(Ibid. references omitted).
- In order to determine whether the way in which the legislature has chosen to distinguish between wallet companies and other few companies meets the conditions of the "means of lesser harm", we must ask two questions: Is it possible to achieve the purpose underlying the arrangement to a similar or equivalent extent through the use of a flexible standard that includes an individual examination in each and every case? If the answer to this question is negative, it is necessary to examine whether there is another set of clear rules that would have resulted in a similar or equivalent result and that would have been less harmful. As will be detailed below, I am of the opinion that the answer to both questions is negative (for the broad range of proportionality available to the legislature in relation to legislation of the type we are dealing with, see: the Be'er Sheva case, at paragraph 12; the case of Lehav, at paragraph 113).
- The answer to the first question, in my approach, lies in the number of minority companies, about 180,000 companies, according to the data presented in the state's position (and it should be noted that the very use of the definition of "minority company" also raises a difficulty for the petitioners). Naturally, in order to examine individually whether each and every one of the relevant companies is a wallet company or not, the Tax Authority will be required to invest enormous resources. Certainly, even if this is possible (and it can be doubted), the effectiveness of the arrangements set forth in the law will be significantly impaired (compare: High Court of Justice 7052/03 Adalah Legal Center for Arab Minority Rights in Israel v. Minister of the Interior, paragraphs 88-89 of the judgment of President Barak [Nevo] (2006)). This is even more true where the purpose that the legislature sought to achieve also includes increasing state revenues, and therefore, choosing a solution that requires such a significant investment of resources on its part undermines it to some extent (see and compare: High Court of Justice 1676/09 Director General of the Ministry of Defense v. Qalandia Village Council, para. 24 [Nevo] (November 30, 2011); High Court of Justice 6644/16 Manufacturers Association of Israel v. Flour Mills Forum v. Minister of Economy and Industry, para. 50 [Nevo] (October 18, 2017)).
- The next question, then, is whether there is an alternative set of rules that is less harmful? In this matter as well, the petitioners did not succeed in convincing them that they had a solution that escaped the eyes of the legislature, and we can only conclude that at least at this time, such a solution does not exist (and at least, it was not presented to us). Moreover, as noted above, the arrangements set forth in the law include many measures designed to distinguish between wallet companies and a few other companies. First, the very fact that the law applies to only "a few companies" (as may be recalled, companies controlled by up to five people and not companies in which the public has a real interest) is intended to help distinguish between the two cases. As the state explained, the larger the number of shareholders of the company, the greater the difficulty in using it as a wallet company (section 159 of the state's position). Similarly, the form of corporate governance that characterizes public companies, as well as the regulatory oversight to which they are subject, makes it difficult to use them as a wallet company. In addition, public companies distribute dividends more frequently than private companies in general, and a few companies in particular (section 160 of the state's position).
Subsequently, and within the framework of the arrangements set out in the law, additional provisions were included that were intended to bring about the law to apply mainly to wallet companies. Thus, the rationale underlying Section 62A(A1) The Ordinance is that when the profitability rate of a company from personal labor is high, the likelihood that it is a profession company is also high. In the same way, the income threshold above which it was determined that the law would not apply (The multiplier of ILS 30 million in the number of controlling shareholders in the company) is based on statistics that show that when the income exceeds this amount, the likelihood that the total income derives from the shareholder's activity is very low. This is also true when considering the excess profits tax that has been determined Sections 81A-81F to the command. Initially, it was determined that the tax would apply only to companies that almost completely refrain from distributing their profits (while it was determined that a distribution of only 6% of the accumulated profits is sufficient to receive an exemption from paying tax). At the same time, it was determined that In section 81c(a) The Ordinance has three shields intended to exclude from the application of the law: companies whose accumulated profits are not high (the financial shield), which have accumulated profits required to finance their ongoing operations (the expense shield), and companies that use the profits they have accumulated for long-term business investments (the asset shield).
- Finally, we will turn to an examination of the petitioners' arguments in the second petition regarding the "less harmful means". Even to the reading claimed in the second petition, and despite the sympathy of the arguments of these petitioners, the conclusion that is reached is that the application of the law to companies such as the petitioning company is an outcome, which is indeed not ideal, but falls within the scope of the inevitable cost derived from the very use of the rules. As described above, the main argument of the petitioners in the second petition is that the inclusion of real estate assets of the type it holds (commercial rental real estate assets) in the definition of the term "special properties" discriminates against it, since even though its activity is realistic, it is required to pay excess profits tax. However, as was explained in the discussions of the Knesset Finance Committee, which discussed this matter at length, real estate assets of the type held by the Petitioning Company are in many cases used as wallet companies for investments that do not relate to their field of activity, i.e., investments of the kind that the legislature believed justified to impose the excess profits tax on. Had the legislature chosen to exclude investments of the said type from the application of the law, the result would have been that the holders of the wallet companies would have been able to divert their investments in this direction, and thus avoid paying the tax (see: Minutes of Session 508 of the Finance Committee, 25th Knesset, 15-17 (December 5, 2024)). To this, it should be added that the Tax Authority's position has a significant difficulty in characterizing whether income deriving from investments in the field of real estate is the result of passive investments (on which the tax is justified) or of real business activity (on which there is prima facie no justification for imposing the tax). As a result, an individual examination of each company engaged in this field will not necessarily lead to a proper distinction between wallet companies and a few other companies (and for more on the difficulty in determining an arrangement based on an individual examination, see paragraph 64 above). For these reasons, and although the Substantial It is doubtful whether it is justified to apply the law to the petitioning company as well, and companies like it, from the perspective of Practical, and in a lateral view, This is required in order to achieve the purpose underlying the law to a similar or equal extent.
