Take a new law, which states that the owner of a property must pay a new tax. Is its application to someone who acquired ownership of the same property before the law came into force a retrospective application of the law? In my opinion, the answer is no. The law will apply to all property owners on the day it is enacted, without its application to them retrospectively. Indeed, the application of the new law will be retrospective, if it also applies to someone who ceased to be a property owner on the day the law came into effect (which applies to someone who had the status of a property owner, and this situation has ended). The application of the law is also not prospective (i.e., only one who will own a property in the future). The application of the law to a person who owns property on the day the law comes into effect is an active application of the law. The law acts immediately on the state of affairs as it exists on the day it came into effect.
(ibid., at pp. 778-779).
This is also true for our case. The Undistributed Profits Taxation Law does not change the legal outcome of past situations, events or actions, but rather stipulates that the accumulated profits in the company's coffers must be On the day it came into effect A new tax will be imposed, with a forward-looking view. In other words, the question that must be examined within the framework of the law is not how the company operated in the past and what are the implications of these actions on its tax liability today. The tax liability will arise only if After the Law Came into Effect Profits remain in its coffers that have not been distributed, and only they will be taxed. This component of the law, therefore, is at most applicable. Active (and certainly not retroactive, as the petitioners claim). Moreover, even when the matter is examined in the light of the purpose that the law seeks to achieve, it is easy to understand that its focus is on the future and not on the past. The purpose of the law is not to punish the relevant companies for the elections that were made in the past, but to direct their behavior with a forward-looking view (compare: Matter Arbiv, at pp. 779-780).
- Another argument raised by the Petitioners in this context is that the Law stands in complete contradiction to economic logic, in a manner that brings it to the fifth suspect category. According to them, the law will lead to harm to many companies in the economy that use the two-stage model in order to expand the scope of their activities; will suppress the incentive to open new companies and entrepreneurship; will harm competition in the economy; And in the long run, it will even lead to a reduction in the state's tax revenues. On the aforementioned side, and concretely, the Petitioners claim that the law will incentivize companies to take economically inefficient steps in an attempt to avoid tax liability. Among other things, it was argued that companies may choose to distribute dividends even when there is no economic justification for doing so; will carry out ineffective actions in order to apply the various exemption provisions set forth in the law; and will even cease their activities altogether. These arguments must be rejected in its entirety from the moment they were made in its entirety, and without presenting an economic, theoretical or empirical basis to support them (High Court of Justice 8035/07 Eliyahu v. Government of Israel, paragraphs 9-10 [Nevo] (May 21, 2008); In this context, it should be noted that the Petitioners' gloomy forecasts stand in stark contrast to the position of the professional bodies in the state, who believe that the law will bring significant economic benefits - increasing the state's tax revenues and reducing the misuse of the two-stage model by wallet companies. It should also be remembered that the law is intended to correct an economic distortion - the inefficient accumulation of profits in the corporate coffers, with the only reason for this being the preferential tax regime that applies to companies over individuals. This is a significant externalization of the entire taxpayer public, since the wallet companies and their shareholders do not bear the tax burden in accordance with their due share. Specifically, the various provisions of the law were established for the clear purpose of distinguishing between wallet companies (to which the law is intended to apply) and other companies that are used by the tax benefit for the purpose of increasing their real activity in accordance with its purpose (and to which the law is intended not to apply). Therefore, even if, on the sidelines, the law is liable to incentivize inefficient actions, when at the heart of the arrangement is a clear purpose of correcting market failure, I do not believe that it is justified to determine that the law is ostensibly contrary to economic logic.
