The Israeli supreme Court, sitting as the High Court of Justice (Bagatz) has ruled on whether landlords are entitled to government compensation for loss of rent evacuation of tenants (Elad Weistoch Vs. Property Tax and Compensation Fund Director, 28190-08-24).
After the "Iron Swords" war erupted on October 7, 2023, the Israeli government decided to evacuate many thousands of Israelis living in frontline locations in the North and South of Israel. Most of these people were evacuated to hotels in places such as Tiveria, the Dead Sea, and Eilat, and the Israeli government footed a large part of the bill.
But what about the landlords who suddenly stopped receiving rental income from homes they rented out in the North and South? Were they entitled to government compensation?
The Israeli tax Authority, which administers war compensation, argued that if landlords derive passive investment income, not business income, no compensation was due for this indirect war damage.
This issue reached the High Court of Justice. In short, the Court gave a largely negative judgment. The relevant law allows compensation for indirect loss-of-profits damage "when the damage is caused by cessation of activity of commerce and services," but the Court ruled this wasn't relevant to the evacuation of tenants.
The judgment: The Court ruled that landlords are not eligible for indirect loss-of-profits compensation. Instead ,the Court agreed with the Israeli Tax Authority that landlords should have tried applying for compensation for direct damage to property due to loss of rental income.
Comment: Claim for direct damage where possible. But it remains unclear whether direct damage covers homes not hit by a missile or drone but evacuated to save lives.
Corporate reorganization reliefs
The Knesset Finance Committee accepted (on February 19, 2025) a bill to relax slightly the harsh Israeli tax rules regarding corporate reorganizations and M&A (merger & acquisition) deals. Once the final law is issued and published, this should be welcome news, especially for high tech.
Until now, the Israeli tax law has only allowed tax-deferred corporate reorganizations in far more limited instances than in many other Western countries. The idea is to tax company sale transactions even if payment is made in shares (stock) rather than cash. The new Israeli rules seek to partially tone down Israeli reorganization rules.
The following are the main changes
First, in a share swap transaction, it may be enough (for tax deferral) to swap 70% of the shares of one company instead of 80% previously. Moreover, 49% of the consideration may actually be cash rather than shares – but then the cash may be taxable for an Israeli resident.
Second, tax deferrals for "unequal mergers" may now be allowed when one merger party is worth up to 19 times the other party, instead of 9 times previously.
Third, additional reliefs are on the way regarding reorganizations to split up companies. In particular, where land assets are split up, the requirement to finish construction within 5 years is to be dropped.
Comments: The first change above seems by far the most important – it may potentially help high-tech "exit M&A deals. However, it seems that clearance will still be needed from the Israeli Tax Authority (ITA) for foreign companies.
Also, ITA clearance will still be needed to fix the withholding tax on the deal: (1) at zero for foreign investors in many cases; (2) at 25%-25% of Israeli resident shareholders' capital gains instead of 30% of sale proceeds.
Tax breaks for production subcontractors
The Israeli tax Authority (ITA) has published a generic tax ruling (2956/25) clarifying when production subcontractors may qualify for Israeli tax breaks as productive "preferred enterprises".
Subcontractors often help start-ups get going
The ITA says subcontractors may take advantage of exports by their clients if they declare: (1) They produce purely as subcontractor, (2) They apply the technical specification provided by their clients, (3) They do not own the knowhow relating to the product specification, (4) They do not conduct R&D or employ R&D personnel, (5) Their products are incorporated in clients' products which meet various conditions, and the subcontractor is not identified with the end products, (6) The company’s marketing activities are marginal.
The preferred income derived by preferred industrial or tech enterprises is generally liable to a company tax of 7.5% in development area A and 16% elsewhere in Israel. Dividends are generally taxed at 20%.
This is better than the regular company tax rate of 23% and dividend withholding tax of 25%-35%.
Moreover, "preferred enterprises" are generally exempt from new rules in 2025 that impose a 52% tax on "labor-intensive activities."