Tax Authority Reform: New Opportunities for Israeli NPOs

The Israel Tax Authority is set to approve a new reform that will enable a quantum leap for non-profit organizations (NPOs) in Israel. The Authority has formulated a comprehensive approach recognizing the need to establish independent financial robustness for NPOs in the long term, for the benefit of their activities on behalf of Israeli civil society.

For years, the Tax Authority's policy regarding NPOs was shaped by a desire to ensure oversight and prevent the misuse of tax benefits. However, in practice, due to law violations by a small number of organizations, a restrictive policy was created that hindered even well-functioning NPOs from developing income sources, investing for the long term, and managing with financial flexibility.

The COVID-19 crisis, the events of October 7, and the Iron Swords War highlighted the immense mobilization of NPOs in security, education, health, and social welfare. In many areas, NPOs supplemented or replaced governmental activity. Yet, existing tools remained outdated. Now, we are witnessing a revolution.

Tax Authority Director Shai Aharonovich’s recognition that the vast majority of NPOs are engaged in selfless work for the public good has led to a policy breakthrough. This move is being carried out within the framework of a new procedure for institutions with Section 46 approval, which allows for tax credits for donors. The procedure was formulated taking into account recommendations from the taxation committee of "Manhigut Ezrahit" (Civil Leadership).

Key Changes

• Recognition under Section 61 of the Real Estate Taxation Law: NPOs with Section 46 status will now receive recognition under Section 61, exempting the sale of real estate rights to public institutions from tax.

• Business Activity: NPOs are permitted to engage in business activity up to 25% of their total operations, provided 75% remains dedicated to their core goals. This creates a stable income source independent of donations.

• Investment Committees: A major innovation allowing NPOs to establish investment committees. This provides flexibility to invest funds and generate profit, with clear risk management guidelines for stocks and bonds.

• Surplus Cash Balance: Accumulating surpluses for emergency operations is now permitted. Balances exceeding 300% of turnover over three consecutive years are considered acceptable with proper justification.

• Senior Salaries: In institutions not receiving state support, executive committees may approve salaries for senior officials at 110%-170% of a government CEO’s salary, helping attract professional management.

• Israel Donations System: All donations must be processed through the Tax Authority’s computerized system, enhancing efficiency and oversight.

Ultimately, these policy changes are designed to propel Israeli NPOs forward by providing advanced business and financial tools to better serve society.

The author is the co-chair of the taxation committee at "Manhigut Ezrahit" and former president of the Institute of Certified Public Accountants.