Asset Shield: The cost of the company's assets, minus the cost of special assets, equity and the balance of a loan from a related party, and plus the cost of a retained group of persons (as defined in the Ordinance). Section 81C(a)(3) to the Ordinance). As detailed in the explanatory notes to the Law, the purpose of this alternative is to enable the few companies to make use of their profits for long-term business investments (ibid., at p. 101). In light of this, assets that are usually used as investment assets that are not related to the company's business activities (including "special assets" that include, inter alia, securities and certain rights in real estate, were deducted from the calculation).
- Even if, according to this calculation, it is found that the company has surplus profits, it will be exempt from paying tax if one of the following three alternatives exists:
- The amount of the company's losses in the tax year exceeds 10% of the amount of its accumulated profits at the end of the previous tax year.
- The amount of dividends paid tax due to their distribution, which the minority company distributed to its shareholders, exceeds 50% of the amount of the surplus profits of the minority company at the end of the previous tax year.
- The amount of dividends paid in tax due to the distribution that the minority company distributed to its shareholders is 6% or more of the amount of the profits accumulated by the minority company at the end of the previous tax year.
In other words, few companies have certain losses, and more importantly for our purposes - Few companies have chosen to distribute dividends in sufficient quantitieswill be exempt from paying excess profits tax (for details see In section 81b(b) to the Ordinance).
- In addition to the arrangements described above, it should be noted that in sections 5 and 6 of the Law, two transitional provisions were set out that were intended to enable a gradual change in the companies' activities. The first transitional provision allows a few companies to distribute dividends in a lower amount than that prescribed in section 81b(b) of the Ordinance during the allotted periods, and still receive an exemption from paying excess profits tax (see in detail in section 5 of the Law). The second transition provision allows for a limited period of time shareholders who are not interested in continuing to operate through the minority company to liquidate it, or to transfer assets to its shareholders (without liquidating it), while reducing the tax burden involved (see in detail in section 6 of the Law). Hereinafter: the Transition Provision regarding the liquidation of a few companies or the Transition Order). For our purposes, it should be noted that the possibility of liquidating the minority company in the track set out in the Transition Directive is conditional on the fact that the liquidation began in the 2025 tax year, and the full tax was paid for it by the end of the 2025 tax year.
- For the sake of completeness, it should be noted that in the framework of the law, section 77 of the Ordinance was amended once again , with the aim of facilitating the exercise of the powers set forth therein. The changes made to it were not attacked in the framework of the petitions before us.
- After the required background to the matter has been presented, the parties' arguments will be described below as detailed in the pleadings they submitted and in the hearing held before us on November 13, 2025.
The parties' arguments
- In the framework of the first petition, the petitioners, an association that incorporates consultants for the business sector (accountants, tax consultants, etc.) and a business organization in the fields of commerce and services, request that the law be invalidated. Alternatively, we were asked to determine that the law will not apply to profits accumulated before it came into force; that the law will apply only as a temporary provision; Or at the very least, that the transitional provision regarding the liquidation of a few companies will be extended by an additional two years. It should be noted that alongside the petition, a request for an interim order was also filed, in which we were asked to instruct the state not to implement the provisions of the law until the petition is decided.
- According to the petitioners, the Undistributed Profits Law has brought about an unprecedented change in basic principles in tax law and corporate law, and is liable to harm the Israeli economy, competition, and the struggle against the cost of living. It was also argued that the law leads to a significant violation of the right to property, the right to freedom of occupation and the right to equality. Thus, since we are dealing with retroactive and punitive tax legislation, which was enacted in a hurry and without its implications being properly examined. Against the background of the aforesaid, the Petitioners are of the opinion that the arrangements set forth in the Law do not meet the conditions of the Limitation Clause - and therefore they are null and void. This is their argument in summary, and now in more detail.
- According to the Petitioners, the Undistributed Profits Taxation Law leads to a violation of three constitutional rights - the right to property, the right to freedom of occupation, and the right to equality. As for the infringement of the right to property, it was argued that tax legislation by its very nature violates the right to property. In the circumstances of the case, the Petitioners are of the opinion that this is a significant infringement, since some of the provisions of the Law apply retroactively, with severe harm to the reliance of the relevant companies and their shareholders. This is, inter alia, because excess profits tax is also imposed on profits accumulated before the law was enacted. With regard to the violation of the right to freedom of occupation, it was explained that the law significantly impairs the ability of the few companies to grow, to compete with companies to which the law does not apply, and even to their chances of survival over time. With regard to the violation of the right to equality, it was argued that the provisions of the law create arbitrary and irrelevant distinctions between a few companies and other companies to which the law does not apply. It was further explained that the law leads to a violation of basic principles of corporate law - the principle of separate legal personality and the business judgment granted to the company. These infringements, according to the Petitioners, do not meet the conditions of the limitation clause, and therefore the law is null and void.
- As to the existence of a proper purpose, the Petitioners admitted that the declared desire to deal with the loss of income caused by the abuse of the two-stage model by wallet companies is a proper purpose. However, according to them, the broad application of the law raises "weighty" questions as to the true purpose of the law, especially when there are other arrangements in the Income Tax Ordinance that are intended to deal with precisely this phenomenon. In any event, the Petitioners focused their arguments on the fact that the law does not meet the tests of proportionality.
- First, and with regard to the rational connection test, the Petitioners claim that according to the Ministry of Finance's data, the share of wallet companies out of the number of companies to which the Law will apply is limited and stands at only about 13% (about 15,000 to 18,000 companies out of 135,000 companies). Hence, the connection between the means chosen in the framework of the law, and the desire to prevent wallet companies from abusing the two-stage model, does not meet the required threshold. Moreover, according to the Petitioners, the Law will actually lead to harm to the State's tax revenues, since as a result of the Law, business activity in Israel will be harmed, and foreign investors will prefer to invest in other countries.
With regard to the means test, which is less harmful, it was argued that there are other arrangements in the Income Tax Ordinance designed to deal with the use made by the wallet companies of the two-stage mechanism, which infringe on rights less (i.e., mainly Sections 77 and86 to the Ordinance). At the same time, the Petitioners proposed other ways that, in their view, can achieve the purpose of the law by means that are less harmful. Among other things, it was proposed to incentivize companies to distribute dividends by providing a one-time discount on the tax rate; to reduce the applicability of the law so that it applies only to wallet companies in accordance with its purpose (without explaining how this should be done); Or alternatively, to expand its application so that it applies to all companies in the economy, while reducing the tax rate accordingly. It was further argued that the period of time set out in the Transition Directive does not allow many companies to take advantage of the benefit set out in its framework.