The war continues, the Israeli economy continues to struggle. Some IDF reservists have returned home. New reservists are being called up and conscription may be extended. It is estimated there are around 120,000 evacuees from the South and the North. Below is a non-exhaustive wartime update.

War Compensation:

The war compensation and other measures are gradually being extended as the war goes on. This applies to compensation for direct damage to property by missiles and so forth until the end of December, 2023. This also applies to compensation for “indirect damage”, meaning reduction in sales and profits, again until the end of December 2023. The rules are complex and vary according to size and location. Broadly, if sales revenues dropped by 25%, a portion of salaries and other expenses (per VAT returns if you are up to date with them) is compensated. There were initial teething problems and delays, but the system seems to be settling down – sometimes payout is received within a week (sometimes it isn’t). This compensation is enormously important for all concerned, especially IDF reservists who serve lengthy periods and cannot attend to their business activities.

Landlords:

Landlords are experiencing problems getting compensation for properties that were not damaged but lie empty. Lost rent is only compensated if the property was frontline, or if the landlord has many properties are reports tax as a business and pays up to 50% tax under regular tax rules, according to guidelines of the Israeli Tax Authority. Landlords passively trying to rent out empty properties and pay the concessionary tax rates (0% or 10%) may get no compensation. This is causing controversy as real estate is a store for hard earned wealth intended to supplement pension income of many ordinary Israelis.

Unemployment and IDF Reservist Pay:

Emergency regulations regarding unemployment pay were extended until the end of 2023. Further extensions are awaited. The situation is complex as some reservists find there is no job to come back to.  Legal advice is recommended, Among other things, the emergency regulations enabled people laid off to be paid unemployment pay by the government (through the National Insurance Institute) subject to certain conditions. IDF reservists who are employees not laid off, freelancers and unemployed people may receive reimbursement of salary/income of up to NIS 49,030 per month in 2024. The formula is generally based on the last three months earnings. There is also a minimum payment of 68% of a “basic amount” which is currently NIS 6,668 (i.e. NIS 4534 apparently) in 2024 even if the reservist didn’t work.

Moody’s:

The credit rating agency, Moody’s, downrated its rating of the Israeli economy on February 9 to A2 and the outlook to negative. This has a medium-term affect. If interest on Israeli government borrowings and bonds rise due to perceived economic risk in Israel, other interest rates may need to rise to discourage too much money flowing into government bonds. Factors affecting the Moody’s rating included both the war and the judicial reform process which has been suspended, not stopped. This matters, because investors want an impartial judiciary to protect Israeli property and technology rights, otherwise they invest elsewhere. Then the government cannot collect large sums of capital gains tax if there are less hitech exits (acquisitions) as it does now. Other credit rating agencies are expected to follow suit.

Bank taxation:

The Israeli government proposes to reduce its burgeoning deficit by tapping into bank profits and raising the Wage and Profit Tax they pay. As in other countries, Israeli banks don’t pay VAT, only businesses do at a standard rate of 17%. But unlike other countries, Israeli banks and insurance companies currently pay a 17% tax on wages and profits tax, because wages plus profits equates to value added. This is in addition to 23% company tax. The government says the rise in interest rates in April 2022 increased bank profits by around 30% in 2022 to around NIS 24 billion and NIS 24 billion in the first 9 months of 2023.

A new Knesset bill (Number 1708 of Jan 29, 2024) proposes to raise the tax on profits of banks from 17% to 26% in the period from March 1, 2024 to December 31, 2025.

Comments: The amount of the higher tax take is not estimated in the bill, presumably because of the complex interaction of taxes. Higher interest rates paid by the banks on customer deposits are not taken into account. It seems Israeli insurance companies are also affected. In short, bank charges and insurance premiums seem set to rise.

Next Steps:

Please contact us to discuss any of the above matters further, or any other matter.

As always, consult experienced legal and tax advisors in each country at an early stage in specific cases.

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(c) Leon Harris 12.2.2024