1 The primary exceptions are a net wealth tax and a progressive consumption tax.

2 See Development of Taxes in Israel(Tax Museum Press, 1968, in Hebrew)Google Scholar, and the supplement, The Development of Taxes in Israel, 1964-1978, Mendal, A.and Arin, A., eds., (Tax Museum Press, 1982, in Hebrew)Google Scholar. See also, Morag's, A.excellent book, The Financing of the Government in Israel(Magnes Press, Jerusalem, 1967, in Hebrew)Google Scholar.

3 The rate of tax ranges from 20% to 48%. See section 121 of the Income Tax Ordinance. “Income ceilings, the amounts of credit points and pension points and social concessions” are linked to the consumer price index, according to the linkage system set out in sec. 120B, Amendment No. 72, 1987, of the Ordinance (S.H. no. 1212, p. 89. at 90).

4 See secs. 126 and 127 of the Income Tax Ordinance. The reform proposal is discussed below.

5 See secs. 88-91 of the Income Tax Ordinance, and secs. 1,6,7 and 48A of the Land Appreciation Tax Law, 1963 (17 L.S.I. 193). Capital gains tax was imposed in stages in Israel, as described below, text at pp. 752-753.

6 30 L.S.I. 46.

7 The figures relating to tax incentives are taken from the “Forecast of amounts of taxation that will not be collected as a result of exemptions, tax relief, or tax concessions in the 1988 budget year”, prepared by the State Revenue Administration in the Treasury as part of the Budget Law (now required by the Budget Basics Law). See p. 780, below. The figures relating to the size of the budget are also taken from the Budget Law for 1988.

8 See Gabai, , “Fiscal Policy in Israel, 1948-1978” (1979/1980) 11 Israel Tax Quarterly139, at 160Google Scholar.

9 The figures for the years 1950-1978 are contained in Table 3 of the appendix to Gabai's article, supra n. 8. The figures for the years since 1979 are taken, in regard to 1980, from Arin, , “The Development of the Tax Burden in Western Countries and in Israel” (1984/1985) 14 Israel Tax Quarterly 183Google Scholar, and, in regard to the years 1981-1987, from the Statistical Report No. 37, from January 1988, of the State Revenue Administration. The sequence is thus not continuous and it should be borne in mind that the figures are somewhat different in the various sources.

10 Yoran, , “Legislative Control Over the Israeli Tax System — New Developments and Defects” (1976) 7 Mishpatim 310Google Scholar.

11 1 L.S.I. 7.

12 Nochimovski v. President Tel Aviv-Jaffa District Court (1953) 7 P.D. 1158. See Yoran, supra n. 10, at 312-315.

13 Lehem Hai Ltd. v. Minister of Trade and Industry (1961) 15 P.D. 197. See Yoran, supra n. 10.

14 29 L.S.I. 273.

15 Yoran, , “Taxation Without Law”, Ha'aretz, January 7, 1973Google Scholar.

16 See Yoran, supra n. 10, at 317-320.

17 Ibid., at 322.

18 Ibid., at 323-325.

19 Supra n. 11, at 8.

20 See Yoran, supra n. 10, at 326-328.

21 This result can be achieved by employing principles of private law to recharacterize the transaction.Under one opinion, it would be possible to invoke sec. 13 of the Contracts (General Part) Law, 1973 (27 L.S.I. 117) which provides that “a contract made merely for appearance sake is void”, to determine the civil results of a transaction falsely presented to evade tax, in accordance with the real transaction which is hidden behind the purported, yet false, one. See Tedeschi, , “Simulation and Illegality” (1978) 8 Mishpatim 507Google Scholar, and the position taken by Barak J. in Biton v. Mizrahi (1979) 33(ii) P.D. 576. The accepted view is that sec. 30 of the Contracts (General Part) Law is applicable to such a transaction. This section stipulates that “A contract, the making, contents, or object of which is or are illegal, immoral, or contrary to public policy is void”. See also, Friedman, , “Illegality and Simulation” (1980/1981) 33 HaPraklit 152Google Scholar. See on this subject Yoran, , “Recharacterization of Transactions for Tax Purposes, and the Proper Place of the Artificial Transaction” (1990) 20 Mishpatim 43Google Scholar.

