Credit rating institutions have said Israel’s budget law process needs to proceed faster, it is now cantering along. The Knesset has yet to legislate most of the final package, but draft bills have now been published. Following is a brief update:

Business Burden Decrease:

On November 4, 2024, the Knesset Finance Committee approved an amendment that aims to make things easier for small businesses. It is proposed that a small business with annual sales below NIS 120,000 may elect to be a Micro Business (Osek Tsa-ir). A  Micro Business would deduct a flat rate expense deduction of 30% of its sales revenues on their annual tax return. The Israeli Tax Authority (ITA) says that in most cases a Micro Dealer may not need to file an annual tax return nor pay monthly income tax installments. The plan is to automate things and let the government big brother calculate your tax for you. The ITA plans to launch the new Micro Dealer online facility later in 2024.

Comment: We await further details of the legislation on the way. But it will clearly require a leap in faith on the part of both taxpayers and tax officials. Will proper books still be needed? Will the system get it all right? What happens when sales revenues grow beyond the NIS 120,000 sales revenue limit during a tax year? Work in progress, watch this space.

Business Burden Increase:

Going in the other direction, the so-called Economic Efficiency bill proposes to raise national insurance (social security) rates on the first NIS 7,522 per month (i.e. 60% of the national average wage) for nearly everyone as follows: employees – from 3.95% to 5.55% (but employers are to pay half); freelancers –  from 2.87% to 4.47%; for passive income – from 7% to 10.5%; for domestic helpers – from 6.2% to 7.85%. Above NIS 7,522 per month it seems higher rates will continue.

It is proposed to freeze various inflationary adjustments in the tax legislation.

Separate proposals to tax undistributed profits of closely held private companies are also expected to proceed. This would be controversial if past profits of Israeli and foreign get swept into the Israeli tax net. On the one hand, some companies are used as wallet companies to hold spare cash and passive investments after paying only 23% company tax. On the other hand, past profits are often re-invested as working capital to finance operations, employment and equipment.

Wars aren’t cheap:

As for the war factor, should extra taxes be imposed to finance an expensive war? Or should medium term war loans be imposed instead? Opinions vary.

Investment Funds:

As for venture capital funds and other investment partnerships to be designated, it is proposed to amend the income tax ordinance: (1) to clarify existing income tax exemptions or reliefs in regulations for foreign resident investors, (2) to allow zero rate VAT for certain partnerships to be designated pro rata to foreign resident investors in them, (3) to spell out when partners’ income is considered passive – this is a problem currently for passive investors who are limited partners, (4) to allow a 32% tax rate on the carried interest (success fee) of fund managers from so-called financial assets to be designated. A VAT exemption is also proposed for the carried interest. Much of this will be subject to rules to be prescribed.

Business Reorganizations:

As for business reorganizations, it is proposed to relax the tax deferral rules a bit. In particular it is proposed to repeal a problematic rule which currently impedes dilutions by way of later fundraising rounds where founders contribute their knowledge and other assets to a start-up company or between commonly owned companies.

Where the reorganization relates to real estate to a real estate entity, it is proposed to repeal a rule currently requiring completion of construction within 5 years.

As for unequal mergers, it is proposed to allow tax deferral where one company is 19 times bigger than the other compared with 9 times now – if shareholders in the smaller company receive at least 5% of the merged company compared with 10% now.

Surtax:

Currently there is a 3% surtax if total income and gains exceed NIS 721,560 (in 2024). For taxable Israeli real estate deals it is proposed to increase the 3% surtax to 5% and make it payable at the time of the transaction rather than after the year-end when filing an annual tax return. The 5% surtax may also apply to other capital gains.

General comment: It remains to be seen what is enacted.

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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© Leon Harris 11.11.2024