Tax innovations in Israel during 2024

Over the past year, alongside handling the economic repercussions of the war and issuing financial assistance to war victims and to evacuees, the courts, the legislative authority and the Israel Tax Authority continued their efforts in the legislative arena and issued several significant tax rulings. Following are the most important innovations relating to income tax, real estate tax and VAT.

Income tax

1. New reporting obligations for trusts and corporations

In April, Amendment 272 to the Income Tax Ordinance (ITO) was enacted, which prescribes that trustees must notify the ITA about the creation of a trust within 90 days (and within 120 days about existing trusts) and must report about the controlling shareholders of trusts in their tax returns as of 2025.

In relation to corporations, Amendment 272 prescribes that corporations are obligated to report about their controlling shareholders, including their tax residency. The amendment delegates authority to the ITA to demand that corporations that are not Israeli tax residents but are managed by Israeli returning residents or first-time Israeli tax residents (‘Oleh’) new immigrants must file tax statements in Israel. The amendment delegates authority to the ITA to contact financial institutions for information on controlling shareholders in accounts for the purpose of exchanging information with foreign countries at the request of their tax authorities (but not for the purpose of enforcing Israeli tax laws).

The purposes of the amendment are to implement the international standard set by the Global Forum on Transparency and Exchange of Information for Tax Purposes and to increase the transparency in the Israeli tax system by adding reporting obligations to the ITA.

2. first-time Israeli tax residents (‘Oleh’) and veterans returning residents are obligated to file tax statements

Veterans returning residents and first-time Israeli tax residents (‘Oleh’) have been entitled, inter alia, to a tax exemption and an exemption from reporting income generated outside of Israel for 10 years. Amendment 272 to the TO revokes the exemption from the reporting obligations. Therefore, as of January 1, 2026, individuals who become first-time Israeli tax residents and Veteran returning residents will no longer be entitled to a reporting exemption and will be obligated to file annual and periodic tax returns (including capital declarations , if necessary) also on their income and assets outside of Israel during the 10-year exemption period. We emphasize that this income will remain tax-exempt.

This provision is also intended to increase the tax transparency in Israel, inter alia, in order to fight black capital and to avoid the EU’s blacklist.

3. The Ministry of Finance will impose minimum corporate tax of 15% on multinational companies, in conformity with the principles of the OECD’s international tax reform (Pillar 2)

In July, the Ministry of Finance issued a press release announcing its intention to impose a minimum tax regime of 15% on multinational corporations operating in Israel, and its intention to complete legislative proceedings in this regard by the beginning of 2026.

This course of action is part of the OECD’s BEPS (Base Erosion and Profit Shifting)  project, which is designed to prevent multinational companies from eroding the domestic tax base by shifting profits to low or no-tax locations as a way to evade paying taxes. Within the framework of this project, in which about 140 countries are participating, Israel announced that it will join the initiative and the two-pillar program, with Pillar 2 focusing on preventing tax reductions for corporations with annual revenue turnovers exceeding EUR 750 million.

Please note that the minimum tax regime known as QDMTT (Qualifying Domestic Minimum Top-Up Tax) will ensure that multinational companies operating in Israel will be taxed at a minimum tax rate of 15%, but will not be exposed to paying tax in other countries on income generated in Israel. It should be noted that at this stage, no additional tax collection mechanism will be adopted in relation to income of companies that are not residents of Israel – a mechanism that is also included in Pillar 2 of the BEPS project.

4. Restructuring enabling the offsetting of losses is legitimate as long as the restructuring is for an appropriate purpose

A parent company transferred assets to its subsidiary against an allotment of shares in the subsidiary, in accordance to section 104A of the ITO. As a result, the parent company’s operations were transferred to its subsidiary. Subsequent to the restructuring, the subsidiary offset business losses totalling approximately ILS 45 million against taxable income from joint operations of the parent company and the subsidiary. The ITA claimed that the restructuring while retaining the subsidiary’s carry-forward losses, is an artificial transaction intended to facilitate an invalid tax reduction. The court rejected this claim and ruled that at issue is legitimate, continuous business conduct over many years between two companies engaging in tangential fields using different technologies that complement each other. The court ruled that the subsidiary may offset the majority of the business loss since the loss can clearly be attributed to it. The court further ruled that the parent company may offset at least the pro rata portion of the business loss from its revenues, according to its holding ratio of the subsidiary at the time the losses were incurred. (Tax Appeal 38077-02-21 Shalam Packaging (1998) Ltd. v. Netanya Tax Assessor).