- Finally, the Petitioners are of the opinion that the Law stands in contrast to the fourth suspect category, since it leads to discrimination against the minority companies - once vis-à-vis other companies to which the Law does not apply (for example, large companies whose turnover exceeds ILS 30 million, as determined in section 62(a1)(1)(a) of the Ordinance); and the second time because the Law applies to all the minority companies without distinguishing between them (and see also the Petitioners' arguments in the Second Petition in this regard). In this context, it was argued that although according to the report of the team for examining undivided profits, there are between 11,000 and 14,000 occupational companies and about 4,000 holding companies, in practice the law is expected to apply to all the few companies whose number is significantly higher. It was further argued that some of the provisions of the law were arbitrarily determined, without effectively distinguishing between wallet companies and other companies. The state, on the other hand, explained, based on updated data, that out of all the few companies in the economy (about 180,000 companies), the Tax Authority's estimate is that about 20,000 companies will be required to pay excess profits tax if they do not change the way they operate, and about 15,000 companies are expected to be subject to section 62a(a1) of the Ordinance. It was further explained that although there is a certain degree of arbitrariness in some of the provisions set out in the law, this cannot be avoided insofar as one wishes to establish clear rules. Moreover, it was argued that the criteria set are sufficient to predict with a reasonable level of certainty which companies are wallet companies.
- I do not believe that the petitioners' arguments pass the threshold required to prove that the Undistributed Profits Taxation Law discriminates against a few companies, in a manner that brings it to the fourth suspect category. Insofar as we are dealing with a decision to apply the law only to a few companies, and not to other entities, it is not arbitrary at all, since according to the experts' positions, the problem that the law seeks to deal with is typical of these bodies, and does not exist (certainly not to the same intensity) in companies with multiple stakeholders. This is because in these companies there is natural pressure to distribute profits, or to invest them for the purpose of the corporation's business, on the part of the interested parties who wish to "meet with the money", and not to leave it outside their area of control (for more on this matter, see paragraph 65 below). Insofar as the application of the Law to all of the minority companies is concerned, the claim of discrimination is based on the excessive applicability of the Law, in a manner that is liable to harm the interests of some of the minority companies, such as the Petitioning Company, unnecessarily (in view of the purposes of the Law). Zero, overapplying (or subtracting) is a problem that characterizes every rulemaking case. In light of this, and as noted above, in order for an infringement of the right to property to be recognized in the context of tax legislation, it is not enough to show that the law is overly applicable (or missing) in one case or another, but it is required to prove that it derives from characteristics that deviate from the necessity derived from the arbitrary nature of the rules. Given the aforesaid, I am not convinced that the petition meets the burden of convincing that it is a law that suffers from inherent inequality, as opposed to a law whose borders can be argued to have been designed more roughly than desired (a flaw that, even if proven, would not justify constitutional intervention. See also in this regard paragraphs 62-66 below).
- In light of the aforesaid, in my opinion, the petitioners' claim of infringement of property could have been rejected, already for the reason before us of tax legislation that the petitioners failed to establish that it was "suspected" of violating one of the characteristics of the "good tax", i.e., they were not persuaded that any of the suspicious categories existed in respect of it that justify, in my opinion, an examination of tax legislation on the basis of infringement of property rights.
At the same time, in order not to find the argument missing I'll lay In favor of the petitioners later in the discussion, that the law's focus on only a few companies leads to a certain violation of equality between taxpayers - To the extent that justifies the transition to the second stage of constitutional review. As clarified, I do not believe that the petitioners duly established this argument, but to the contrary Of the two arguments that preceded it (retroactive tax legislation that lacks economic logic), at least it is not unfounded, in my opinion.
