Israeli Tax Experts Warn Broad Tax Incentives Create Unfair Competition Amid Calls for Reform

Ahead of the upcoming Duns 100 Tax Leaders Forum on September 2, leading Israeli tax attorneys discussed pressing issues facing Israel's tax policy, including the need for reform of the 'trapped profits' tax and the impact of a low dollar exchange rate on high-tech companies. The experts highlighted the tension between the state's increased budgetary needs due to ongoing conflict and the necessity of maintaining a stable business environment to foster growth and investment.

The 'trapped profits' reform, implemented in early 2025, has been criticized for its complexity, inconsistent application, and negative effects on real estate companies and others. Attorney Chaya Abisror Shimoni called for simpler, clearer rules and a realistic threshold for retained earnings exemptions linked to business investment. Other experts, including Rani Schwartz and Meir Nosbaum, advocated for fundamental changes to the law, such as narrowing the definition of "shell companies" and exempting companies investing in fixed assets, R&D, or human capital. There was consensus that the reform currently penalizes companies holding earnings for legitimate business purposes.

Regarding the low dollar exchange rate, which reduces the profitability of Israeli high-tech firms with dollar revenues but shekel expenses, experts opposed broad tax incentives for foreign companies entering Israel. Instead, they recommended enhancing regulatory certainty and aligning tax laws with international standards to encourage investment. Suggestions included allowing companies operating solely in foreign currency to pay taxes in that currency and improving administrative flexibility to mitigate currency risks.

On increasing tax revenues amid ongoing conflict, the experts warned against raising taxes on the productive middle class, citing potential harm to economic growth. They urged focusing on improving tax enforcement, closing loopholes exploited by large corporations, and combating the shadow economy. Proposals included targeted tax reliefs, streamlined dispute resolution, and updated voluntary disclosure programs to boost immediate state revenues without undermining investment incentives.

Overall, the forum participants emphasized the need for a balanced tax system that provides sufficient state resources while fostering a predictable, fair environment for businesses, especially in the high-tech sector, to support Israel's long-term economic resilience.