VARONIS SYSTEMS INCVRNS
VARONIS SYSTEMS INC Income Taxes Disclosure
INCOME TAXES
| a. | U.S. Tax Reform: | ||||
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was signed into law. The TCJA makes broad and complex changes to the Code that impact the Company's provision for income taxes. The changes include, but are not limited to:
•Decreasing the corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017 (“Rate Reduction”); and
•Taxation of GILTI earned by foreign subsidiaries beginning after December 31, 2017. The GILTI tax imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations.
•Beginning in 2022, the TCJA requires taxpayers to capitalize specified research and development expenses with amortization periods over five and fifteen years, which has increased the Company's tax liability in the U.S. As the Company has a valuation allowance against its deferred tax assets, including capitalized research and development costs, the taxable income in the United States has increased to account for the capitalization of research and development costs starting in 2022.
On July 4, 2025, the One Big Beautiful Bill Act ("OBBBA") entered into effect. This legislation introduces several measures, including provisions that allow for the immediate expensing of U.S. research and development expenses and certain capital expenditures, as well as changes to the U.S. taxation of profits derived from foreign operations. The OBBBA has multiple effective dates, with certain provisions that became effective in 2025 and others implemented through 2027.
Effective in July 2025, the TCJA, as revised by the OBBBA, requires all U.S. companies to capitalize and subsequently amortize specified research and development expenses over fifteen years for research and development activities conducted outside of the U.S.
GILTI Tax
Certain income (i.e., GILTI) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return.
For 2025, the Company is subject to tax on account of GILTI as it has net CFC tested income on an aggregated basis. The resulting tax liability is not significant due to utilization of carried forward net operating loss ("NOL") and research and development tax credits.
Accounting for the TCJA and OBBBA
The Company accounted for the tax impact related to the TCJA and believes its analysis to be completed. The Company recognizes that the IRS is continuing to publish and finalize ongoing guidance which may modify accounting interpretation for the TCJA. The Company would look to account for these impacts in the period of such change is enacted.
The Company accounted for the tax impact related to the OBBBA for legislation that was effective in 2025 and these matters did not have a material effect on the Company's effective tax rate. The Company recognizes that additional legislation becomes effective after 2025 and that the IRS is continuing to publish and finalize ongoing guidance which may modify accounting interpretation for the OBBBA. The Company would look to account for these impacts when effective and in the period of such change is enacted.
| b. | The Company: | ||||
The Company is taxed in accordance with U.S. tax laws.
As of December 31, 2025, the Company had gross federal NOL carry-forwards of approximately $211,483, of which $1,435 can be carried forward until December 31, 2037 and can fully offset taxable income, while $210,049 of which can be carried forward indefinitely but can only be used to offset 80% of taxable income. As of December 31, 2025, the Company had NOL carry-forwards for state and foreign income tax purposes of approximately $182,043 and $84,605, respectively. State NOL carry-forwards of $148,154 expire between 2027-2044 and the remainder do not expire. Foreign NOL carry-forwards do not expire. In addition, as of December 31, 2025, the Company had federal research credit carryforwards of approximately $10,533. If not utilized, the federal tax carryforwards will begin to expire in 2041.
A U.S. corporation's ability to utilize its federal and state NOL and tax credit carryforwards to offset its taxable income is limited under Section 382 and Section 383 of the Code if the corporation undergoes an ownership change (within the meaning of Code Section 382). In general, an “ownership change” occurs whenever the percentage of the stock of a corporation owned by “5-percent shareholders” (within the meaning of Code Section 382) increases by more than 50 percentage points over the lowest percentage of the stock of such corporation owned by such “5-percent shareholders” at any time over the testing period.
An ownership change within the meaning of Code Section 382 would establish an annual limitation to the amount of federal and state NOL and tax credit carryforwards the Company could utilize to offset its taxable income or income tax in any single year. The annual limitation may result in the expiration of state net operating losses and federal and state credits before utilization and in the event we have a change of ownership, utilization of the carryforwards could be restricted.
| c. | Loss before income taxes is comprised as follows (in thousands): | ||||
| Year ended | |||||||||||||||||
| December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Domestic | $ | (69,006) | $ | (19,840) | $ | (21,491) | |||||||||||
| Foreign | (47,314) | (63,167) | (65,427) | ||||||||||||||
| $ | (116,320) | $ | (83,007) | $ | (86,918) | ||||||||||||
| d. | Income taxes is comprised as follows (in thousands): | ||||
| Year ended | |||||||||||||||||
| December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current: | |||||||||||||||||
| Domestic: | |||||||||||||||||
| Federal | $ | (1,002) | $ | 15 | $ | (1,077) | |||||||||||
| State | 665 | 1,511 | 2,420 | ||||||||||||||
| Foreign | 13,089 | 11,214 | 12,569 | ||||||||||||||
| Total current income tax | $ | 12,752 | $ | 12,740 | $ | 13,912 | |||||||||||
| Deferred: | |||||||||||||||||
| Domestic: | |||||||||||||||||
| Federal | $ | 153 | $ | 62 | $ | 61 | |||||||||||
| State | 12 | 12 | 21 | ||||||||||||||
| Foreign | 87 | (56) | 4 | ||||||||||||||
| Total deferred income tax | $ | 252 | $ | 18 | $ | 86 | |||||||||||
| Income tax expense | $ | 13,004 | $ | 12,758 | $ | 13,998 | |||||||||||
| e. | Deferred income taxes: | ||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s deferred tax assets are derived from its U.S. NOL carry-forwards and other temporary differences.
