Israeli Tax Authority Plans Major Reform to Increase Partnership Tax Revenue by Up to 8 Billion Shekels Annually
The Israeli Tax Authority and Ministry of Finance are developing a significant reform targeting the taxation of partnerships, expected to increase annual tax revenues by up to 8 billion shekels. The reform includes imposing extensive new reporting obligations, closing tax loopholes, and applying corporate tax rules, including the recent reform on retained earnings, to partnerships and cooperative associations. This initiative affects a broad range of entities such as law firms, accounting offices, architectural firms, medical clinics, real estate investment partnerships, agricultural cooperatives, and kibbutz-owned enterprises.
Currently, partnerships are "transparent entities" for tax purposes, meaning they do not pay income tax directly; instead, partners report and pay tax on their share of income. The reform proposes applying a dual-level taxation system to certain transparent entities, taxing both the partnership and the partners, which marks a fundamental shift from the existing model. This change is expected to significantly increase the tax burden on large and mega partnerships, including cooperative agricultural associations.
The reform stems from findings in a recent State Comptroller report revealing substantial tax revenue losses, estimated at around 340 million shekels annually, due to underreporting by partners and lack of registration of most partnerships. The report highlighted that about 93% of the approximately 43,000 active partnerships in Israel are not registered with the Registrar of Partnerships, with many partners failing to declare their partnership status or income accurately.
A special team formed by the Ministry of Finance and the Tax Authority, led by Karim Kanaan and Dr. Ofer Raz-Dor, has been working for several months on legislative amendments to enforce stricter reporting, auditing, and taxation rules. The team recommends categorizing partnerships by size, with small partnerships facing minimal reporting requirements, medium partnerships required to file audited financial statements, and large partnerships subject to the full dual-level taxation model.
Officials emphasize that the reform aims to align Israel with international tax standards, improve tax collection efficiency, and curb aggressive tax planning prevalent in partnerships due to their flexible profit allocation. The team is expected to submit an interim or final report soon, paving the way for legislative action. The reform does not raise tax rates but enforces existing rules more rigorously to capture significant untaxed income within partnerships.