22 An important development in this context is the ruling by Barak J. to the effect that strict interpretation is being superseded by the new doctrine of interpretation in tax provisions as well, in order to accomplish the purpose of the law. Kibbutz Hatzor v. Assessing Officer (1985) 39(ii) P.D. 70.

23 For a comprehensive discussion of the subject, see Yoran, supra n. 21, and the doctoral thesis, under my supervision, of Gliksberg, David, The Boundaries of Tax Planning: Reclassification of Transactions for Taxation Purposes(Harry Sacher Institute for Legislative Research and Comparative Law, The Hebrew University, Jerusalem, 1990, in Hebrew)Google Scholar.

24 See Yoran, supra n. 21 and the comments of Ben-Porat J. in Mor Industrial Center Ltd. v. The Director of Land Appreciation Tax (1980) 12 P.D.E. 63, at 67.

25 1 L.S.I. [N.V.] 145, as on Dec. 31, 1967.

26 Ismar Ltd. v. Assessing Officer (1960) 14 P.D. 65.

27 Mefi Ltd. v. Assessing Officer (1967) 21(ii) P.D. 593. In a later case, Assessing Officer v. Recording Studios in Israel Ltd. (1974), it was held that only a commercial object is potent to salvage a transaction from artificiality. Later, in Mor Industrial Center v. The Director of Land Appreciation Tax, supra n. 24, the then Deputy President of the Supreme Court formulated the rule as requiring a “credible purpose” (at p. 65), thus creating a lack of clarity as to whether the requirement is a “credible commercial purpose”, or whether another “credible purpose” would suffice to salvage the transaction. Ben-Porat J. also altered the Mefi formulation by holding (at p. 67) that “…in many cases a transaction that appears to be artificial is not so if accompanied by a reasonable commercial objective (not, of course, avoidance of tax payment). In these cases, in light of the legitimate objective, what seemed to be artificial becomes reasonable and genuine. Nevertheless, it sometimes happens — and this is the case before us — that a commissioner is permitted, under sec. 84 of the Law, to continue to view a transaction as artificial, despite the existence of an economic objective”.

28 Income Tax Ordinance (Amendment No. 13) Law, 1968 (22 L.S.I. 193, at 199).

29 Hirtzikovitz v. Assessing Officer (1976) 30(iii) P.D. 164, at 168.

30 Property Tax and Compensation Fund Law, 1961 (15 L.S.I. 101).

31 Arnold Shper v. Director of Property Tax and Compensation Fund (1976) 30(i) P.D. 271.

32 T.M.B. Factory Maintenance v. Assessing Officer (1986) 40(iii) P.D. 402. The provision that was discussed in T.M.B. is sec. 95 of the Income Tax Ordinance, which grants a tax deferral to a taxpayer who transferred property to a company in return for shares in the company alone, on condition that immediately after the sale he held at least 90% of the voting power in the company. The discussion revolved around the interpretation of the requirement of “immediacy”. For a criticism of the case see Hollander, , “The Case of T.M.B. Factory Maintenance Ltd., and the Interpretation of Section 95 of the Ordinance” (1988) 143 Yeda Le-Meda 150Google Scholar; Eran, , “Immediately or Never—The Interpretation of Section 95 of the Income Tax Ordinance” (1987) 1 Taxes 39Google Scholar.

33 Sec. 5 in the Mandatory Ordinance. P.G. no. 1568 of 1947 (Supp. No. 1) p. 93.

34 Supra n. 25, at 148.

35 See Yoran, A., Tax Aspects in Tort Compensation(The Harry Sacher Institute for Legislative Research, Jerusalem, 1988, in Hebrew) 13Google Scholar(Hereinafter Yoran, Tort Compensation).

