investment, the state is forced to see those veterans found and transfer their activities to other countries. In recent years, the phenomenon of entrepreneurs registering their companies abroad (mainly in Delaware) and transferring the center of their lives to other countries for tax purposes has been increasing.

Therefore, the Tax Authority proposes to amend the law so that the creation of a binding "social contract" is created. In return for the prestigious training that the state provides to these employees, they will undertake to keep their economic activity and tax base in Israel for a decade. The law also seeks to prevent complex tax planning and exhausting legal discussions with the Authority on the issue of the "center of life".

The planned legislation will not apply retroactively, but only to veterans of special tech units, enlisting after the law is enacted by the Knesset, if it is indeed enacted.

The statement by the director of the Tax Authority and the details of the draft bill are already drawing sharp criticism from tax and tech experts. They insist that the bill is problematic and violates basic laws such as freedom of occupation and movement, as well as contradicting international tax treaties and discriminating against veterans of technological military units compared with veterans of other leading units.

"This is draconian legislation," says Adv. Leor Nouman, head of the tax department at the S. Horowitz law firm. "If you want tech unit veterans to stay in the country, the conditions must be created so that it is in their interest. But from here to setting draconian conditions in which someone who graduated from a tech unit will not be able to move their center of life abroad, there is a huge distance. It is also draconian to set that it is mandatory to incorporate in Israel, even if it is more convenient for veterans from a business perspective to have the intellectual property abroad. This is a disproportionate harm."

He adds, "The bill also contradicts tax treaties that set a person's center of life according to agreements between the State of Israel and that country, when this usually involves parameters such as the number of days spent in each country, permanent place of residence and place of business activity."

Adv. Daniel Paserman CPA, head of the tax practice at Gornitzky GNY, says, "The bill may raise major difficulties and there is doubt about its applicability. If a veteran who moved their center of life to the US continues to be an Israeli resident for tax purposes, how will double residency and double taxation be resolved? How will the tax treaty be implemented? Reaching an agreement between the countries may take years. Beyond the fundamental and ethical questions raised by the bill, it entails major practical questions that cast doubt on its feasibility."

Another problematic aspect raised by Adv. Nouman is the damage to motivation to serve in these units. "The state forces recruits to these units to be subject to a restriction for a decade. The army will have to inform recruits and make them sign strict commitments, when most young people of this age are not yet beginning to understand the implications of signing such commitments."

Officials at the Tax Authority are not thrilled by the criticism and are confident that the bill has a high chance of passing. "It's an injustice that affects state revenues," says a senior official at the Authority. "Although it's a difficult and unpopular step, the bill will solve an injustice that harms the public. Most of the recent major exits involved veterans of tech units who developed intellectual property and registered it abroad, and on the sale they paid no tax here. Almost every 8200 graduate founds a startup. This is a resource that the state developed and invested in."

The official stresses, "The planned legislation does not violate any fundamental right, it only concerns taxation aspects. No one will keep the veterans in the country and they will be able to relocate and found foreign companies. But for tax purposes, they and the companies will be considered residents of Israel for ten years."

According to him, the amount of tax lost by the state coffers in recent years has been enormous: "When these companies want to grow and turn to foreign investors, many of the assets flee abroad. There are deals worth tens of billions of dollars with very little tax. The tax lost by the state can reach tens of billions over several years."

The Tax Authority said, "Service in a prestigious tech unit allows the acquisition of valuable knowledge, with the developments of veterans of the units often based on the knowledge they gained during their years of military service. Therefore, we are examining the possibility of promoting a bill according to which a company founded by a veteran of such a unit for 10 years after their discharge will be considered a company domiciled in Israel, with the tax implications arising from this. Of course, the law will not be applied retroactively, if enacted."