Israeli Finance Ministry Proposes Major Reform to Streamline Savings Products and Tax Benefits

Two years after its establishment, Israel's Finance Ministry has unveiled the recommendations of the "Arbitrage Committee" aimed at reducing regulatory arbitrage and harmonizing tax conditions across different savings products. The reform seeks to simplify the process for the public to transfer money from current accounts to interest-bearing financial instruments by unifying three main financial products, investment provident funds, savings policies, and mutual funds, under a single framework. This consolidation is expected to facilitate easier comparison and investment decisions for consumers.

A key change includes limiting the capital gains tax exemption on investment provident funds to a combined ceiling of 200,000 shekels, replacing the current full exemption for withdrawals after age 60 as a pension. Transfers between these products within the unified platform will benefit from tax deferral, and partial tax exemptions will apply upon withdrawal after age 60. The reform targets approximately 900 billion shekels currently managed in short- and medium-term public savings.

The Finance Ministry disclosed that while the total tax benefit allocation will remain unchanged, it will be distributed among more savers and across the three product types. The reform is expected to require legislative approval and may be enacted earliest in the next state budget law, without retroactive effect on existing provident fund deposits.

The proposed changes are anticipated to significantly alter the competitive landscape among banks, insurance companies, investment houses, and insurance agents. Behind the scenes, the committee, formed by former Finance Ministry Director General Shlomi Heisler, saw a split between the Securities Authority, which supports the reform as a competition driver, and the Capital Market Authority, which warns it could harm consumers through increased fees. A compromise was reached allowing provident funds managed outside the unified accounts to continue independently but with reduced tax benefits aligned with the new model.

The committee included key officials such as Capital Market Supervisor Amit Gal, Securities Authority Chairman Safi Singer, Tax Authority Director Shay Aharonovitch, Deputy Chief Economist Moran Moshe Hantsis, Budget Deputy Director Tamar Levi-Bona, and Deputy Accountant General Gil Cohen. The final recommendations come weeks before the Knesset is set to dissolve, meaning legislative action will likely await the next parliament.