36 For an opinion that by a legitimate interpretation it is possible to define “income” in Israel as any realized addition to wealth, thus eliminating the requirement of source, see Edrey, , “The Source Doctrine — Is it the End?; On the Definition of the Term ‘Income’ in the Israeli ‘Common Law’” (1987) 17 Mishpatim 25Google Scholar. I have already expressed elsewhere my opinion that “the definition of income on the basis of source or periodicity is not successful and needs to be amended. However, the doctrine of source is the cornerstone of the tax base in Israel. An attempt to alter this definition by judicial law-making, which is naturally unable to deal with all of the principles that would be undermined and is unable to grant exemptions, will shake the system out of equilibrium. This is a matter for the legislature to deal with; it could use the opportunity for abolishing the distinction between ordinary and capital profits”. Yoran, Tort Compensation, supra n. 35, at 12, n. 3. For the limits of judicial lawmaking, see Barak, , “Judicial Law-Malting” (1983) 13 Mishpatim 25Google Scholar. The Tel Aviv District Court held, in Kiryat Yehudit v. Assessing Office (1985) 14 P.D.E. 24, that the sources of income in the section are not mutually exclusive, and applied the stricter of the applicable source rules to the “schizophrenic” income. See Yoran, Tort Compensation, supra n. 35, at 12, n. 4.

37 Income is certainly not created when a loan is received. Since there is an obligation to return the loan, there is no addition to wealth. The Tel Aviv District Court recently held, on the receipt of a deposit by a gas company, that the tax result is determined according to the conditional legal obligation to repay deriving from the contract between the consumer and the company, and not according to the statistical probability of repayment. Israel-American Gas Co. Ltd. v. Assessing Officer (1988) 16 P.D.E. 50.

38 See Yoran, , “Taxation of Annuities and Pensions” (1980) 10 Mishpatim38, at 49–50Google Scholar.

39 See the references in Yoran, Tort Compensation, supra n. 35, at 12, n. 5.

40 36 L.S.I. 249. Eliyahu Assets Ltd. v. The Director of Land Appreciation Tax (1987) 15 P.D.E. 217.

41 See sec. D4 below.

42 Until the 1987 tax year, the tax on capital gains was always lower than the tax on ordinary profits.

43 Assessing Officer v. The Israeli Phoenix Insurance Company Ltd. (1967) 21(i) P.D. 660.

44 ‘Bahen’ Insurance Company Ltd. v. Assessing Officer (1965) 19(i) P.D. 277; Assessing Officer v. ‘Argus’ National Company for Insurance Ltd. (1973) 7 P.D.E. 51.

45 ‘Kupat Aliyah’ Cooperative Society and Credit and Savings Ltd. v. Assessing Officer (1979) 33(ii) P.D. 525.

46 Industrial Development Bank Ltd. v. Assessing Officer (1976) 9 P.D.E. 339.

47 K.B.A. Group of City Builders Ltd. v. Assessing Officer (1977) 10 P.D.E. 137, which was approved in K.B.A. Group of City Builders Ltd. v. Assessing Officer (1981) 35(iii) P.D. 572.

48 In contrast, the Tel Aviv District Court recently held that a provision should not be recognized for revaluing deposits that a gas distribution company receives from its customers: Israel-American Gas Co. Ltd. v. Assessing Officer, supra n. 37.

49 See the discussion on p. 775, below.

50 Shahal Building Materials Ltd. v. Assessing Officer (1983) 14 P.D.E. 51, in which it was held that the purchase of a certificate of deposit or foreign currency, constitutes part of the regular day-to-day business cycle of an approved enterprise that includes investing money, the source of which is business activity, with the aim of preserving the value of the money and covering short-term debts.

51 Shikun Ovdim Ltd. v. Assessing Officer (1985) 16 P.D.E. 19, which rejected an attempt to escape the applicability of section 19 of the Income Tax Ordinance by claiming that the shares held by a housing company constituted business inventory.

52 Gorevitz Estate v. Assessing Officer (1966) 20(iv) P.D. 594.

53 See the discussion in Witkon, A.and Ne'eman, Y., Tax Law (Tel Aviv, Schocken, 4thed. (1969, in Hebrew) 81–84Google Scholar(hereinafter Witkon/Ne'eman).