ASC No. 740 requires an assessment of both positive and negative evidence concerning the realizability of deferred tax assets in each jurisdiction. After considering evidence such as current and cumulative financial reporting incomes, the expected sources of future taxable income and tax planning strategies, the Company’s management concluded that a valuation allowance is required in the United States and some foreign jurisdictions. A net deferred tax liability of $700 was recorded as of December 31, 2025. Future changes in these factors, including the Company’s anticipated results, could have a significant impact on the realization of the deferred tax assets which would result in an increase or decrease to the valuation allowance and a corresponding charge to income tax expense. The Company reevaluates the judgements surrounding its estimates and makes adjustments as appropriate each reporting period.
Significant components of the Company's deferred tax assets and liabilities as of December 31, 2025 and 2024 are as follows (in thousands):
| December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Deferred tax assets: | |||||||||||
| Carry forward losses and credits | $ | 63,310 | $ | 42,218 | |||||||
| Deferred revenues | 2,399 | — | |||||||||
| Accrued payroll, commissions, vacation | 14,601 | 14,409 | |||||||||
| Equity compensation | 38,841 | 36,169 | |||||||||
| Allowance for credit losses | 774 | 2,521 | |||||||||
| Accrued severance pay | 229 | 240 | |||||||||
| Operating lease liabilities | 12,233 | 7,226 | |||||||||
| Research and development capitalized expense | 102,094 | 91,706 | |||||||||
| Other | 12,198 | 5,367 | |||||||||
| Deferred tax assets before valuation allowance | 246,679 | 199,856 | |||||||||
| Valuation allowance | (215,693) | (181,124) | |||||||||
| Deferred tax assets | $ | 30,986 | $ | 18,732 | |||||||
| Deferred tax liability: | |||||||||||
| Deferred commissions | $ | (20,121) | $ | (12,548) | |||||||
| Operating lease right-of-use assets | (10,303) | (5,373) | |||||||||
| Other | (1,262) | (1,245) | |||||||||
| Deferred tax liability | $ | (31,686) | $ | (19,166) | |||||||
| Net deferred tax liability | $ | (700) | $ | (434) | |||||||
The change in the valuation allowance was an increase of $34,569 and $11,650 during 2025 and 2024, respectively.
| f. | Reconciliation of the theoretical tax expenses: | ||||
The company adopted ASU 2023-09 for the year ended December 31, 2025 on a prospective basis. A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company, and the actual tax expense as reported in the consolidated statements of operations is as follows (in thousands, except for percentages):
| Year ended December 31, | |||||||||||
| 2025 | |||||||||||
| Amount | Percent | ||||||||||
| Provision computed at federal statutory rate | $ | (24,427) | 21.0 | % | |||||||
| State and local income taxes, net of federal income tax effect* | 612 | (0.5) | |||||||||
| Foreign tax effects: | |||||||||||
| Israel: | |||||||||||
| Statutory tax rate difference between Israel and the United States | (1,071) | 0.9 | |||||||||
| Effect of Investment Law | 3,749 | (3.2) | |||||||||
| Changes in valuation allowance | 2,686 | (2.3) | |||||||||
| Other adjustments | (192) | 0.2 | |||||||||
| Other foreign jurisdictions | (1,284) | 1.1 | |||||||||
| Effect of cross-border tax laws: | |||||||||||
| Global intangible low-taxed income inclusion | 2,803 | (2.4) | |||||||||
| Tax credits: | |||||||||||
| Research and development tax credit | (3,187) | 2.7 | |||||||||
| Changes in valuation allowances | 3,085 | (2.7) | |||||||||
| Non-taxable or non-deductible items: | |||||||||||
| Equity-based compensation expenses | (3,562) | 3.1 | |||||||||
| Section 162(m) limitation on officer compensation | 14,270 | (12.3) | |||||||||
| Other | 1,893 | (1.6) | |||||||||
| Changes in unrecognized tax benefits | 17,629 | (15.2) | |||||||||
| Income tax expense | $ | 13,004 | (11.2) | % | |||||||
* State taxes in Massachusetts, New York and Virginia made up the majority (greater than 50 percent) of the tax effect in this category.