The bottom line – restructuring under particular circumstances can be used as a tool for offsetting losses.

5. Imposition of the OECD’s STTR on Israeli companies

In August, the ITA published an announcement regarding the imposition of the STTR (Subject to Tax Rule), which is an additional component of Pillar 2 intended to address the tax challenges deriving from the development of the digital economy.

The STTR allows source jurisdictions in which income was generated to impose an additional limited tax on transactions between “related parties”, when the recipient of the income is subject to a corporate income tax rate below 9% in its country of tax residence. This provision may be relevant, inter alia, to Israeli tax resident companies providing services to foreign related companies and which benefit from the Encouragement of Capital Investments Law of 5719-1959 (which are taxable at rates under 9%). In such instance, these companies may find themselves obligated to pay additional taxes in foreign countries (in addition to the obligation to file a tax return on their income in these countries). The ITA’s announcement also states that the country of tax residence of the income recipient is not obligated, by virtue of the tax treaty, to grant a tax credit on the additional taxes that will apply in the source jurisdiction after the STTR comes into effect.

Please note: the STTR has not yet been implemented in the tax treaties to which the State of Israel is a signatory, and the ITA’s announcement at this stage is intended to bring the matter to the public’s attention.

6. Voluntary disclosure of money laundering offenses

In July, the district court ruled that a bank is not obligated to accept any person’s money from abroad if the bank has concerns about whether the money is from legitimate sources, despite the fact that a voluntary disclosure process was carried out in relation to these funds and the ITA’s approval was received.

The court ruled that a voluntary disclosure process is, essentially, a process through which a person admits to committing tax offenses. Although this process gives the person immunity from prosecution for the tax offenses, it does not prevent other authorities or banks from examining the source of the funds, particularly in relation to the prohibition of money laundering (CC 41090-11-22 Furman v. Bank Hapoalim).

7. New rules on option allotments to employees under section 102

The Income Tax Rules (Tax Relief when Allotting Shares to Employees) (Amendment) of 5784 – 2024 were published in the Official Gazette recently, which amend the existing rules from 2003 and are expected to come into effect on January 1, 2025.

The new rules include the following provisions:

• • Ÿ they establish a positive approval track for option allotment plans (as opposed to the current non-positive approvals;
  • Ÿ they prescribe that the plans will be submitted digitally to the ITA with positive approval for the plan, instead of the current physical submission through 102 trustees;
  • Ÿ they add a questionnaire to be filled out by companies as part of the submission documents, in order to ensure that the option plan complies with the applicable law; and
  • Ÿ they impose a new obligation on companies to file quarterly and annual reports on equity compensation to employees.

8. Payment for beverage extracts will be classified as taxable royalties

The district court ruled that some of the Central Bottling Company’s payments to Coca-Cola International constitute payment for the use of the global company’s reputation and not for the purchase of finished goods.

The court reached this conclusion, inter alia, due to the fact that the Central Bottling Company participates in the manufacturing process of the final product and later, markets the product using the reputation and trademarks of Coca-Cola International. The court ruled therefore that this component constitutes royalty payments for the use of Coca-Cola’s reputation and is subject to withholding tax, in conformity with the provisions of the law (Tax Appeal 26284-04-24 Central Bottling Company v. Gush Dan Tax Assessor).

Real estate tax

1. The ITA cannot deduct depreciation when calculating the capital gains tax on sales of residential apartments that were rented out with an income tax exemption

The court found in favor of a class action regarding sales of residential apartments that were rented out with an income tax exemption. The court ruled that depreciation should not be deducted in the calculation of the capital gain from the sale. The court also ruled that the ITA must refund the sum of the capital gains tax that was overpaid to every member of the class, plus linkage differentials and interest. The ITA appealed the ruling and filed a motion for a stay of proceedings. The Supreme Court accepted the motion and ordered a stay of proceedings in relation to the tax refund (Administrative Appeal 5975/24, Class Action 42666-01-20 Adv. Chen Reshef v. State of Israel Tax Authority).