54 See Witkon/Ne'eman, ibid., at 70-78.

55 Dekel v. Assessing Officer (1972) 6 P.D.E. 25; Mizrahi v. Assessing Officer (1982) 12 P.D.E. 313.

56 For an opposing view see, Yoran, A.and Flomin, Y., Tax Planning(Jerusalem Academic Press, 1974, in Hebrew) 190–191Google Scholar.

57 30 L.S.I. 46.

58 Ibid., at 49.

59 Value Added Tax (Amendment No. 3) Law, 1979 (33 L.S.I. 55).

60 Ibid., at 56.

61 For a discussion of the taxation of “an occasional transaction” under the Value Added Tax Law, see Gross, Y.and Alter, A., Value Added Tax(Papyrus, 1987, in Hebrew) 88–102Google Scholar.

62 Ben-Zvi v. Assessing Officer (1963) 17 P.D. 1963.

63 Sharkey v. Wernher (1956) A.C. 58 (H.L.).

64 Sec. 85(a)(2) of the Income Tax Ordinance.

65 Sec. 100 of the Income Tax Ordinance, and sec. 5(b) of the Land Appreciation Tax Law.

66 The reason for this is that the definition of “real estate right” in sec. 1 of the Land Appreciation Tax Law, 1963, does not exclude land for private use, whilst the definition of “property” in sec. 88 of the Income Tax Ordinance excludes “movable property of an individual held by him for his personal use or the personal use of the members of his family or of persons dependent upon him” (1 L.S.I. [N.V.] 145, at 178). Sec. 100 applies to the transfer of “property”.

67 Cohen v. Assessing Officer (1966) 20(ii) P.D. 421; Zelniker v. Assessing Officer (1967) 1 Padim 55.

68 In regard to the question of how to determine when the change of objective occurred, see Neve Sha'anan Company Ltd. v. Assessing Officer (1972) 6 P.D.E. 267; Mivne Yedidiya Ltd. v. Assessing Officer (1979) 12 P.D.E. 119.

69 Sec. 101 of the Income Tax Ordinance.

70 Sec. 8 of the Land Appreciation Tax Law.

71 The tax on imputed income from home property was abolished in 1968.

72 See secs. 2(2)(b) and 3(9) of the Income Tax Ordinance.

73 Yoran, , “Granting the Employee Free Use of the Employer's Property Taxation of the Employer” (1975) 25 Roeh Heshbon 279Google Scholar; Edrey, , “Tax Consequences of Low Interest Loan” (1987) 12 Iyunei Mishpat 145Google Scholar.

74 ‘Dan’ Cooperative Society Ltd. v. Assessing Officer (1966) 20(ii) P.D. 730.

75 In Bat-Yam Municipality v. Assessing Officer (1969) 3 P.D.E. 237, in which the Treasury was successful. The government attorney declared that “this is a test case. The intention is that, to the extent that the Court decides to recognize the principle, it will be operated unwaveringly in every case to which it applies. The Treasury will not be deterred by the administrative and public difficulties that it is likely to encounter in correcting the present situation full as it is of inequities and distortions”. The declaration was never implemented in practice.

76 See secs. 181B and 3(g) of the Income Tax Ordinance.

77 Income Tax Regulations (Deduction of Specific Expenses), 1972 (K.T. no. 2865, p. 1337). See also, Income Tax Regulations (Deduction of Car Expenses), 1975 (K.T. no. 3377, p. 2402).

78 Assessing Officer v. Okba Company Ltd. (1969) 23(ii) P.D. 437. See also, Stetner v. Assessing Officer (1971) 5 P.D.E. 205, regarding the insurance of a partner's life for the benefit of the partnership.

79 Soliatan Ltd. v. Assessing Officer (1973) 27(ii) P.D. 821.

80 Dr. Wolff-Bloch v. Jerusalem District Assessing Officer (1956) 10 P.D. 441, 2 S.J. 309 (in regard to a self-employed person); and Assessing Officer v. Laizer (1966) 20(ii) P.D. 75 (in regard to a salaried worker).

