2016 Overview of Israel’s Third Sector Regulation and 2017 Trends

2016 was characterized mainly by the completion of a number of processes and initiatives promoted in recent years, mainly relating to tax issues and the recognition of non-profit organizations as public institutions entitled to tax benefits for donations received.

On the regulatory plain, additional disclosure and transparency obligations were imposed on third-sector organizations, and the criteria for granting an exemption from municipal tax were expanded, which could be relevant for a significant number of NPOs and public benefit companies. In this review, we will present the highlights of the recent developments.

In relation to tax benefits, the Knesset Finance Committee continued its routine work during 2016, in conformity with a new procedure for approving and issuing tax benefits to NPOs pursuant to section 46 of the Income Tax Ordinance, which is issued by way of a tax credit to a contributor in respect of donations given to such NPOs. Parallel to this, the Israel Tax Authority’s new circular (number 9/2015), which was published back in 2015, outlined the new criteria and tests that constitute preconditions to recognizing an organization as a public institution pursuant to section 46 of the Income Tax Ordinance. The new procedure, which had been approved by the Knesset Finance Committee back in 2014, is the outcome of the conclusions drawn by an ad hoc public committee headed by retired Judge Sara Frisch, after the Minister of Finance had delegated the authority in this regard to the ITA director-general. This procedure adopted some of the key recommendations raised in the Frisch Committee’s report, and prescribes the technical-procedural approval process to be carried out within the Israel Tax Authority, as well as the approval process by the Knesset Finance Committee.

The implementation of the new work procedure by the Knesset Finance Committee during 2016 improved the speed and efficiency in handling applications to obtain approval for the granting of the tax benefit pursuant to section 46 of the Income Tax Ordinance, which resulted in a significant increase in the number of NPOs and public benefit companies that received the coveted benefit for the first time, and those who received approval for continuing to receive the benefit for an additional period.

It should be noted that at issue are unprecedented numbers of NPOs compared to the period prior to the implementation of the new procedure. There are also those who argue that the implementation of this procedure eliminates the various types of political considerations of whoever is holding office as the Minister of Finance since, according to this new procedure, the Minister of Finance will no longer be allowed to be involved in this process. The control over granting recognition as a public institution shall be delegated to the Knesset Finance Committee, when applications for such recognition are submitted to it, after having undergone examination by a semi-professional committee at the Israel Tax Authority.

Furthermore, within the scope of the streamlining of the procedures for granting the aforesaid tax benefit, a new procedure was instituted for the first time at the ITA, whereby the ITA will automatically renew the approvals for public institutions pursuant to section 46 of the Income Tax Ordinance, without NPOs having to re-apply for an extension of the validity of the approval. Up until this new procedure, public institutions had to individually apply for an extension before their approvals expired, which involved the completion of forms and the submission of documents and was a burden mainly for small public institutions basically operating on a volunteer basis, because, if they failed to submit their extension applications on time, their approvals expired, which adversely affected their activities and their contributors.

Another example of the implementation of the new procedure and circular during 2016 is the Finance Committee’s preliminary recognition of an Israeli organization operating abroad as a public institution pursuant to section 46 of the Income Tax Ordinance.

In relation to legislation, a draft bill was approved during 2016 called Disclosure Obligations of Recipients of Support from Foreign Political Entities Law (Amendment). This law, which will come into effect on January 1, 2017, is designed to increase the transparency of the operations of NPOs and public benefit companies primarily funded through contributions from foreign political entities, beyond the transparency imposed on all recipients of such donations. These disclosure obligations include, inter alia, the obligation to disclose the fact that the majority of their funding is from foreign political entities, both in advertisements and in reports prepared for or available to the public, and in particular interfaces with elected officials and civil servants. Furthermore, any such recipient of support will also be obligated to disclose that it is principally funded by foreign political entities whenever it writes to an elected official or public servant and during any meeting being held at the office of an elected official or civil servant during which minutes are recorded (including disclosure of the names of the foreign political entities that contributed to the recipient during the relevant years).

Another draft bill was approved at the beginning of August, 2016 – Amendment to the Municipal Tax and Government Tax Ordinance (Exemptions). This law now enables ‘voluntary public service institutions’ to receive an exemption from municipal tax, provided that their activities target the general public and are not limited to the residents of the particular local authority where the property relevant to the application for exemption from municipal tax is located. Up until now, the criteria for granting this exemption were pursuant to Circular 2/99 issued by the Director-General of the Ministry of the Interior, whereby an exemption from municipal tax shall be issued to such an institution only if the institution’s activities mainly serve the residents of that local authority where the property relevant to the exemption application is located. Now, for example, an NPO operating nationwide through many branches will be able to receive an exemption from municipal tax also in respect of its property located in a local authority, even if it carries out most or all of its activities in a different local authority.

And what can be expected in 2017? As of 2017, additional significant third-sector legislation is expected to be promoted.

First and foremost – a new NPO law, the principles of which were drafted by the Ministry of Justice back in 2014, and after inter-ministerial round-table discussions were held by the Ministry of Justice during 2015. This law will constitute a comprehensive modern regulatory framework that will prescribe full and detailed arrangements in relation to NPOs’ corporate governance and mode of operation, will differentiate between the various types of NPOs according to their characteristics, including in relation to their sources of funding and the scope of their activities, and will prescribe supervisory and enforcement arrangements that are also customized for the different types of NPOs.

Furthermore, the Frisch Committee report and its recommendations concerning the tax benefit pursuant to section 46 of the Income Tax Ordinance (both those approved and adopted by the Knesset Finance Committee and other topics presented among the Frisch Committee’s recommendations, such as changing the definition of “public institution” and “public benefit”) are expected to be anchored within the scope of new primary legislation.

Concurrently, the Israel Tax Authority is also expected to publish another supplementary circular addressing the technical-procedural aspects for ascertaining eligibility for an approval pursuant to section 46 of the Income Tax Ordinance.