In our opinion, although the final ruling has not yet been issued, there is a basis for a starting position whereby depreciation should not be deducted in the calculation of the capital gain when filing reports to the tax authorities regarding sales of residential apartments that were rented out under the income tax exemption track. This means lower capital gains tax!

2. A seller’s option is not a real estate right

A seller’s option is not a real-estate transaction for the purposes of the Real Estate Taxation Law. However, the ITA argued in a particular case that a 25-year lease transaction that included the seller’s option to extend the lease for another 25 years should be taxed as a real estate transaction. According to the ITA, when there is certainty that the option will be exercised, that option is also given to the seller and not to the buyer, and this should be deemed as a sale of a right in real estate. The case reached the court, which rejected this argument on the grounds that the ITA had not proven its argument (Appeals Committee 3683-10-22 KMY Metal Industry v. Nazareth Capital Gains Tax Administration).

It is important to note Honorable Judge Hod’s comment in her ruling whereby the option exercise notice date is of considerable importance. This is due in her opinion to the remainder of the original option period (the base period) being added to the extended option period on the option exercise notice date. If the remainder of the base period plus the estimated option period exceeds 25 years, this will necessarily trigger a tax liability.

3. Is an addendum to an agreement subject to purchase tax?

The appellant signed an agreement to purchase land from the municipality for the purpose of establishing an affordable housing project. After the municipality changed the urban building scheme at the appellant’s request in order to increase the profitability, an addendum to the agreement was signed, under which the appellant paid the municipality an additional sum of ILS 14.6 million. In respect hereof the tax administration claimed that the appellant must pay purchase tax. The appeals committee split the payment into three components: (1) payment for the increase in the value of the land according to the municipality’s appraisal, which derives from the changes in the land and apartment prices; (2) payment for the addition of four apartments in public housing to be rented out by the appellant; (3) payment for the increase in the value of the land, which derives from the addition of four apartments to be sold on the free market by the appellant. The appeals committee ruled that purchase tax must be paid only on the value of component (3), which was paid in respect of the additional land given to the appellant and which it did not previously own, which led to an increase in the land being sold and in the consideration being generated for the appellant (Appeals Committee 36623-06-22 Moshe Hadif Building and Investments Ltd. v. Tel Aviv Real Estate Tax Administration).

The conclusion is that not every addendum to an agreement will trigger an additional tax liability, but only in instances whereby the additional payment received, increases or the property being sold or the consideration and generates economic benefit.

4. Presumption of the family unit – property separation in relation to an apartment purchased after marriage

A prenuptial agreement did not include separation of assets purchased after marriage. Each spouse purchased his/her own apartment after they married. When the husband sold his apartment, he claimed that he was entitled to an exemption from capital gains tax in respect of a single apartment, since his wife’s apartment should not be attributed to him. The court rejected the husband’s claim for several reasons. One of the main reasons was that, since the husband participated in financing the purchase of his wife’s apartment (he was registered as a borrower in the mortgage), this is sufficient to attribute fiscal rights in her apartment to him, and to disqualify him for a single-apartment exemption when he sold his apartment (Appeals Committee 21336-03-22 Simovitz v. Tel Aviv Real Estate Tax Administration).

It is important to note Honorable Judge Seroussi’s incidental comment in her ruling, whereby rights in an apartment purchased before the family unit was formed should not be included in the counting of the number of apartments owned by the family unit, even if there is no prenuptial agreement.

5. Classification of a residential apartment for the purpose of capital gains tax benefits

Several rulings were issued in this regard this year, with the common denominator between them being the question of whether an apartment’s poor physical condition can disqualify it from being classified as “habitable housing,” in which case, the seller will not be able to receive the special tax benefits granted solely to habitable housing.