- It should be clarified that my willingness to assume (as clarified, for the purpose of the discussion) that the law may be perceived as violating equality between taxpayers in a manner that may justify moving beyond the second stage of the constitutional examination in terms of the infringement of property, does not lead in the present case to the willingness to assume (not even for the purpose of the discussion) that the law violates the constitutional right to equality, in a manner that justifies moving beyond the second stage also with respect to the constitutional protection granted to this right. As is well known, the protection of the right to equality on the constitutional level is part of the protection of "the dignity of a person as a human being" enshrined in section 2 of the Basic Law: Human Dignity and Liberty, and as such it is partial, and is limited only to situations in which it is a matter of discrimination due to suspicious group affiliation or is closely related to human dignity (High Court of Justice 6427/02 The Movement for Quality Government in Israel v. Knesset, IsrSC 61(1) 619, 687 (2006); High Court of Justice 5577/23 Anonymous v. Knesset of Israel, para. 12 and the references there [Nevo] (June 24, 2024)). In our case, the petitioners explained at length why it was necessary to distinguish between wallet companies and a few other companies (to which the state was a partner), and why the arrangements set out in the law do not do so properly. However, even if I were willing to accept their argument that the provisions set forth in the law lead to a result that is liable to have a certain degree of discrimination (and as clarified, I do not believe so), this matter is certainly not sufficient to establish a violation of equality on the constitutional level (as opposed to a claim of a violation of administrative equality: High Court of Justice 11163/03 The Supreme Follow-up Committee for Arab Affairs in Israel v. the Prime Minister of Israel, IsrSC 66(1) 1, 32 (2006); High Court of Justice 9722/04 Polgat Jeans in Tax Appeal v. Government of Israel, para. 23 [Nevo] (December 7, 2006) (hereinafter: the Polgat case)). I have repeatedly reviewed the pleadings submitted by the petitioners, and in the absence of any concrete reference to the matter, they were asked in the hearing before us to explain why this is an infringement related to a close substantive and close connection to human dignity (see: pp. 10-13, 16 of the minutes of the hearing of November 13, 2025). However, despite the many opportunities given to them, the petitioners have not been able to clarify why the infringement crosses the constitutional threshold. Indeed, while the arrangements in the law have a limited impact on the economic-business activity and profitability of the companies to which the law will apply, it is difficult to view this as an infringement that has a sufficient connection to the right to human dignity (see and compare: the Polegat case, at paragraph 23; High Court of Justice 956/06 Association of Banks in Israel v. Minister of Communications, para. 7 [Nevo] (March 25, 2007)). In these circumstances, their arguments regarding the violation of equality should be rejected.
- Similarly, I do not believe that the petitioners have succeeded in establishing a violation of the right to freedom of occupation, certainly not with the intensity that justifies moving beyond the second stage of the constitutional examination. Section 3 of the Basic Law: Freedom of Occupation states that "every citizen or resident of the State is entitled to engage in any occupation, profession or occupation." This provision was interpreted very broadly by the case law. Among other things, it was held that the right to freedom of occupation includes the freedom to "enter" a field of occupation, profession or occupation, and therefore setting conditions or imposing restrictions on entry into a particular field of occupation will be considered an infringement of the right (High Court of Justice 4330/93 Ghanem v. Tel Aviv District Committee of the Israel Bar Association, IsrSC 50(4) 221, 233 (1996); High Court of Justice 4769/95 Menachem v. Minister of Transport, IsrSC 57(1) 235, 260 (2002)). Similarly, it was held that the imposition of restrictions relating to the manner in which a particular occupation can be exercised may also be considered an infringement of the freedom of occupation, even if, as a rule, it is less severe (HCJ 5975/12 Vending Machine Cigarette Dispensers Division v. Ministry of Health, para. 9 [Nevo] (July 3, 2013); High Court of Justice 6637/16 Lowenstein Levy v. State of Israel, para. 34 [Nevo] (April 18, 2017)). The case law also recognized that actions that harm free competition in the economy may also be considered an infringement of freedom of occupation (High Court of Justice 726/94 Clal Insurance Company in Tax Appeal v. Minister of Finance, IsrSC 48(5) 441, 471 (1994); High Court of Justice 1030/99 Oron v. Speaker of the Knesset, IsrSC 56(3) 640, 658 (2002). and cases dealing with a similar (and reverse) case in which a subsidy was granted to some of the competitors in the market: High Court of Justice 1703/92 A.L. Cargo Lines in Tax Appeal v. Prime Minister, IsrSC 52(4) 193, 216 (1998); High Court of Justice 5636/01 Beckman v. Minister of Labor and Welfare, IsrSC 58(5) 890, 897 (2004)). On the other hand, it was clarified that no harm to a business interest or that which could affect activity in the economy will be considered an infringement of the freedom of occupation (High Court of Justice 6268/00 Kibbutz Hahotrim Registered Agricultural Cooperative Society v. Israel Lands Administration, IsrSC 55(5) 639, 671 (2001); High Court of Justice 5064/03 Association of Insurance Agents in Israel v. Supervisor of Insurance, IsrSC 58(3) 217, 237 (2004); High Court of Justice 1953/09 Elwalidi v. Minister of Agriculture and Rural Development, para. 20 [Nevo] (July 8, 2009)).
