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Bill must pass by end of year; expected to create over NIS 9 billion national income in 2025.
By ELIAV BREUER DECEMBER 30, 2024 19:19 Updated: DECEMBER 30, 2024 19:34
Itamar Ben Gvir and Bezalel Smotrich attend a plenum session on forming the government, in the Israeli parliament, on December 29, 2022.
(photo credit: YONATAN SINDEL/FLASH90)
A central government legislative proposal intended to create over NIS 9 billion in national income from taxes is in jeopardy after two coalition parties, Otmza Yehudit and Agudat Yisrael, threatened on Monday to vote against it for separate reasons.
Since the bill is a tax reform, in order for it to apply for the year 2025, it must pass into law before the end of 2024 on Tuesday at midnight.
If the bill does not pass on time, the government will face a significant gap in income for its 2025 budget, since the over NIS 9 billion joins a second bill that will not pass on time, which was expected to create over NIS 4 billion in income.
In this scenario, it is unclear how the finance ministry will address the NIS 13 billion gap. According to law, if the 2025 budget does not pass by the end of March, the government automatically falls and an election is called.
Otmza Yehudit repeated on Monday an earlier threat to vote against budget-related bills due to expected budget cuts in the National Security Ministry, led by Otzma chairman MK Itamar Ben-Gvir. Ben-Gvir has demanded that his ministry be exempt from planned budget cuts across the board, which were made necessary by the immense costs of the ongoing war.
A spokesperson for Ben-Gvir claimed on Monday that the cut would “force the closure of police stations, shrink first-response teams, and damage the activity of Israel Fire and Rescue Service volunteers.”
The Israel Police added in a rare statement attacking the finance ministry on Monday that the finance ministry had frozen funds allocated for a “new structure” for the YAMAM, Israel’s National Counter-Terrorism Unit.
Project had been frozen at the police’s request
The finance ministry responded that the project had been frozen at the police’s request. Ben-Gvir and Finance Minister Bezalel Smotrich also clashed last week on the Yamam’s budget - Smotrich announced on Wednesday that the government and police had agreed on a 35% pay rise for Yamam police officers along with a package of benefits for Yamam; Ben-Gvir responded by calling the move a “feeble spin,” arguing that Smotrich was recycling an earlier agreement in order to deflect criticism.
The Hamodia newspaper, associated with Agudat Yisrael, the Hassidic faction within the haredi United Torah Judaism party, reported on Monday that Agudat Yisrael would not support any budget related bills until the agreement for a new bill to regulate haredi IDF service. A spokesperson for UTJ party leader, Housing Minister Yizhak Goldknopf, claimed that Prime Minister Benjamin Netanyahu had promised to resolve the haredi draft issue prior to the budget.
The coalition has 68 members out of the 120 Members of Knesset. If Otzma Yehudit’s six MKs and Agudat Yisrael’s three MKs vote against the bill, the coalition will no longer have a majority.
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The aim of the legislative proposal is to close a loophole that enables certain companies to avoid paying taxes on “trapped profits”. "Trapped profits" are profits accumulated in companies which have are not been reinvested or distributed as dividends. Companies today pay a 23% corporate tax on these profits, but my leaving them within the company they avoid paying an additional 33% tax once it becomes income.
The Ministry of Finance's original proposal set a new tax of 2% annually on all trapped profits. In the course of the discussions in the Knesset Finance Committee, an alternative track was added whereby the tax can be replaced by a dividend distribution, at first of 5% of the accumulated amount, and 6% from 2026. This incentivizes companies to pay out dividends in 2025, which will then be taxed 33% and create state income.
According to finance ministry estimates, the new tax will create NIS 9.25 billion in income for 2025, and then 4.35 billion every year from 2026 onwards. The legislation is the largest reform accompanying the 2025 budget proposal.
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