• • Ÿ Appeals Committee 9287-05-22 Yedid v. Jerusalem Real Estate Tax Administration – a neglected property that can be renovated and become habitable at reasonable expense fulfills the definition of “habitable housing,” even though it had been sealed and was inhabitable during the last few years before its sale and despite the fact that it had been granted an exemption from municipal taxes.
  • Ÿ Appeals Committee 3944-05-20 Yigal Abergil v. Jerusalem Real Estate Tax Administration – a completely destroyed, burned building lacking basic utilities and missing part of the roof, which was abandoned and neglected, is not “habitable housing.”

In our opinion, the different conclusions reached by the court in both cases derives, inter alia, from the factual differences in the condition of the properties. The case law regarding the classification of “habitable housing” is extensive and varies depending upon the circumstances of each case. Therefore, each case must be examined according to its unique circumstances since no rules of thumb apply in this regard.

Within this context, albeit under entirely different circumstances, we would also like to refer to Tax Ruling 6005/24, which addresses the special exemption prescribed in the Real Estate Taxation Law for “evacuate and build” transactions (Chapter E.4). This ruling stated that residential apartments in a building that collapsed after it was declared a hazardous building will be considered “habitable housing” for the purpose of receiving the exemption under Chapter E.4 of the law for 12 months after the date of the collapse, provided that the rights-holders can prove that they were unable to prevent the collapse. Another condition for receiving the exemption under these circumstances is that the evacuate and build agreement must be signed with the developer within one year of the collapse.  In this particular circumstance, preliminary approval was issued to declare the complex an “evacuate and build’ complex before the building collapsed.

6. Failure to declare a construction services agreement to the tax authorities led to criminal proceedings

A private individual sold half a lot, and a company under his control engaged in an agreement with the buyers to provide construction services. The individual reported only the sale of the land to the real estate tax authority. The parties failed to report the construction services agreement to the tax authorities, notwithstanding clause d.1 of the reporting form to the tax authorities, which obligates the parties to declare whether a construction services agreement was signed in connection with the sale of the right in the real estate and whether any additional consideration was paid. As a result, an indictment was filed alleging, inter alia, that the failure to declare the construction services agreement resulted in an inaccurate assessment of the capital gains tax. The defendants pleaded guilty to the charges and iin the proceedings the appropriate punishment was decided (CrimC 8335-11-21 State of Israel v. Fitoussi).

It is important to note that, under particular circumstances, the tax authorities will classify a land purchase agreement and a construction services agreement as a single transaction for the sale of a finished property. However, even if, under the circumstances, the taxpayers’ claim that these are two separate transactions – one of which (the construction services transaction) is not subject to capital gains tax and purchase tax, is accepted,  at the very least, the taxpayers are obligated to declare the existence of the construction services agreement in relation to that land.

7. What are purchase tax rates for an additional residential apartment in 2025?

Correct as of date hereof, the validity of the temporary order setting the purchase tax rate at brackets of 8% and 10% for the purchase of a residential apartment that is not the sole apartment is about to expire at the end of 2024. The draft Real Estate Tax Order (Capital Gains and Purchase Tax) of 2024 has not yet been approved as a final version extending the validity of the temporary order for another two years.

So is it worth waiting until 2025 to purchase another residential apartment? Is the purchase tax rate for an additional apartment about to be reduced, or is this an unrealistic expectation and would it be a pity to hold off on purchasing an apartment because of this? The legislature expressed its intention of completing the process of enacting the said order in the draft economic plan for 2025. It seems therefore that the trend is clear and that we only need to wait for its implementation.

8. Purchase tax benefit for new immigrants purchasing a first apartment

An amendment to the Real Estate Tax Regulations (Capital Gains and Purchase Tax) came into effect in August, which improves the purchase tax benefits for new immigrants who are purchasing a residential apartment that is their only apartment. New immigrants who purchase a first residential apartment on or after August 15, 2024 will be entitled to purchase tax at the following brackets: up to ILS 1,978,745 – 0%; ILS 1,978,746 – ILS 6,055,070 – 0.5%; ILS 6,055,071 – ILS 20,183,565 – 8%. If the value of the apartment exceeds ILS 20,183,565, there will be no tax benefit for the entire value of the apartment. New immigrants who purchase an apartment that is not their only apartment will no longer be entitled to the tax benefit for immigrants.