- In our case, the difficulty in recognizing that the law leads to a violation of the right to freedom of occupation that is not "marginal or negligible" stems from a number of reasons: First, it should be remembered that the wallet companies, to which the law is intended to apply, are not companies that conduct real business activity. Their purpose, as explained above, is to serve as a tool for their shareholders to invest in preferential tax conditions, in assets that do not relate to their field of activity. Thus, the burden on their activity does not impair their ability to operate in a particular field of activity, but mainly the ability of their shareholders to invest their profits under preferential tax conditions. Activity of this type is not intended to protect the right to freedom of occupation. Second, the law is actually expected to improve the ability of individuals who do not operate through a company to compete with dealers, who operate through a few companies to which the two-stage regime is not justified, and hence the law may even promote free competition in the economy. Third, and finally, the fear that the law will significantly harm a few companies that are not wallet companies is not great. As noted above, the law contains many provisions intended to distinguish between wallet companies and a few others; and between profits on which there is justification for imposing excess profits tax, and profits that are used or expected to be used by the company for the purpose of expanding its real activity. In this context, significant weight should be given to the Tax Authority's assessment that the gap between the number of wallet companies and the number of few companies on which the law is expected to affect is not large, especially when examining not only the number of companies that are expected to be affected by the law, but also the extent of the impact (and it should be noted that it is estimated that 80% of the excess profits tax base will be collected from only a few 5,000 companies). To this, it should be added that the rate of the tax is only 2% of the excess profits accumulated in the companies' coffers and were not distributed as dividends, and that its effect on the ability of a few companies to operate and compete is at most indirect. Given the aforesaid, and while the petitioners have not been able to show otherwise, I do not believe that the harm that will be caused to a few companies that are not wallet companies justifies the transition to the second stage of constitutional review in relation to the law's infringement of the freedom of occupation.
- Summary of this part: In my opinion, no convincing factual and legal basis has been laid for the petitioners' claims that the Undistributed Profits Taxation Law violates the basic protected rights of minority companies with such intensity that it justifies the transition to the next stage of the constitutional examination - not the right to property, not the right to equality, not even the freedom of occupation. This would have ended the judgment, since this is sufficient to reject the constitutional argument against the law at the very first stage. Nevertheless, and in order not to find the argument lacking, itis assumed for the purpose of the discussion that there is a certain infringement of the property rights of the few companies, and I will turn to examining under this assumption whether the law meets the conditions of the limitation clause, i.e., it passes the second stage of the constitutional analysis.
Stage 2: Does the law meet the conditions of the limitation clause?
- At the beginning of this section, it should be noted that the petitioners do not dispute that most of the conditions of the limitation clause are met. Thus, there is no dispute that the infringement (if any) was done by the Knesset law; that the law is in line with the values of the State of Israel; and even that the law was intended for a proper purpose (see: paragraph 349 of the first petition; paragraph 67 of the second petition). In this context, it should be clarified that the arguments raised by the petitioners, which relate to questions such as whether the law succeeds in achieving its underlying purpose; whether the means chosen to achieve it are appropriate; And whether the benefit of the arrangement exceeds the damage caused as a result of it - it is appropriate to clarify as part of the requirement of proportionality. This is the next stage in examining the constitutional validity of the law, to which I will now turn.
