The Ministry of Finance unveiled drastic measures today, with cuts worth NIS 35-40 billion to narrow Israel’s ballooning fiscal deficit to 4% in 2025. The measures were revealed in the draft on taxation and the campaign against black capital, as part of the economic arrangements bill, which will accompany the 2025 budget. The measures include taxation of advanced study funds, a cut in pensions, tax on trapped profits, reducing tax benefits on electric vehicles, freezing the revision in tax brackets until 2027, a surtax for the wealthy, cutting the VAT exemption for foreign tourists, and more.
Tax on advanced study funds (Keren Hishtalmut)
From January 1, 2025 interest and profits accrued in advanced study funds from the date the fund became liquid will be taxable. The tax rate will be in accordance with the provisions of the Income Tax Ordinance, and it will be paid when the funds are withdrawn. It is important to note that the change will only apply to new profits accrued from the start of 2025, and will not affect profits before this date. This measure is expected to increase state revenues by NIS 1.4 billion annually.
Pension benefits to be cut
Also in savings, the Ministry of Finance proposes that the tax exemption rate on taxable pensions will remain at 52% (as it was in 2020-2024) also in 2025 and beyond, instead of increasing to 67% as planned in the current outline. The rationale according to the Treasury is that the current exemption is considered regressive and benefits mainly those with high pension benefits, mainly from budget pensions or veterans’ funds. The Ministry of Finance estimates that this is a budgetary saving of about NIS 400 million per year.
Tax bracket revisions to be frozen for three years
The tax bracket revisions, updated according to the rise in the Consumer Price Index (CPI), will be frozen for three years (2025-2027) and will affect the next income of every taxpayer. This is a significant measure, which will bring billions into the state coffers every year.
Imposing tax on trapped profits
The Ministry of Finance also plans imposing a new tax of 2% each year on trapped profits in holding companies that have accumulated amounts above a certain ceiling; to tax substantial shareholders in small companies with high profitability rates and with marginal income tax on their share of the company’s profits in excess of 25%; and to establish that payments to a wallet company for the shareholder’s services to another company in which they have a holding rate of less than 50%, are considered to be earned income personally of the shareholder in the wallet company and will therefore be taxed at a marginal income tax rate.
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The adoption of the recommendations for legislation is contrary to efforts by Prime Minister Binyamin Netanyahu and his economic advisor Prof. Avi Simhon to promote releasing trapped profits, while allowing companies to distribute dividends with a reduced tax.
According to the Ministry of Finance, the steps p in this proposal would increase revenues in 2025 by NIS 10 billion annually, if the law is passed by the end of the 2024 tax year.
Imposing VAT on foreign tourists
The Ministry of Finance proposes canceling the VAT exemption for foreign tourists. This would bring in an extra NIS 3 billion per year, which the government would plough back into the tourist industry. It has long been felt that subsidizing accommodation and hotel services for foreign tourists makes hotel rooms and services more expensive for domestic tourism.
Purchase tax on vehicles
Two tax hikes are planned for vehicles. From January 2025, the benefit ceiling of the “green tax” will be reduced for all vehicles. The benefit ceiling for vehicles in pollution groups 1 to 14, which currently stands at about NIS 17,000, will be reduced by about NIS 4,000. The benefit reduction will also apply to plug-in vehicles from group 1. While the reduction of the benefit on electric vehicles will occur according to the proposal only in January 2028. The tax reduction is expected to affect over 90% of the new vehicles currently marketed in Israel.
In addition to reducing the tax benefit, the Ministry of Finance’s proposal also includes a “pollution fine” on polluting luxury vehicles. From January 2025 the highest level of pollution, level 15, will be split into three groups according to their air pollution (the green score). These cars will incur a “pollution fine” in the form of an additional purchase tax at a rate of between NIS 2,450 and NIS 7,500. This will mean an increase in the price of many SUVs, luxury vehicles and vehicles with large engines in general. According to Ministry of Finance estimates, these moves will bring NIS 650 million per year in additional revenues from 2025.
“The rich tax”
The Ministry of Finance also plans a surtax, also known as “the rich tax.” The new tax of an extra 2% will be on annual income of NIS 721,560. People in this category who already pay a 3% surtax will now a 5% surtax. The annual income does not include work or business income but rather income from real estate, capital gains, interest and dividends. According to the Israel Tax Authority, Israel’s richest 1% pays effective tax of 26% and the top 0.1%, an effective tax of 21%.
The surtax will bring the state coffers an extra NIS 1 billion in 2025 and NIS 1.5 billion from 2026.
Published by Globes, Israel business news – en.globes.co.il – on September 23, 2024.
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