Our December 2025 Tax Newsflash analyzes the complex 2026 Economic Arrangements Law – a plan featuring both “sticks and carrots” in the taxation arena. After more than 25 years, property tax is expected to return and be imposed on vacant land for construction at a rate of 1.5%, a move that may dramatically impact many landowners and real estate developers in Israel. Concurrently, the government proposes significant tax incentives to encourage immigration: new immigrants and veteran returning residents arriving in 2026 will receive tax exemptions on income from personal exertion in Israel for five years, with decreasing annual ceilings. The plan also includes special taxation on banks, relief measures to encourage competition in the banking sector, and a comprehensive incentive framework for multinational companies as part of Israel’s adaptation to the OECD’s Pillar Two initiative.
The Ministry of Finance recently published the draft Economic Plan for 2026 (Legislative Amendments for the Implementation of Economic Policies for the 2026 Budget, 5786-2025). The draft Economic Plan comprises a long list of structural reforms which the government intends to implement in order to foster economic activity in Israel and accelerate growth. A review of the various draft Bills included in the draft, reveals a complicated economic plan that includes also dramatic legislative proposals in the taxation sector. These proposals include, on the one hand, new tax decrees, spearheaded by the “revival” of property tax, which was revoked more than two decades ago, and “carrots” and tools, on the other hand, for developing economic growth engines, including by encouraging immigration to Israel, advancing competition in the banking world and the alignment of the incentives framework for multinational companies with the OECD Pillar Two rules. In this newsletter we wish to update you on key provisions of the draft Arrangements Law in the various tax fields.
One of the most prominent tax decrees included in the Economic Plan is the reinstatement of property tax and its imposition on vacant land for construction in Israel, the foregoing after being revoked and not applying in practice for more than 25 years. It is not disputed, that the imposition of property tax under the current proposed outline may dramatically impact many landowners and real estate project developers in Israel.
In the explanatory notes to the Bill, it is emphasized that the tax is intended “to capture social value”- since an increase in the value of land usually stems from public infrastructure investments rather than the personal efforts of owners. Moreover, the imposition of tax on capital that is concentrated in the hands of a few is designed to reduce social gaps and assist in the financing of State expenses, the foregoing against the backdrop of the severe budget gaps that were created during the “Iron Swords” war.
The draft Bill proposes to amend section 3 of the Property Tax and Compensation Fund Law, 5721-1961 (the Law), in a way that will result in the imposition of property tax in the rate of 1.5% of the market value of properties defined as “vacant land”.
What is “vacant land”? Pursuant to the definition of the term “land” in section 1 of the Law, land will be considered vacant for the imposition of property tax purposes, to the extent no building has been built on it, or if a building has been built on it – provided that the built-up area comprises less than 10% of the total permitted building rights. In this context, it is important to bear in mind that also land constituting business inventory in the hands of its owners may fall within the scope of application of this old-new law.
The collection model determined in the Bill obliges landowners on which the Law shall have application to submit an annual online declaration (self-assessment) by 31 January, containing an estimated value of the property and the calculated property tax deriving from it. The Director will have the authority to examine the self-assessment within 12 months and to even impose a tax deficit of up to 30% in appropriate circumstances.
Owners of vacant land should bear in mind that according to the proposed transitional provisions, it will be necessary to file online declarations in relation to property tax within 30 days from the commencement date, with the payment of tax for 2026 being deferred to 31 December 2026.
In our view, alongside the blatant and understandable need for increasing State revenues, the draft Bill regarding property tax lacks the essential balancing mechanisms. Thus, as currently framed, the Law could lead to disproportionate harm being caused to the property rights of many taxpayers and the “revival” of acute distortions that characterized the property taxation model in the past, until it was repealed. Thus, for example, the Law does not include exemptions or any relief for landowners who cannot build on it for planning reasons or due to infrastructure constraints and building restrictions. In any event, this draconian legislation requires preliminary and meticulous preparation. Accordingly, in light of the short-term reporting requirement prescribed in the Bill, we recommend that landowners prepare for its application in advance.
