The Jewish National Fund (JNF) has told the state that it regards itself as exempt from taxes on its revenue because it is a public benefit corporation. Sources inform "Globes" that in a discussion that took place last week at the Ministry of Finance led by Ministry of Finance director general Shai Babad, the Israel Tax Authority expressed the view that JNF could nevertheless be taxed, but professional sources predicted that the dispute was now likely to result in litigation, with years passing before the state sees any money in taxes from JNF.
JNF's position is embarrassing for the Ministry of Finance, given the state's expectations of NIS 300-500 million in tax revenue from JNF this year. The revenue of JNF, which owns 13% of all the land in Israel, amounted to NIS 2.2 billion in 2017.
As a national institution, JNF has enjoyed a tax exemption since Israel became independent anchored in the national institutions law. Last October, Babad reached an agreement with JNF chairperson Danny Atar under which JNF would fund NIS 2 billion in budget projects (NIS 1 billion each in 2018 and 2019), but the agreement fell through.
A law passed by the Knesset on its second and third readings on January states, "Tax law shall apply to the Jewish National Fund and its institutions," but left JNF an option of nevertheless obtaining an extension of its exemption until 2020 on condition that it announced by January 10 that it would pay the state an amount equal to 65% of its 2018 revenue. JNF opted not to request an extension of its exemption. The Tax Authority thereupon set up a special team to handle collection of taxes from JNF and has already contacted JNF demanding that money be set aside for withholding tax for money due to the state.
It is now clear why JNF preferred not to exercise the option of extending its tax exemption. JNF asserts that although tax law applies to it, it is tax exempt in practice because it is a public benefit corporation, i.e. a non-profit organization. JNF is relying on Section 9(2) of the Income Tax Ordinance, which states that the income of a public institution is tax exempt if not obtained from the business it engages in.
The exemption clause in question is subject to legal interpretation concerning the question of what is "income not from business." The prevailing interpretation is that activity directly related to the organization's goals is not business activity and is therefore tax exempt. JNF can argue that as an agency whose main purpose is the redemption of land for the Jewish people, its revenue from land management is directly related to the purpose of its activity. The Tax Authority disputes this approach, but it appears that there is no way of avoiding a court decision on the issue; state tax revenue from JNF will meanwhile be zero.
JNF said in response, "JNF is conducting intensive discussions with the Tax Authority about its tax status and obligations following the cancellation of the exemptions. To the best of JNF's knowledge, no final decision has been taken about its status and tax obligations."
"Makes money as it pleases"
In mid-2017, with the Knesset discussion about the new law in the background, Babad published an article in "Globes" supporting a change in JNF's status. "In recent years, due to the efforts of Minister of Finance Moshe Kahlon to expedite construction and development in Israel, revenue from land has grown to unprecedented proportions, thereby creating a situation in which the state uses revenue from the land and returns it to people by developing roads, public transportation, the buyer fixed price plan, and other infrastructure, but JNF is making money as it pleases: petty cash funds with tens of millions of shekels for unclear missions, political distribution of money to local authorities, and more political payments of various types about which the State Comptroller spoke his opinion and many probes were conducted.
"In the absence of transparency, when there is no reporting obligation… in contrast to the other national institutions, the World Zionist Organization, Keren Hayesod the United Israel Appeal, and the Jewish Agency, JNF has a regular cash flow of billions, almost all of which comes from operations in land by the Israeli government. This is public money, not JNF's money. When a young couple buys an apartment in Glil Yam, JNF is the sole beneficiary of the payments for the land, instead of the money going to the state.
"The Ministry of Finance is demanding that this money be given back to the public. These development funds should be returned to the residents and used for needs - schools, roads, other infrastructure, according to fair priorities and the existing tender rules in the country, not those of JNF… in line with the principle of equal and transparent division, which only the elected government, the official representative of the people's will and its various needs can and should perform."
Published by Globes [online], Israel business news - www.globes-online.com - on June 4, 2018
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