Please note that the new arrangement for immigrants purchasing a first apartment eliminates the condition whereby the apartment must be used as the immigrant’s residence. As long as no clarification is published in this regard, this rescinded condition opens the door for new immigrants to purchase an apartment with a purchase tax benefit without having to actually live in the apartment and they will be able to rent it out.

9. Urban renewal – expiration of National Outline Plan 38 and the tax benefits pursuant to Chapter E.5 of the Law

Despite the expiration of National Outline Plan 38 (“NOP 38”) in some Israeli cities, the tax benefits pursuant to Chapter E.5 of the Real Estate Taxation Law, which grants tax benefits in NOP 38 transactions, will continue to apply as long as the building permit was obtained pursuant to a plan included under the definition of an “earthquake retrofit plan.” This definition, which is prescribed in the Land Law (Earthquake Retrofitting of Condominium Buildings) of 2008, includes three alternatives: NOP 38; a plan whose objectives include earthquake retrofitting of buildings, which was prepared in conformity with the provisions of NOP 38, which enables a permit to be issued without needing approval for an additional plan; and a plan that applies to a building requiring retrofitting as defined in section 70A of the Planning and Building Law, and a precondition to the plan’s implementation is earthquake retrofitting of the building.

10. What real estate tax decrees can be expected in 2025?

The draft economic plan for 2025 includes several references to the Real Estate Taxation Law. Although this is a preliminary draft and changes can be expected, it indicates the measures that the Ministry of Finance envisions as possible ways to increase the tax burden, and it would be wise to prepare accordingly. Following are the proposals included in the aforesaid draft:

• • ŸCompleting the legislative proceedings to extend the validity of the temporary order setting tax brackets for purchases of additional apartments at 8% and 10% for an additional two years;
  • Ÿ Completing the legislative proceedings to regulate the obligation to report rental income and the income tax exemption bracket in respect of renting out residential apartments;
  • Ÿ Raising the minimum tax rate from 3% to 5%.
  • Ÿ Including the capital gain from the sale of a residential apartment that is not exempt from capital gains tax, within the framework of “taxable income” for the purposes of a surtax including the exempt capital gain up until 2014 in the calculation of the improved linear tax.
  • Ÿ The proposal is that the surtax should be collected already as part of the assessment of the capital gains tax and that adjustments be made when filing the annual report (tax refund or payment of additional tax).
  • Ÿ Changes in relation to the deduction of expenses from the capital gain for the purpose of calculating the tax:

• • • deductions of expenses will not be allowed if there are reasonable grounds to assume that they constitute a violation of the Reduction of Use of Cash Law;
    • deductions of cash payments aggregately exceeding ILS 200 thousand per annum will not be allowed;
    • deductions of expenses exceeding ILS 25 thousand will expressly not be allowed without proper documentation – a receipt or invoice;
    • revoking the existing provision in the Real Estate Taxation Law that permitted the deduction of an imputed expense – which is the assessed value of the work performed by the rights-holder of the real estate or by his relative for the purpose of improving the real estate.
    • Ÿ Freezing various sums stipulated in the Real Estate Taxation Law, which are updated annually according to the various indices, such as purchase tax brackets, the maximum tax exemption for a single apartment, etcetera.

Value Added Tax

1. Raising the VAT rate to 18% as of January 1, 2025

In this regard, see the Value Added Tax Order (Tax Rate on Transactions and Imports of Goods) (Amendment) of 2024 dated February 27, 2024 and the Value Added Tax Order (Tax Rate on NPOs and Financial Institutions) (Amendment) of 2024 dated April 14, 2024.

2. Full VAT will apply to financial brokerage service transactions that also involve Israeli residents

GFI is an English company that established a branch in Israel and brokered a financial instrument transaction between an Israeli bank and a foreign bank. For its efforts brokering the transaction, GFI received separate service fees from each of the banks. The question before the Supreme Court was whether the fee that GFI collected from the foreign bank was subject to VAT at the full rate, or zero VAT.

