Israeli Supreme Court Reviews Tax Benefits for Ultra-Orthodox Yeshivas with Draft-Dodging Students

The Israeli Supreme Court is currently hearing a petition seeking to revoke tax benefits granted to donors of ultra-Orthodox yeshivas where draft-eligible students have not reported for military service. The petitioners, represented by the "Free Israel" movement, argue that these tax benefits constitute indirect public funding of institutions encouraging draft evasion. They contend that following a previous Supreme Court ruling prohibiting state funding for yeshivas with draft-dodging students, there is no justification for continuing indirect support through tax exemptions.

The petition targets the Ministry of Finance and Finance Minister Bezalel Smotrich, focusing on the recognition of these yeshivas as public institutions under Section 46 of the Income Tax Ordinance, which allows donors to receive tax credits. According to the petition, in 2023 alone, tax benefits for just four yeshivas exceeded 24 million shekels. Government Legal Advisor Gali Baharav-Miara supports the petitioners, stating that tax benefits should not be extended to yeshivas with students who have not regularized their military status, as this amounts to indirect public funding of draft evasion.

Following her guidance, the Tax Authority has begun identifying relevant yeshivas by cross-referencing student data with military records and has requested declarations from yeshivas regarding the status of their students. Institutions found to have draft-dodging students may lose their tax benefit eligibility. Conversely, Finance Minister Smotrich opposes a blanket revocation of these benefits based on students' military status. Nonetheless, professional teams within the Finance Ministry and Tax Authority are preparing for potential policy changes.

Meanwhile, Knesset Finance Committee Chairman Moshe Gafni is advancing a legislative effort to prevent the mass revocation of tax exemptions from hundreds of nonprofit organizations, concerned about the broader implications of the Legal Advisor's position.