Israel's Supreme Court Rejects Further Review of "Trapped Profits" Tax Law

The President of Israel's Supreme Court, Justice Yitzhak Amit, has rejected a request for an additional hearing on the "trapped profits" tax law. The law, which was approved in May and takes effect January 1, 2025, targets "minority companies," defined as those controlled by up to five individuals and not publicly traded. It introduces two main provisions: expanding cases where a minority company's income is attributed to its individual owners, and imposing a new 2% tax on profits the company chooses not to distribute as dividends.

The legislation aims to combat the use of "wallet companies" that exploit a two-stage corporate tax system to defer tax payments, often for purposes other than intended. Following the law's enactment, several companies argued it was unjust, infringing on their property rights and unfairly impacting legitimate businesses that retained funds for business reasons, a phenomenon termed "incidental damage."

Two petitions challenging the law's constitutionality were filed with the Supreme Court. In May, the court unanimously upheld the law, stating its benefits were clear and immediate, while the potential harm to non-"wallet" companies was not severe or definitively quantifiable. The petitioners, represented by the Rubinstein Group, sought an additional hearing to overturn the ruling.

Justice Amit ruled that additional hearings are an exceptional procedure, not a further appeal, and the request did not meet the necessary criteria. He clarified that a law being constitutional does not mean it doesn't impact rights, but rather that the impact serves a legitimate purpose and is proportionate. The Rubinstein Group's attorney expressed regret over the decision, stating they would continue to seek remedies for the "distortion" caused by the law, which they believe unfairly harms businesses.