81 Nakid Ltd. v. Assessing Officer (1960) 14 P.D. 2237 (Convalescence Pay) and Assessing Officer v. Nakid Ltd. (1959) 13 P.D. 1453 (Holiday Pay).

82 Tel Ronen Ltd. v. Assessing Officer (1975) 9 P.D.E. 86.

83 K.B.A. Group of City Builders Ltd. v. Assessing Officer, supra n. 47.

84 In the words of Witkon J. in the Tel Ronen case, supra n. 82, at 89.

85 Sec. 18(a) of the Income Tax Ordinance.

86 Sec. 32(10)(a) of the Income Tax Ordinance.

87 Discount Bank v. Assessing Officer (1947) A.L.R. 418.

88 See secs. 14(a), 68, and 214 of the Ordinance.

89 Assessing Officer v. The Israel Electric Co. Ltd. (1970) 4 P.D.E. 263.

90 Income Tax Ordinance (Amendment No. 21) Law, 1975 (29 L.S.I. 49, at 51), and (Amendment No. 22) (29 L.S.I. 215, at 218).

91 S.H. no. 1135, p. 43, at 44.

92 K.T. (1988) no. 5131, p. 1094.

93 Sec. 5(3), supra n. 25, at 150.

94 Oron v. Assessing Officer (1969) 23(ii) P.D. 295.

95 Income Tax Ordinance (Amendment No. 59), 1984 (38 L.S.I. 70, at 71).

96 For a review of the changes that were proposed see, Yoran, , “Amendments to the Income Tax Ordinance, 1974” (1974) 29 HaPraklit422, at 443–444Google Scholar.

97 Sec. 1 of the Income Tax Order (Double Taxation Relief) 1963, by virtue of sec. 214 of the Income Tax Ordinance.

98 See the definitions of “real estate right”, “real estate association”, and “association act” in section 1 of the Land Appreciation Tax Law 1963, and secs. 6 and 7 of the same Law.

99 See the definition of “property” in sec. 88 of the Income Tax Ordinance, and the provision contained in sec. 89(b) of the Income Tax Ordinance.

100 See sec. 2 of the Order (Double Taxation Relief), supra n. 97.

101 The taxation of residents or citizens of Israel by the sovereign Israeli authority is a different and separate question from that of the taxation of residents of the Territories by the area commander. See, K.P.A. Kiryat Arba Steel Company Ltd. v. State of Israel (1983) 12 P.D.E. 291, at 295. Parallel to the imposition of value added tax in Israel, an identical tax was imposed in the Territories, known as added excise. The court held that the tax was legally imposed by the area commander. Abu Aita et al. v. Officer in Charge of Customs, Gaza Strip Region et al. (1983) 37(ii) P.D. 197. In an amendment to the Value Added Tax Law from 1986, it was stipulated, in section 144A (S.H. no. 1195, p. 264, at 274), that value added tax in Israel would be imposed “on transactions carried out in the area by a national of Israel resident in the area”, and “by a body of persons the control and management of whose activity in the area is, directly or indirectly, exercised by an Israeli national who is a resident of the area”. See also section 1A of the Law. This section is similar in character to section 3A of the Income Tax Ordinance (see infra n. 102) and different in character from the imposition of added excise in the Territories by the area commander.

102 Income Tax Ordinance (Amendment No. 32) Law, 1978 (32 L.S.I. 277, at 278).

103 6 L.S.I. 50.

104 The Supreme Court rejected a contention, in the case of K.P.A. Steel, supra n. 101, that an Israel national who is a resident of the Territories is not a national for the purposes of section 3A(b).

105 Israel Shipping Association v. The Director of Customs and Excise (1977) 31(i) P.D. 444.

106 No longer! After this article went to print, sec. 3A was amended in the Law to Amend Income Tax Ordinance (Amendment No. 81) 1990, S.H. no. 1303, p. 52. For our purposes the important amendment is that “Israeli national” has been changed to include the following:

(1) Israeli national in accordance with meaning of same in Nationality Law, 1952 (6 L.S.I. 50);

(2) Resident of Israel;

(3) One entitled to status of “oleh” under the Law of Return, 1950 (4 L.S.I. 114) which same person being a resident of the area;

(4) A group of persons, where an Israeli national as defined in subsecs. (1) to (3) above, is the controlling owner therein: “controlling owner” as defined in sec. 32(9).

