Israeli Finance Ministry Plans Sharp Tax Benefit Cuts for Investment Savings Funds

Over a year after the interim report of the "Arbitrage Committee," established by former Finance Ministry Director Shlomi Heisler to propose a comprehensive reform of Israel's savings sector, the Finance Ministry is set to present the final recommendations on Wednesday. The reform aims to unify various financial products, including investment provident funds, savings policies, and mutual funds, under a single platform with standardized tax benefits. This consolidation is intended to encourage the public to move money from current accounts into interest-bearing financial instruments by simplifying comparisons and transfers between products.

Under the new model, transfers within the platform will receive tax deferral, and withdrawals after age 60 will enjoy partial capital gains tax exemptions similar to current investment provident funds. This represents a significant shift in managing short- and medium-term public savings, which currently total around 900 billion shekels. The tax benefits currently granted to investment provident funds will be redistributed across all products in the new investment account. For savers accustomed to high annual deposits (up to 83,000 shekels) in investment provident funds to maximize tax benefits potentially worth millions, the reform will impose a substantial reduction. The maximum tax benefit per saver is expected to be capped at a few hundred thousand shekels, a sharp cut from current levels.

Behind the scenes, the committee saw two main camps: the Israel Securities Authority, which supports the reform as a competition driver, and the Capital Market Authority, which warned it could harm consumers through increased fees. A key compromise allows investment provident funds managed outside the new accounts to continue independently but with reduced tax benefits aligned with the new model. The committee includes senior officials such as Capital Market Supervisor Amit Gal, Israel Securities Authority Chair Safi Zinger, Tax Authority Director Shai Aharonovitch, and others.

The final recommendations come weeks before the anticipated dissolution of the Knesset and more than two years after the committee's formation. Implementing the reform will require legislation, which will have to wait for the next Knesset session. The reform is expected to reshape Israel's financial savings landscape by making tax benefits more equitable across products and encouraging better public engagement with financial instruments.