The proportionality of the arrangement established by law
- The concept on which the requirement of proportionality is based is that the protection of human rights is not absolute. Therefore, when there is sufficient justification, the legislature may exercise its authority in the manner it deems appropriate. The role of the court, when it comes to examining whether the infringement of the rights inherent in the law was done "to the extent that it does not exceed what is required", is to examine the question of whether the legislature deviated from the boundaries set by the Knesset in its capacity as a constituent authority in the limitation clause. The way to determine whether a law subject to judicial review meets the requirement of proportionality passes through three sub-tests: the rational context test; the test of the means that is less harmful; and the test of proportionality in the narrow sense (benefit versus harm). I will examine these tests as they are.
The First Test of Proportionality: The Test of Rational Connection
- The rational connection test is concerned with the relationship between the means chosen by the legislature and the purpose that the law is intended to achieve. In particular, the court must examine whether the implementation of the law will lead to the realization of the purpose underlying it. It is precise that in order for the law to pass this test, it is not necessary that the law will bring about the full realization of the purpose that the law is intended to achieve. With regard to the threshold that must be met, it was held that "there is no requirement that the chosen means fully achieve the goal, and a partial realization that is not marginal or negligible is sufficient in order to fulfill the requirement of the rational connection" (High Court of Justice 1213/10 Nir v. Speaker of the Knesset, paragraph 23 of the judgment of President Beinisch [Nevo] (February 23, 2012); See also: High Court of Justice 2293/17 Gerseghar v. Knesset, paragraph 36 of the judgment of President Hayut [Nevo] (April 23, 2020)). As described above, the purpose of the law is to increase the state's tax revenues on a regular basis, by reducing the phenomenon of using wallet companies for the purpose of deferring tax payments without economic justification, and providing an incentive for distribution. Is there a rational connection between the means chosen by law and these purposes?
- As for the first part, the aforementioned purpose (increasing state revenues), if we set aside the petitioners' gloomy forecasts regarding the long-term impact of the law on the economy(which, as noted, were not anchored in anything), the law is expected to significantly increase the state's tax revenues - about ILS 5 billion per year, according to the estimate of the team for examining undistributed profits. As for the second part of the purpose of the law (reducing the phenomenon of using wallet companies and providing an incentive for distribution), the two main arrangements set out in the law are expected to lead to the realization of this goal. Thus, expanding the range of cases in which it will be possible to attribute the company's income to its shareholders (as determined in the amendments to section 62A of the Ordinance), makes it possible to deal in more cases with the use made by salaried employees or officers of occupational companies in order to benefit from the tax benefit without any economic justification for doing so. In particular, section 62A(a1) of the Ordinance, which is the focus of the first petition, allows the company's income to be attributed to its shareholders in cases where the rate of profitability from their personal labor is high - situations in which in the assessment of the team for examining undivided profits the likelihood that it is a wallet company is high (report of the team for examining undivided profits, at pp. 30-31). Similarly, the tax on excess profits (as determined in sections 81a-81f of the Ordinance) reduces the incentive for wallet companies to avoid distribution, especially in situations where the accumulation of profits has no economic purpose related to its activity. Moreover, even if the wallet company chooses to avoid distribution, the tax rate that has been set is intended to bring about the benefit that grows from the deferral of tax payment will be transferred to the state coffers and not to the pocket of the shareholder. As will be detailed below, in relation to this arrangement, provisions were also made in relation to the purpose of distinguishing between wallet companies and a few other companies. The rational connection test exists, then, in relation to the Undivided Profits Taxation Law.
