Wartime update: Compensation for property owners, reservists

The war continues, and the Israeli economy continues to struggle. Some IDF reservists have returned home. New reservists are being called up, and conscription may be extended. It is estimated that there are about 120,000 evacuees from the South and the North. Here is a partial wartime update.

War compensation

Compensation and other measures are gradually being extended as the war continues. This applies to compensation for direct damage to property by missiles, etc., until the end of December 2023. This also applies to compensation for “indirect damage,” meaning a reduction in sales and profits until the end of December 2023.

The rules are complex and vary according to size and location. Broadly, if sales revenues drop by 25%, a portion of salaries and other expenses (per VAT returns if you are up to date with them) is compensated.

There were initial teething problems and delays, but the system seems to be settling down, and sometimes payout is received within a week (sometimes it isn’t). This compensation is enormously important for all concerned, especially IDF reservists who serve lengthy periods and cannot attend to their business activities.

Landlords

Landlords are experiencing problems getting compensation for properties that were not damaged but lie empty. Lost rent is only compensated if the property was on the front line, or if the landlord has many properties and pays up to 50% tax under regular tax rules, according to guidelines of the Israel Tax Authority. Landlords passively trying to rent out empty properties and pay the concessionary tax rates (0% or 10%) may get no compensation. This is causing controversy because real estate is a store for hard-earned wealth intended to supplement the pension income of many ordinary Israelis.

Payments for reservists  and the unemployed

Emergency regulations regarding unemployment pay were extended until the end of 2023. Further extensions are expected. The situation is complex as some reservists find there is no job to come back to. Legal advice is recommended.

Among other things, the emergency regulations enabled people laid off to receive unemployment payments by the government (through the National Insurance Institute), subject to certain conditions. IDF reservists who are employees not laid off, freelancers, and unemployed people may receive reimbursement of salary and/or income of up to NIS 49,030 per month in 2024. The formula is generally based on the last three months’ earnings. There is also a minimum payment of 68% of a “basic amount,” which is currently NIS 6,668 (i.e., NIS 4,534 apparently) in 2024 even if the reservist did not work.

Moody’s

Moody’s credit-rating agency downgraded its rating for the Israeli economy on February 9 to A2 and its outlook to negative. This has a medium-term effect. If interest on Israeli government borrowing and bonds rises due to perceived economic risk in Israel, other interest rates may need to rise to discourage too much money flowing into government bonds.

Factors affecting the Moody’s downgrade included both the war and the judicial reform process, which has been suspended but not stopped. This matters because investors want an impartial judiciary to protect Israeli property and technology rights; otherwise they might invest elsewhere. Then the government cannot collect large sums of capital-gains tax if there are fewer hi-tech exits (acquisitions), as it does now. Other credit-rating agencies are expected to follow suit.

Bank taxation

The government proposes to reduce its burgeoning deficit by tapping into bank profits and raising the wage and profit tax they pay. As in other countries, Israeli banks don’t pay VAT; only businesses do at a standard rate of 17%. But unlike other countries, Israeli banks and insurance companies currently pay a 17% tax on wages and profits because wages plus profits equates to value added. This is in addition to 23% company tax. The government says the rise in interest rates in April 2022 increased bank profits by nearly 30% in 2022 to about NIS 24 billion and NIS 24b. in the first nine months of 2023.

A recent Knesset bill proposes to raise the tax on profits of banks from 17% to 26% in the period from March 1, 2024, to December 31, 2025.

Comments

The amount of the higher tax returns is not estimated in the bill, presumably because of the complex interaction of taxes. Higher interest rates paid by the banks on customer deposits are not taken into account. It seems Israeli insurance companies are also affected. In short, bank charges and insurance premiums seem set to rise.

As always, consult experienced tax advisers in each country at an early stage in specific cases.leon@hcat.co

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.