Draft Bill: Compensation for Businesses Affected by the War

Last Thursday, the Knesset approved the Compensation Law draft bill in its first reading. The purpose of the draft bill is to provide economic assistance to businesses and civilians whose income suffered an adverse impact due to Operation Swords of Iron, and to ensure the survivability of businesses that must pay fixed expenses notwithstanding a decline in revenues.

Since small and medium-sized businesses naturally have a harder time coping, the draft bill focuses on assisting them and takes into account eligible businesses’ volumes of activity and fixed expenses.

The compensation to a business will be calculated according to the percentage of decrease in its business turnover, the height of its fixed expenses, and the salaries it pays its employees.

The calculation of the compensation for an eligible business will take into account a business’s lower wage expenses in October 2023 compared to its wage expenses last year. Businesses whose wage expenses remained the same or decreased only slightly will receive higher compensation.

What Is a “Significant Adverse Impact”?

A “significant adverse impact” is defined as more than a 25% drop in transaction turnover during the qualifying period caused as a result of Operation Swords of Iron, compared to the corresponding reporting period last year.

The draft bill proposes defining two qualifying periods: the reporting period in respect of October and the reporting period in respect of November. The bill seeks to grant compensation separately for each period.

Compensation for Businesses

The compensation for businesses will be based on their fixed expenses, which they must bear despite the decrease in revenue and business activity, and to help businesses survive the period.

The compensation will focus on businesses characterized by poor business survivability to begin with, and which are struggling to survive the economic hardships caused by Operation Swords of Iron.

Please note that the category of businesses eligible for the assistance grant differs from the category the tax authorities customarily define as “small businesses.” However, the draft bill maintains the principle whereby eligibility will be limited and determined according to the volume of business turnover.

Eligibility

Adversely impacted businesses eligible for compensation include:

• A business with an annual transaction turnover exceeding ILS 18,000 but not exceeding ILS 300,000 will receive a fixed sum of compensation according to the rate of decline in its business turnover multiplied by a coefficient to the defined.
• A business with an annual transaction turnover exceeding NIS 300,000 will receive compensation at the height of its “qualifying expenses.”

For a VAT-exempt micro-business, the draft bill proposes to set a uniform rate of compensation according to the size of the business without multiplying it by any coefficient, since micro-businesses report their revenues only once a year and no data are available about a decline in operating turnover in any given month.

The draft bill’s definition of “qualifying expenses” is comprised of two components:

• “Fixed expenses” – Fixed expenses are the average monthly expenses in the last tax year (according to recognized types of expenses, such as rent, municipal tax, and selling and service expenses, excluding wage expenses), plus a coefficient to be determined
• “Qualifying portion of wage expenses” – This reflects that portion of compensation to be given in respect of the payment of wage expenses during the defined period. The qualifying portion of wage expenses and the rate of decrease in wage payments is defined at 75% of the wage expenses payable by the business in October 2023. The idea is to create an incentive for businesses to continue paying wages to their employees and to ensure business continuity when the war is over.

Businesses with an annual transaction turnover exceeding ILS 400 million will not be eligible for compensation.

Broad Assistance Plan

The economic assistance delineated in the draft bill is part of a broad assistance plan:

• ŸState-guaranteed loans.
• ŸAllowances for individuals, within the framework of the Victims of Hostile Actions (Benefits) Law and other allowances from the National Insurance Institute.
• Reliefs from the Israel Tax Authority and the National Insurance Institute in relation to collections of taxes and insurance contributions, extensions of deadlines for reporting, refraining from enforcement measures, etc.

To ensure accurate compensation based on post-war changes in business income and expenses, it’s advisable for business owners to consult with their CPAs. This will help clarify the compensation claim and minimize the risk of later reimbursement demands, as seen during the COVID-19 pandemic.

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Barnea Jaffe Landa is at your service to assist with understanding the nature of the compensation your business deserves and to advise vis-à-vis the various authorities

Adv. Amos E. Rosenzweig serves as an of counsel at the firm and leads its National Insurance practice.