| Year ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Loss before income taxes, as reported in the consolidated statements of operations | $ | (83,007) | $ | (86,918) | |||||||
| Statutory tax rate | 21 | % | 21 | % | |||||||
Theoretical tax benefits on the above amount at the US statutory tax rate | $ | (17,431) | $ | (18,253) | |||||||
| Income tax at rate other than the U.S. statutory tax rate | 3,207 | 6,954 | |||||||||
| Non-deductible expenses including equity based compensation expenses | (339) | (3,983) | |||||||||
Operating losses and other temporary differences for which valuation allowance was provided | 12,096 | 27,291 | |||||||||
| Research and development tax credit | (2,525) | (1,516) | |||||||||
| State tax | (1,204) | (1,780) | |||||||||
| Impact of rate change | 999 | (3,199) | |||||||||
| Change in tax reserve for uncertain tax positions | 17,083 | 7,869 | |||||||||
| Other individually immaterial income tax items | 872 | 615 | |||||||||
| Actual tax expense | $ | 12,758 | $ | 13,998 | |||||||
| g. | A reconciliation of the beginning and ending amounts of unrecognized tax benefits, including interest and penalties, in the years ended December 31, 2025 and 2024 are as follows (in thousands): | ||||
| Gross unrecognized tax benefits as of January 1, 2024 | $ | 25,193 | |||
| Increase in tax position for current year | 10,487 | ||||
| Increase in tax position for prior years | 7,088 | ||||
| Decrease in tax position for prior years | (287) | ||||
| Decrease for lapse of statute of limitations/settlements | (205) | ||||
Gross unrecognized tax benefits as of December 31, 2024 | $ | 42,276 | |||
| Increase in tax position for current year | 12,989 | ||||
| Increase in tax position for prior years | 11,635 | ||||
| Decrease in tax position for prior years | (1,104) | ||||
| Decrease for lapse of statute of limitations/settlements | (131) | ||||
Gross unrecognized tax benefits as of December 31, 2025 | $ | 65,665 | |||
There was $65,665 of unrecognized income tax benefits that, if recognized, approximately $50,474 would impact the effective tax rate after consideration of valuation allowance on deferred tax assets in the period in which each of the benefits is recognized. The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes in the consolidated statements of operations. The total amount of interest and penalties is approximately $5,009 as of December 31, 2025, which is included in the table above.
| h. | Foreign taxation: | ||||
1. Israeli tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”):
VSL has utilized various benefits under the Investment Law. Those benefits relate only to taxable income attributable to the specific investment program and are conditioned upon meeting the terms stipulated in the Investment Law, the related regulations and the applicable certificate of approval. If VSL does not fulfill these conditions, in whole or in part, the benefits will most likely be cancelled, and VSL may be required to refund the benefits, in an amount linked to the Israeli consumer price index plus interest.
If cash dividends are distributed out of tax-exempt profits in a manner other than upon complete liquidation, VSL will then become liable for tax at the rate of 10% - 25% (depending on the level of foreign investments in VSL) in respect of the amount distributed.
2. Undistributed earnings of foreign subsidiaries:
In general, it is the Company’s practice and intention to reinvest the earnings of its non-U.S. subsidiaries in those operations. Undistributed earnings, if any, of foreign subsidiaries are immaterial for all periods presented. Because the Company’s non-U.S. subsidiary earnings have previously been included in the computation of the one-time Transition Tax on foreign earnings required by the TCJA and throughout the years have been included in the GILTI computations, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of its foreign investments would generally be limited to foreign withholding taxes and/or U.S. state income taxes.
| i. | Tax assessments: | ||||
As of December 31, 2025, the Company's federal tax returns for the years 2010 through the current period, excluding the 2016 tax year which was audited by the Internal Revenue Service, and most state tax returns for the years 2009 through the current period, are still open to examination. The Company remains open to examination to the extent net carry-over unused operating losses and tax credit attributable to those years remain unutilized.
The Israeli Tax Authority is conducting an income tax audit for the years 2020-2023 and a value added tax audit for the years 2020-2025. In early 2026, New York state initiated a corporate income tax audit for the years 2022-2024.
The Company has final income tax assessments for VSL through 2019.
| j. | Income tax payments: | ||||
Pursuant to the disclosure requirements of ASU 2023-09, below is a summary of income taxes paid, net of refunds received, by jurisdiction for the year ended December 31, 2025 (in thousands):
| Year ended December 31, | |||||
| Cash taxes paid (refunds received) | 2025 | ||||
| Federal income taxes | $ | 4,082 | |||
| State and local income taxes: | |||||
| New York State | 370 | ||||
| New York City | 275 | ||||
| Montana | (351) | ||||
| Florida | (241) | ||||
| Other | 346 | ||||
| Total state and local income taxes, net of refunds | 399 | ||||
| Foreign income taxes: | |||||
| France | 598 | ||||
| Canada | 373 | ||||
| Israel | (2,231) | ||||
| Other foreign jurisdictions | 364 | ||||
| Total foreign income taxes, net of refunds | (896) | ||||
| Total cash paid for income taxes, net of refunds | $ | 3,585 | |||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 4, 2026 | Showing above |
| 2024 | Feb 6, 2025 | |
| 2023 | Feb 6, 2024 | |
| 2022 | Feb 7, 2023 | |
| 2020 | Feb 9, 2021 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.