The Second Test of Proportionality: "The Least Harmful Means"
- Let us proceed, then, to the second test of proportionality. The issue of the "means with less harm" test is the question of whether the means chosen by the Knesset in order to realize the purpose underlying the law are those whose infringement of constitutional rights is less. It is customary to liken this test to climbing a staircase: "The legislature must begin with the 'step' that is less harmful, and gradually ascend the staircase, until it reaches that level in which the proper purpose is achieved without infringing beyond what is required of the human right" (Mizrahi Bank, at p. 444). It should be noted that in the framework of this test, it is necessary to examine not only the question of whether there are other measures that infringe to a lesser extent constitutional rights, but also whether these measures fulfill the purpose underlying the law "to a similar extent" or "equivalent" (HCJ 4231/16 Yedid v. Attorney General, para. 21 [Nevo] (June 15, 2017); High Court of Justice 781/15 Arad-Pinkas v. The Committee for the Approval of Embryo Carrying Agreements under the Embryo Carrying Agreements Law (Approval of Agreement and Status of the Newborn), 5756-1996, paragraph 28 of the judgment of President Esther Hayut [Nevo] (February 27, 2020)).
- In the framework of the first petition, the petitioners referred to four means which, in their view, can reduce the violation of rights without prejudice to the achievement of the purpose of the law. The first option referred to by the Petitioners is the determination of economic incentives for the distribution of dividends by providing a one-time benefit in the tax rate ("dividend promotion"). Not only does past experience show that this is only a temporary solution, but it actually replaces one unjustified tax benefit (in the form of deferral of tax payments) with another unjustified tax benefit (reduction in the tax rate). See also pp. 42-43 of the report of the team for examining undistributed profits). A second option raised by the Petitioners is to expand the use of the existing means in the Income Tax Ordinance (and in particular sections 77 and 86 of the Ordinance) for the purpose of dealing with the wallet companies. However, even with regard to this possibility, the state noted that past experience shows that these are not means capable of providing a satisfactory response to the phenomenon, since unlike the arrangements set out in the law, these are intended to deal with individual cases, as opposed to dealing with the phenomenon laterally. Another and third option proposed by the Petitioners is to apply the Law to all companies in the economy, while reducing the tax rate accordingly. However, even if this alternative is relevant to the desire to increase the state's tax revenues, it is clear that it does not help reduce the phenomenon of the use of wallet companies, which is part of the purpose of the law. Moreover, the application of the law to all companies entails a significant increase in the administrative costs involved in its implementation, without it has been clarified that this has a real benefit for advancing its purposes. A fourth and final option addressed by the Petitioners is to reduce the application of the Law so that it applies only to wallet companies (without explaining how this should be done). This, in fact, is also the argument of the petitioners in the second petition, who are of the opinion that the application of the law should be limited so that it does not apply to companies such as the petitioning company. I will discuss things in general, and then focusing on the specific case of the Petitioning Company.
- As explained above, the law incorporates many provisions intended to distinguish between wallet companies and a few other companies. The petitioners' argument is that the criteria set for this purpose are "arbitrary", do not properly distinguish between the two aforementioned groups, and therefore the law suffers from an overapplication that justifies its disqualification. This claim is not surprising. In fact, it is relevant in almost every case in which the legislature chooses to establish an arrangement based on rules as opposed to standards, since "there are few situations in which there is a uniform relationship between the legal rule and the purpose underlying it" (HCJ 3830/22 Cohen v. Minister of Health, para. 23 [Nevo] (May 15, 2024)). As I have mentioned in this context in the past:
The nature of the legal rule is that it is based on the use of clear and rigid criteria, the application of which leads to a result that is consistent with the purposes that the rule wishes to promote in most cases, but not in every case. It is precisely in contrast to this deficiency of the rule, the inclusion of the excess and the deficiency in it, its main virtue - the creation of clarity and legal certainty that enables the recipients of the rule to plan their steps. Therefore, there is nothing wrong with using the rules. Nor can it be argued that it is necessary to amend the rule, and to add reservations and conditions to it, in every single case in which it turns out that the result is not fully consistent with the purpose.