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August 3, 2021

Israel publishes tax measures under its 2021-2022 proposed budget

Executive summary

The Israeli Ministry of Finance, over the past several days, has released various tax measures to be included in the long-anticipated 2021/2022 budget. These measures vary from: (i) accelerating the tax attractiveness of the tech industry by allowing more tax efficient debt and equity to start-up companies; (ii) stimulating distributions of “trapped earnings” from historical tax regimes; (iii) increasing the financial data transfer from financial institutions (including payment apps, digital wallets, etc.) to the Israeli Tax Authority (ITA); (iv) applying value-added tax (VAT) registration and reporting requirements on non-Israeli digital service providers and sellers to the Israeli market; (v) requiring a partial tax prepayment as a prerequisite for an appeal on a tax order; and (vi) introducing a behavior-oriented tax policy to tackle climate change, among others.

This Alert summarizes these proposed measures.

Detailed discussion

Based on the released measures, it is anticipated that the2021/2022 budget will include, inter alia, the following:

Removing barriers and encouraging the growth of high-tech companies in Israel

This proposal seeks to increase the attractiveness of the Israeli tech industry by two amendments.

  • The first is by relaxing some of the requirements that allow individuals and companies to deduct acquisition costs of early-stage companies for tax purposes. As an alternative for the said deduction, there is a suggestion to allow a capital gain deferral under a “like-kind exchange” scheme for an individual that makes another investment in a research and development company (as will be defined by the law) within a 12-month period.
    • In addition, it is proposed to allow a similar tax deduction for acquisitions made by Israeli companies of non-Israeli tech companies, subject to certain conditions, that will require, inter alia, that the intellectual property of such an acquired company will be transferred to the Israeli company. This will be an alternative for the deduction of other assets that will be acquired from the non-Israeli acquired company.
  • The second suggestion will provide a financing alternative to Israeli start-ups by providing a tax exemption to foreign (non-Israeli) financial institutions with respect to loans that will be extended to tech companies from 1 January 2022, if certain conditions are met.

Stimulating distributions of “trapped earnings” from historical tax regimes

Starting from 1 January 2022 through 31 December 2022, Israeli companies who have tax-exempt earnings (the so-called “trapped earnings”) under the historical Approved and Beneficial Enterprise regimes, that are generally subject to a claw-back of the corporate income tax (CIT) that was not paid on such earnings upon their distribution, will be able to distribute such earnings with up to a 40% “discount” of the applicable CIT, but not less than a 6% CIT rate. The CIT rate will be determined based on a formula that considers the ratio of the “released” earnings out of the trapped earnings and allows the maximum benefit if the entire amount is to be released. This is the second time in the past several years that Israel has offered a limited time relief to repatriate trapped earnings.

Following that period, it is suggested to eliminate the clause that allowed companies to elect the type of earnings they distribute, the impact being that every dividend distribution will be regarded as if it was made on a prorated basis from all types of earnings, with the said claw-back applicable to the distribution of the prorated trapped earnings.

Increasing the financial data transfer from financial institutions to the ITA

This proposal seeks to expand the level of information financial institutions, including payment apps, digital wallets, and similar players, share with the ITA to increase transparency and enhance audit trails. The intention is to require banks, creditors, insurance companies, clearance companies, digital payment companies and currency exchange companies to share information on business accounts, and their receipts and payments, in order to allow an efficient audit procedure. Privacy requirements on the information to be transferred to the ITA are suggested to be included as well.

Applying VAT registration and reporting requirements on non-Israeli digital service providers and sellers to the Israeli market

Following a 2016 draft bill that has yet to be enacted, it is again proposed to require digital, communications, radio and television non-Israeli service providers to be registered and report for VAT purposes if the recipient is not a VAT dealer, financial institution or a non-profit institution. Furthermore, it is proposed that a sale of low-value tangibles (that are not subject to customs duty, but rather only to VAT) by non-Israeli resident via an online store to such a non-VAT dealer, financial institution or a non-profit institution, will be required to be registered and report for VAT purposes in Israel.

As part of the authorities to be granted to the Minister of Finance under this law, the Minister shall have the authority to publish regulations with regards to the registration process, that will include the following principles: the foreign resident will not be required to open a business bank account in Israel; it will not be required to have a local representation in Israel; and it will not be required to establish an Israeli company.

Requiring a partial tax prepayment as a prerequisite for an appeal on a tax order

This proposal seeks to require a prepayment by a taxpayer of 30% of the disputed tax amount in order to appeal to the District Court on orders issued under the Income Tax Ordinance, the VAT Law and the Real Estate Tax Law, if either: (i) the turnover of the taxpayer is at least NIS20m in one of the tax years under audit; or (ii) the disputed tax amount is at least NIS20m.

Introducing a behavior-oriented tax policy to tackle climate change

This measure includes suggestions to amend the excise tax application to different types of fuel and gas, and exempt industries that use diesel substitutes; as well as to apply sales tax on disposable plastic utensils to reduce their consumption.


With the constantly changing international tax environment, and the COVID-19 continuous impact as well as governments’ financial needs, Israel is likely to introduce the above-mentioned tax proposals as part of its long-anticipated 2021/2022 budget, with the intention to better align its sources and uses for the upcoming years.

Companies are encouraged to follow the proposed tax legislation, consider the applicability of proposed benefits and prepare for any changes, when introduced.


For additional information with respect to this Alert, please contact the following:

EY Israel, Tel Aviv

Ernst & Young LLP (United States), Israel Tax Desk, New York


The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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