Israeli Government Proposes Changes to Better Regulate Controversial Betterment Tax Collection

After nearly three years of work, an interministerial team in Israel has recommended a series of reforms aimed at reducing uncertainty surrounding the betterment tax, a contentious levy in the real estate sector. The team suggests postponing the tax liability in cases where building rights under development plans are not yet finalized, setting mandatory deadlines for tax assessments, and formalizing rules already established by court rulings. The Supreme Court has previously halted betterment tax collection for certain urban renewal projects like Tama 38.

The report distinguishes between immediate legislative amendments and broader reforms requiring further study. Immediate steps include deferring tax charges until building permits are issued, thus avoiding speculative assessments, and adopting a uniform appraisal framework for urban renewal property sales to ease disputes. The team also recommends establishing binding timelines for preparing tax assessments and creating a permanent forum of legal and appraisal experts to streamline appeals and reduce litigation.

More comprehensive reforms, which need additional research and coordination with government ministries and local authorities, involve simplifying the tax system with uniform regional rates, integrating the betterment tax with capital gains tax, and eliminating property sale as a taxable event. Other proposals include piloting upfront tax setting upon plan approval, enhancing appraiser independence, increasing transparency, and possibly creating a national fund to address revenue disparities between affluent central municipalities and weaker peripheral ones.

The betterment tax is a mandatory payment to local authorities when zoning changes increase property value, funding infrastructure and public development. However, it has faced criticism for unpredictable assessments, lengthy appeals, and uneven revenue distribution. The government formed the team in February 2023, led by Deputy Legal Advisor Karmit Yulis and Interior Ministry Director General Israel Ozen, including representatives from the Finance, Justice, and Planning ministries.

Some stakeholders have criticized the report, arguing that despite its intent to create certainty, the recommendations could raise the tax burden. The government is expected to consider the proposed targeted legislative changes soon, while the broader reforms remain under review.