The draft Economic Plan includes a draft Bill that is designed to encourage immigration to Israel and the return of veteran returning residents who generally belong to a population group with a high socio-economic standard. This, among other things, against the backdrop of the rising revelations of anti-Semitism around the world since the events of 7 October 2023.
The draft Bill has been formulated as a Temporary Order that will apply to new immigrants and veteran returning residents who return to Israel and become Israeli residents for tax purposes during 2026. As will be explained below, the Temporary Order will grant those falling within its scope a far-reaching tax benefit – a tax exemption on portion of the income from personal exertion that will be generated by them in Israel, for a period of five years, with the exemption ceiling in this regard decreasing over the years. In this context, it should be recalled that the tax exemption that is currently granted to new immigrants and veteran returning residents is limited only to income generated or accrued outside Israel during the benefits period.
The draft Bill therefore proposes to grant a tax exemption on “qualifying income” – income earned from personal exertion pursuant to section 2(1) or 2(2) of the Income Tax Ordinance (income from work or a business/vocation), which was generated or accrued in Israel, and not constituting income from a relative. The exemption will accordingly be granted during the tax years 2026-2030 based on annual, graded and reduced ceilings, as follows:
– in the tax years 2026 and 2027 – an exemption on income totalling NIS 1,000,000, per year;
– in the 2028 tax year – an exemption on income totalling NIS 600,000;
– in the 2029 tax year – an exemption on income totalling NIS 350,000;
– in the 2030 tax year – an exemption on income totalling NIS 150,000.
Over and above these ceilings, income earned from personal exertion will be taxed according to the regular tax brackets, with the remaining tax benefits currently granted to new immigrants and veteran returning residents continuing to have application.
The draft Bill includes several mechanisms that are intended to safeguard the purpose of the tax benefit and prevent its exploitation, key of which are:
– Proportionality of the exemption ceiling in 2026 – it provides that in 2026 the exemption ceiling will be considered proportionate to the period of residency in Israel in that year (so that anyone who immigrates/returns to Israel during the year, will benefit from a partial exemption ceiling proportionate to the linear part of the year in which he was an Israeli resident).
– Exclusion of income from a relative – as a rule, income from relatives does not enjoy the tax benefit as specified in the draft Bill, as noted above. Nonetheless, an important exception in this respect is determined in the definition of “relative”, where a company that is wholly-owned by the person entitled to the benefit will not be considered a “relative”. This exception is designed to allow eligible persons to operate in Israel through a company under their ownership.
– Documentary requirement for veteran returning resident status – in order to benefit from the aforesaid tax relief, veteran returning residents will be required to present a certificate from the Ministry of Immigration and Absorption attesting to their status.
– Family company – a unique mechanism is provided to cater for situations where the new immigrant/veteran returning resident is the representative taxpayer in a family company, and pursuant to which the exemption will apply pro rata to the taxpayer’s share in the profits of the family company. This mechanism is intended to prevent a situation in which the benefit that is granted to a new immigrant/veteran returning resident is spread over the income of his family members who are not entitled to benefit from it.
The draft Economic Plan includes two separate draft Bills operating in a different vector: the one – seeks to impose an additional tax on bank profits that surpass a certain rate of profitability; and the other – is designed to grant VAT relief for new banks in order to encourage competition in this sector. Let us explain:
The Economic Efficiency Draft Bill (Legislative Amendment for Achieving the Budget Targets for the 2026 Budget Year), 5786-2025: a special tax on the activities of banks, including legislative amendments that are expected to be included within the framework of the Economic Plan for 2026. The purpose of the draft Bill is to impose a special tax on banks that enjoy a high rate of profitability. It was therefore proposed to impose an additional tax on banks whose profits in a particular year, until 2030, will be 50% higher than their average profits during the years 2018-2022 (the Base Profit). The level of tax to be imposed will be 15% of the profits generated by banks that surpass 50% of the Base Profit.
Pursuant to the provisions of the draft Bill, beginning in 2027, the average Base Profit will be linked to the rate of increase in the GDP. This mechanism is intended to ensure that normative growth of the bank stemming from expansion of the economy will not be debited as an exceptional profit.
