Elbit Systems (ESLT): Export Tax Break Gone, R&D Grant in Its Place

Elbit Systems (ESLT) has lost the low Israeli tax rate its export status carried for years, and the Israeli government has replaced it with money paid against research and development spending instead. On its FY2026 second-quarter earnings call on 11 August 2026, the company said its effective tax rate rose from 5.6% a year earlier to 16.4% because the OECD Pillar 2 global minimum tax took effect in Israel, and that a research incentive law passed in March 2026 funded about half of the increase in its first-half R&D spending [1]. It is so far the only company whose direct disclosure covers both halves of that swap.

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How Israel's export tax break worked, and what the 15% minimum tax does to it

Israel has long used the tax code to support its export industries, and the Pillar 2 global minimum tax now overrides that support. Under the Law for the Encouragement of Capital Investments, 1959, a qualifying technology exporter can hold "Special Preferred Technological Enterprise" status, which cuts its corporate tax rate to a very low level. Elbit's FY2025 annual report states that as of 31 December 2025 the company and certain of its Israeli subsidiaries still met the conditions for that status [2]. Pillar 2 sets a 15% floor on the effective rate a large multinational group actually pays in a jurisdiction; where the group pays less, the shortfall is collected as a top-up, so the low-rate status stops reducing what the group hands over. This did not reach Israel immediately. Elbit's FY2024 annual report still carried a risk factor noting that Pillar 2 was effective in certain countries but not in Israel, and that the company had not yet estimated the impact [3].

Israel did not restore the rate. It changed how the money is paid. On 31 March 2026 the Knesset enacted a law for the encouragement of research and development, applying to qualifying R&D expenditure incurred in the tax year beginning 1 January 2026 [1]. That money lands one line higher in the income statement than tax does: it offsets R&D actually incurred in Israel rather than lowering the tax on profit earned in Israel. Any Israeli exporter large enough to fall under the minimum tax and low-taxed enough to have relied on that status faces both changes together, so this does not stop at one company.

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The tax line steps up in a single quarter while a grant comes back through R&D

Elbit's tax change showed up inside one quarter. Taxes on income went from $7.1 million in the second quarter of 2025 to $32.7 million in the second quarter of 2026, and the effective rate moved from 5.6% to 16.4%. CFO Kobi Kagan attributed the increase to the implementation of the Pillar 2 rules rather than to business mix or a one-off item [1]. On the same call he said the company increased first-half R&D spending by about $70 million, of which roughly half was funded by the new incentive law and the rest from company resources, while margin expansion was maintained [1].

The step-up has not landed evenly across Israeli exporters. Nova (NVMI) said on its second-quarter 2026 earnings call that its effective tax rate for the quarter was approximately 16% [4], against approximately 15.5% on the same call a year earlier [5]. Nova was already sitting near the 15% floor, so the minimum tax produced no visible break in its rate. The exporters the floor actually catches are those that were still paying single-digit rates.

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What an exporter recovers depends on its Israeli R&D relative to its Israeli profit

State support for Israeli exporters has moved from the profit line to the R&D line. The old benefit scaled with Israeli profit and carried no requirement about where the company spent its money. The replacement pays only against R&D that actually takes place in Israel. Whether the swap leaves a given company better or worse off therefore turns on how large its Israeli R&D budget is against its Israeli profit. A research-heavy exporter can recover much of the additional tax through the grant side. An exporter with a small R&D budget that earns its money from production lines and equipment has no comparable route to get the extra tax back.

The limits of this reading are visible in the material itself. Only Elbit has disclosed both halves of the swap, and only across a single half-year. Two things are worth following: whether its effective tax rate holds above 15% over the next several quarters, and whether the government-funded offset inside R&D expense keeps appearing and moves with the R&D budget.

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Companies exposed to this change

• Check Point Software (CHKP): An Israeli cybersecurity software company whose research is concentrated in Israel and whose group revenue reaches the threshold at which the minimum tax applies. It has also relied on Israeli technology-enterprise status to hold its rate down, so the loss of the rate benefit and the shift to spending-linked support would touch both its tax line and its R&D line.
• Mobileye (MBLY): Builds vision systems for automated driving, with its engineering concentrated in Israel and R&D spending high as a share of revenue compared with similar companies. On the mechanism above, a company like this recovers relatively more through the grant side, though how much depends on what it discloses.
• Tower Semiconductor (TSEM): An Israeli foundry that manufactures chips for other companies and spends its money mainly on production lines and equipment rather than research. It falls inside the minimum tax as well, but a company whose spending is capital rather than research has little way to recover the additional tax through a grant tied to R&D, which marks the edge of what this swap can cover.

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Sources

[1] Drillr · Elbit Systems (ESLT) · 2026-08-11 · FY2026 Q2 earnings call

"Taxes on income were $32.7 million in the second quarter of 2026 as compared to $7.1 million in the second quarter of 2025. The higher tax expense in the second quarter of 2026 was mainly driven by the implementation of the OECD Pillar 2 Global Minimum Tax Rules. The effective tax rate in the second quarter of 2026 was 16.4% compared to 5.6% in the second quarter of 2025."

[2] Drillr · Elbit Systems (ESLT) · 2026-03-17 · FY2025 annual report (20-F), tax note

[3] Drillr · Elbit Systems (ESLT) · 2025-03-20 · FY2024 annual report (20-F), tax law risk factor

[4] Drillr · Nova (NVMI) · 2026-08-06 · FY2026 Q2 earnings call

[5] Drillr · Nova (NVMI) · 2025-08-07 · FY2025 Q2 earnings call

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