The court ruled that a financial brokerage service transaction involving both Israeli residents and foreign residents should not be regarded as two separate services – one provided to an Israeli resident (who is subject to full VAT) and the other to a foreign resident (who is subject to zero VAT) – but rather, as a transaction providing one service to two parties. Therefore, the court denied the benefit of zero VAT in respect of that part of the service provided to the foreign resident (Civil Appeal 8556/21 Value Added Tax Administration, Tel Aviv Central v. GFI Securities Limited).

We refer to the district court’s ruling in the same matter, which ruled that the fact that a broker provides service to two parties to the same transaction does not suffice to determine that it is providing the same service to both, and that, under particular circumstances, it might be determined that each of the parties receives a different service that serves to achieve different purposes. It seems that this position represents the desired and balanced approach that is consistent with the purpose of the law.

3. Developers may deduct input tax included in attorney-tenant invoices

Input tax included in the invoice issued by the attorney representing the tenants in an urban renewal transaction will be deductible by the developer, since at issue is a service that is an integral part of all expenses required in order to carry out the project. Another important determination in the court ruling concerned the deduction of input tax in a transaction that is partially taxable and partially exempt. In this regard, the court ruled that a proportionate deduction of input tax will be possible according to the portion of the area attributed to the taxable transactions out of the total area of the project [Tax Appeal 53560-11-21 Naveh-Gad Building Development Ltd. v. VAT Administration, Tel Aviv Central).

4. A joint engagement between a company and its shareholders to purchase rights from the Israel Land Authority and the division of rights between the parties – the VAT Administration’s claim of an additional transaction is denied

The appellant and its shareholders won an ILA tender and purchased land. The agreement between them divided the rights and considerations, such that all future rights, including NOP rights, would be assigned exclusively to some of the shareholders. The VAT authorities determined that, considering the disparity between the division of the payment for the real estate (at the ratio of 80:20) and the division of the payment for the construction (at the ratio of 50:50) and notwithstanding the explicit agreement, the appellant had also originally purchased part of the NOP rights and subsequently engaged in an additional transaction in which it sold some of those rights to the shareholders. The court rejected the position of the VAT authorities and ruled that, in light of the agreement signed prior to the tender, all of the future rights were purchased from the ILA exclusively and solely by the shareholders already at the time of the tender, despite the fact that the rights had not yet been approved for realization at that time, and even though no consideration had been paid for them. It was clarified that, in any case, the assignment and division proceeding does not per se constitute a transaction for VAT purposes. The court further ruled that even if there had been a transfer of rights as the VAT authorities claimed, it occurred when the buyers signed the agreement between themselves, and therefore, the statute of limitations applies, since prescription begins on the transaction execution date [Tax Appeal 68651-05-21 A.Z. Real Estate Ltd. v. VAT Administration, Tel Aviv).

We point out the court’s cautionary remark that although under these circumstances, it had ruled to accept the appeal, this does not open the door for future manipulations and that any transaction between related parties will be viewed with suspicion if it includes a division of consideration that is incongruent with the actual division of the real estate.

5. VAT to be charged on tips

In July, the ITA published a clarification regarding the VAT liability on tips given by customers in restaurants and similar businesses.

According to the ITA’s position, any tip received by a business for service, whether directly or indirectly, will be recognized as income for VAT purposes because it constitutes a receipt that is part of the consideration for the service and, as a result, is also subject to VAT. The ITA clarified that this interpretation will be applied as of January 1, 2025.

6. Israel invoice model

The “Israel Invoices” reform took effect in May 2024. The main goal of this reform is to fight the phenomenon of black  capital in Israel and, specifically, the phenomenon of fictitious invoices.

As a result of the reform, Israeli dealers have been obligated since May 5, 2024 to apply online to receive allocation numbers for tax invoices to their customers. Obtaining an allocation number is a precondition to a customer being able to deduct input tax from invoices.

The minimum sum (before VAT) for which an allocation number is required will decrease over the years:

At this stage, the reform does not apply to exempt dealers who only issue receipts and not invoices.