Moreover, the draft Bill proposes to exclude from its application “banks with a small scope of activity”, namely, banks whose asset value does not surpass 5% of the asset value of all banks in Israel. This exception is designed to encourage competition in the banking system and prevent harm being caused to “small players”.
The Economic Plan for the 2026 Budget Year Draft Bill, includes a chapter regarding the promotion of competition in the banking sector. As is known, the Value Added Tax Law, 5736-1975 (the VAT Law) prescribes a unique mechanism for the taxation of financial institutions (for example, banks), that are not subject to VAT for transactions carried out by them (as opposed to “dealers”). Therefore, pursuant to section 4 of the VAT Law, a financial institution is subject to tax on the profits and wages paid by it at a rate identical to the customary VAT rate. With regard to the ability of banks to set-off losses – section 4(b) of the VAT Law allows a financial institution that accumulated a loss in the tax year to set-off same against the wages paid by it in that year.
Within the ambit of the Economic Plan, it has been proposed to amend section 4 of the VAT Law. It has thus been proposed to determine that a bank that is classified as a financial institution will be entitled to set-off losses accumulated in its first years of operation also against profit tax in future years, and not only against the wages paid by it in the year the loss was sustained. The arrangement will apply with respect to losses sustained by the bank beginning from the 2026 tax year onwards. In the explanatory notes accompanying the proposed amendment, it states that in most cases, a veteran financial institution that sustains a loss can set-off such loss against the wages paid by it in that year. However, for new banks, the scope of losses owing to its establishment might be so high, that even after implementation of the set-off mechanism against wages, there will still remain a loss balance that cannot be reflected in the reduction of profit tax in future years.
In our newsflash for October 2025, we elaborated on the State of Israel implementing the Pillar 2 model spearheaded by the OECD, as well as of the intention to adopt the Qualified Domestic Minimum Top-Up Tax (QDMTT) regime. As explained by us, this regime will apply to the income of Israeli resident companies that are members of multinational groups and will result in them being taxed the minimum corporate rate of 15% (To read more, click here).
In order to preserve the attractiveness of the State of Israel for investments and business activities on the one hand, and comply with the OECD’s rules with regard to the types of qualifying incentives on the other hand, the draft Bill in this respect proposes to apply an array of broad incentives for Israeli resident companies that are members of a multinational group.
The incentives proposed in the draft Bill focus on research and development (R&D) expenses that are incurred in Israel. The draft Bill therefore seeks to confer on Israeli resident companies, that are members of a multinational group and satisfy the threshold conditions as determined therein, the right to obtain a tax credit at a certain rate of the R&D expenses incurred by it in Israel, with a distinction being made between the peripheral areas and other regions. In this regard, plants in development area A, as well as special preferential technological plants throughout the country, will benefit from a tax credit of 15% of the R&D expenses incurred by them, while plants in other areas will be entitled to a tax credit of 2% of their expenses. Groups whose total qualifying R&D expenses surpass NIS 1.25 billion annually can opt for a special incentive track, in which they will benefit from increased credit rates. Moreover, it is proposed to confer on the Minister of Finance authority to order that the credit be converted into a grant.
Pursuant to the proposed draft Bill, the threshold requirements which the group will need to meet in order to attain eligibility are as follows:
(a) The total income sourced from preferential income or preferential technological income of all the members of the group that are Israeli residents in the tax year constitute at least 60% of the total income of the members of the group.
(b) The total income sourced from preferential income or preferential technological income of all the members of the group in the tax year amounted to at least NIS 100 million. This sum will be index-linked.
(c) The members of the group employ at least 200 employees in Isreal.
It therefore seems that this speaks of significant tax benefits that can balance to a large extent the expected harm to the various multinational companies operating in Israel, which currently enjoy far-reaching tax benefits pursuant to the provisions of the Encouragement of Capital Investments Law. In light of the complexity of the provisions of the draft Bill, companies meeting the above threshold conditions will be required to prepare for its application in advance.
Advs. Leor Nouman and Moti Saban from our Tax Department are at your service to answer questions regarding these updates and other tax-related issues.
* The newsflash is intended to provide subscribers with general information only and should not in any way be regarded as firm professional advice and/or a definitive legal opinion.
