The Finance Ministry today unveiled sweeping measures including NIS 35-40 billion in cuts to reduce Israel’s ballooning fiscal deficit to 4% in 2025. The measures were unveiled in the Tax Bill and the Anti-Dark Capital Bill, part of the Economic Arrangements Bill, which will accompany the 2025 budget. The measures include taxing advanced study funds, cutting pensions, taxing trapped profits, reducing tax benefits on electric vehicles, freezing tax bracket reviews until 2027, an additional tax for the wealthy, reducing the VAT exemption for foreign tourists, and more.
Tax on advanced study funds (Keren Hechtalmut)
Beginning January 1, 2025, tax will be imposed on interest and dividends accumulated in advanced study funds since the date the fund was liquidated. The tax will be calculated in accordance with the provisions of the Income Tax Ordinance, and will be paid upon withdrawal of the funds. It is important to note that the change will only apply to new dividends accumulated since the beginning of 2025, and will not affect dividends before that date. This measure is expected to increase state revenues by NIS 1.4 billion annually.
Reduction of pensions
Also in the area of savings, the Finance Ministry proposes that the tax exemption rate on taxable pensions remain at 52% (as it was in 2020-2024) in 2025 and beyond, instead of increasing it to 67% as planned in the current plan. The reason, according to the Finance Ministry, is that the current exemption is regressive and primarily benefits those with high retirement benefits, especially from budget pensions or veterans’ funds. The Finance Ministry estimates that this represents a budget savings of about NIS 400 million annually.
Freezing tax bracket amendments for three years
Tax bracket adjustments, which are updated based on the rise in the Consumer Price Index, will be frozen for three years (2025-2027) and will affect every taxpayer’s next income. This is a significant measure that will bring billions of dollars into state coffers every year.
retained earnings tax
The Ministry of Finance also plans to impose a new 2% annual tax on retained earnings in holding companies that have accumulated amounts above a certain ceiling; impose a tax on large shareholders in small companies with high profitability rates, with a marginal income tax on their share of the company’s profits exceeding 25%; and define payments to a portfolio company for the shareholder’s services to another company in which he owns less than 50% of the share, as the shareholder’s personally earned income in the portfolio company, and thus will be taxed at a marginal income tax rate.
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The adoption of the legislative recommendations comes in contrast to efforts by Prime Minister Benjamin Netanyahu and his economic adviser, Professor Avi Simhon, to promote the release of trapped profits, allowing companies to distribute profits while reducing taxes.
According to the Finance Ministry, the steps included in this proposal would increase revenues in 2025 by 10 billion shekels annually, if the law is passed by the end of the 2024 tax year.
VAT on foreign tourists
The Finance Ministry proposes to cancel the VAT exemption for foreign tourists, which would bring in an additional NIS 3 billion annually, which the government would invest in the tourism industry. There has long been a feeling that subsidizing accommodation and hotel services for foreign tourists makes hotel rooms and services more expensive for domestic tourism.
Vehicle purchase tax
The vehicle tax is set to be raised twice. Starting in January 2025, the “green tax” benefit ceiling will be lowered for all vehicles. The benefit ceiling for vehicles in pollution groups 1 through 14, which currently stands at about NIS 17,000, will be lowered by about NIS 4,000. The benefit reduction will also apply to plug-in vehicles in group 1. The benefit reduction for electric vehicles, according to the proposal, will only occur in January 2028. The tax cut is expected to affect more than 90% of new vehicles currently marketed in Israel.
In addition to reducing the tax exemption, the Finance Ministry proposal also includes a “pollution fine” for polluting luxury vehicles. Starting in January 2025, the highest pollution level, Level 15, will be divided into three groups according to air pollution (green grade). These vehicles will incur a “pollution fine” in the form of an additional purchase tax 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 Finance Ministry estimates, these steps will bring in NIS 650 million annually in additional revenues starting in 2025.
“rich tax”
The Finance Ministry is also planning to impose an additional tax, also known as the “rich tax.” The new 2% tax will be imposed on annual income of NIS 721,560. People in this category, who already pay an additional 3% tax, will now be taxed at 5%. Annual income does not include income from work or business, but rather income from real estate, capital gains, interest and dividends. According to the Israel Tax Authority, the richest 1% in Israel pay an effective tax rate of 26%, while the top 0.1% pay an effective tax rate of 21%.
The additional tax will add an additional NIS 1 billion to the state treasury in 2025, and NIS 1.5 billion starting in 2026.
This article was published in Globes, Israeli Business News – en.globes.co.il – on September 23, 2024.
© Copyright Globes Publisher Itonut (1983) Ltd., 2024.