- For the sake of completeness, it should be noted that the Petitioners' approach also flawed the transitional provision regarding the liquidation of a few companies that was established in the framework of the law. As may be recalled, the Transition Provision allows shareholders who are no longer interested in operating through a minority company to choose to liquidate them or transfer assets to their shareholders, as long as the liquidation began in the 2025 tax year, and the full tax has been paid for it by the end of the 2025 tax year. According to the Petitioners' approach, taking into account that the liquidation proceeding is a complex and lengthy legal proceeding, the time period set out in the Transition Provision is too short, and hence its extension is a "less harmful measure". This argument should be rejected. Even if it is possible to accept an argument of this type on the basis of principle, in the circumstances of the case, I do not believe that the Petitioners met the burden of showing that there was a defect in the transitional provisions (compare: High Court of Justice 5782/21 Zilber v. Minister of Finance, para. 45 [Nevo] (January 12, 2022)). The Transition Provision gave the few companies a full year in order to prepare for the implementation of the Law, a determination that is consistent with the duration of the relevant unit of time when it comes to legislation of the type we are dealing with - a tax year (ibid., in paragraph 3 of my opinion). Moreover, the fact that by the time the State submitted its preliminary response (October 31, 2025), about 1,200 companies had submitted a request to apply the Transitional Provision in their case, also indicates that the Transition Provision provided a response to a significant number of companies. If so, in this matter as well, I do not believe that there is justification for judicial intervention.
The Third Test of Proportionality: Proportionality "in the Narrow Sense" (Benefit vs. Harm)
- The third and final proportionality test concerns the relationship between the benefit that will arise from the law under attack and the degree of infringement of the constitutional right (see Mini-Many: High Court of Justice 7146/12 Adam v. Knesset, 66(1) 717, 811-812 (2013); the Gavish case, at para. 47). And in application for our purposes, the question is in fact whether the economic benefit that will arise from the law outweighs the damage that may be caused to a few companies that are not wallet companies and to which the law will apply.
- On the one hand, the benefit that will arise from the law is clear and immediate. As noted above, the team for examining undistributed profits estimates that the potential collection from the measures taken under the law is about ILS 5 billion per year, of which it is estimated that 99% will be collected from the top income decile. As if that were not enough, the law is expected to significantly reduce the abuse of the two-stage regime - a significant economic distortion that leads to a violation of equality between taxpayers who can operate through a wallet company and other groups in the population. In these circumstances, weighty reasons are required in order for it to be justified to order the nullity of the law. However, in practice, the harm that the petitioners showed relates to a few companies that are not wallet companies only, the scope of which is unknown, and in any case, as explained above, the harm that will be caused to them is not at the high threshold (and as stated, in my opinion, it does not cross the threshold of constitutional infringement at all).
Conclusion
- In my opinion, the law before us is a clear case in which there is no justification for the court to intervene in primary legislation in the field of taxation. This is an amendment to the Income Tax Ordinance that is intended to remove long-standing economic distortion, and which is expected to lead to a significant increase in state revenues. Moreover, the many provisions set out in the framework of the amendment to the law indicate that the legislature has made a significant effort to establish mechanisms that will enable the distinction between wallet companies and a few other companies. The legislature is presumed that if it becomes clear later on that in one aspect or another that the law has failed the result test in achieving its objectives, it will take the necessary steps in order to correct it. At the present time, the mere possibility, which is doubtful to be realized in relation to a significant number of taxpayers, is not sufficient to justify the granting of constitutional remedy.
- In light of the above, I would suggest to my colleague and colleague that the petitions be dismissed. In the circumstances of the case, taking into account the scope of the scope that the petitioners laid out before the court, the delay in which the petitions were filed, and the nature of the matter at hand, I am of the opinion that it is justified for the petitioners to impose expenses at the highest level. Therefore, I would suggest that the petitioners bear the expenses of the government respondents in the sum of ILS 100,000 according to the following division: the petitioners in the first petition in the sum of ILS 90,000; and the petitioners in the second petition in the sum of ILS 10,000.
| Ofer Grosskopf |