It transpires from the above that a company registered in Israel, carrying on its activities and managed in the Territories and having as its controlling owners individuals who are Israeli nationals, is itself an Israeli national and will be subject to the first tax tier in sec. 3A(b). For a survey of the amendment, see Tubul, A., “Application of Israel's Tax Law to the Territories” (1990) 4 Taxes 22Google Scholar.

107 Land Appreciation Tax (Amendment No. 15) Law, 1984 (38 L.S.I. 246, at 247).

108 Shlosh v. Yafet Company Ltd. (1968) 22(ii) P.D. 133.

109 For developments in Israel until 1969 see, Witkon/Ne'eman, supra n. 53, at 124-128, and 169-180. In regard to the situation in 1981, on the eve of the passing of the Adjustment Law, see the Income Tax (Special Deductions by Reason of Inflation) (Temporary Provisions and Amendment of Laws) Law, 1981 (35 L.S.I. 354).

110 Sec. 19 of the Income Tax Ordinance. The applicability of this section was suspended during the period of the inflation adjustment laws with regard to incomes covered by these laws.

111 Income Tax (Taxation under Conditions of Inflation) Law, 1982 (36 L.S.I. 249).

112 Income Tax (Inflation Adjustments) (Temporary Provisions) Law, 1985 (S.H. no. 1154, p. 172). This Law (known as the “Steinberg Law”) has since been amended a number of times and its applicability extended.

113 See Yoran, , “A Proposal to Change Corporate Taxation” (1972]/1973) 28 HaPraklit 395Google Scholar.

114 See sec. A above.

115 S.H. no. 1245, p. 58.

116 Secs. 3(e), 3(e1), 9(b), 9(7a), 9(16), 9(16a), 9(17), 9(18), and 9A of the Income Tax Ordinance.

117 Income Tax Commissioner v. Bar-Ze'ev (1986) 40(iv) P.D. 351.

118 See sec. D(1) above.

119 During the period in which the securities stock exchange was closed due to the bank securities crisis, taxpayers transferred bank securities to their businesses by different methods in order that the drop in value would be recognized as a loss that could be used to offset taxable income. In an attempt to deal with this phenomenon, the Income Tax (Taxation under Conditions of Inflation) (Temporary Provisions and Amendment) Law, 1984 (38 L.S.I. 47) was passed. However, the fault is structural, and cannot be remedied by plugging up holes. As long as different tax systems are operated, there will be leakages in the system, whenever they serve the interests of the taxpayers.

120 According to sec. 9(13) of the Income Tax Ordinance (Amendment No. 22) Law, 1975 (29 L.S.I. 215) the exemption is given to “linkage differentials, not being income under section 2(1), on preferred loans”. “Preferred loans” are defined in section 1 of the Ordinance as “loans, or deposits under a savings scheme, the interest on which is wholly or in part exempt from tax under any law, unless otherwise provided in that law, as well as certificates of participation therein”.

121 The provisions of the Banking (Licensing) Law, 1981 (35 L.S.I. 277) prohibiting banks from controlling business corporations, which were supposed to become valid on 1 April 1985, have been postponed time and again, and have yet to be implemented because the structural change involves taxation.

122 Such as sec. 95 of the Income Tax Ordinance, and sec. 70 of the Land Appreciation Tax Law.

123 According to Chapter 7 (secs. 28-43) of the Encouragement of Industry (Taxes) Law, 1969 (23 L.S.I. 253, at 260-264). The regulations also apply to mergers in international shipping, international aviation, and in the hotel industry.

124 The “Report of the Committee for the Examination of the Tax Aspects of the Reorganization of Corporations” (Jerusalem, 1988)Google Scholarsubmitted to the Director of State Revenues and to the Income Tax Commissioner, is based on such thinking.