Israel Tax Authority targets end to security forces’ tax benefits

Unless there is a last-minute change, the net salary of Israel’s security forces will be cut by hundreds of shekels per month starting with the July salary. This is when the Israel Tax Authority’s directive to cancel historical agreements that grant security forces an almost complete tax exemption from benefits, such as meals and vacations, is scheduled to take effect.

In a directive sent to the security forces last September by Tax Authority head Shay Aharonovich, he stated that they were “acting contrary to tax laws.” In preparation for implementation of the decision, feverish negotiations are taking place between the Tax Authority and the Ministry of Finance and the Ministry of Defense, the IDF, Israel Police, the Prison Service and other security agencies seeking to cancel the decision or soften it. Some are even threatening to turn to the Attorney General if understandings are not reached.

Direct hit to the pocket

The value of the tax benefits in dispute, which are unique to the security forces, is estimated at hundreds of millions of shekels per year by the Tax Authority. The Ministry of Defense estimates the value of the measure to be more than NIS 1 billion shekels per year. These are significantly smaller amounts than the large periodic negotiations between the Ministry of Finance and the IDF on additions to the defense budget to finance the continuation of the war. But this time, when the pockets of the security forces employees are directly at stake, and in the midst of a war, emotions are running particularly high.

At the center of the storm is an agreement signed in 1995 between the IDF and the Tax Authority. The agreement established special arrangements for tax deductions from benefits provided to army professionals, “based on a common understanding regarding the uniqueness of service in the IDF.” Two of the main benefits covered under the agreement are meals that service members receive and vacations to which service members are entitled each year. Today, these benefits are exempt from tax or are subject to only a symbolic tax. Over the years, the benefits from the agreement have been expanded to include the police, the prison service, the Mossad, and Shin Bet.

Moreover, some of the benefits were even extended to officials at the Ministries of Defense, Internal Security, and the National Security Council – civil servants who do not wear uniforms. Some of the expansions came by virtue of Resolution 33, which aligns the conditions of the various bodies with those set in the IDF. However, the Ministry of Finance insists that the expansions were also made voluntarily by the bodies. On the other hand, it is claimed that the benefits in civilian bodies are negligible compared to the uniformed security forces.

In the framework of the negotiations, Aharonovitz explained that he does not intend to harm service members, but rather to correct tax distortions that have taken root over the years and create lack of uniformity in the system. He did not rule out the possibility that the date for the sweeping cancellation of the benefits will be postponed by several months until agreements are reached with the various security bodies.

Who is entitled to benefits?

Beyond the economic aspects of the dispute, there is also a disagreement on the question of who is entitled to these benefits. Among other things, the Ministry of Finance is examining whether it is possible to reach a compromise based on a distinction between non-combatants and combatants, those serving on an open or closed base, and between uniformed personnel and civilian employees of the security forces.

Most security agencies are waiting to see what agreements will be reached, if any, in discussions between the Ministry of Finance and the main player – the IDF. Army representatives have made it clear to the Tax Authority that they will not agree to a single shekel loss in the net salaries of permanent employees.

The IDF has not expressed an objection in principle to the opening of the old agreement, but proposed that the difference from the cancellation of the benefits be reflected in the salaries of the security forces. In other words, they would receive an addition to their gross salary that will offset the increase in income tax they will pay through cancellation of the benefits. However, this would require an annual budget addition of NIS 700 million according to the IDF’s calculation, which the Ministry of Finance is not interested in paying. An alternative compromise would be a gradual implementation of the new outline for future security forces staff, to prevent harm to the salaries of those currently in uniform.

Due to the ongoing war and the need to maintain the morale of the security forces, the issue takes on added political and security significance. The question is whether a compromise solution will be found that will balance the need to maintain fair taxation principles and the recognition of the uniqueness of the security forces, or whether the issue will develop into a political conflict?

Negotiations near breaking down

According to government sources, it appears that talks between the Tax Authority and some of the security agencies are heading towards a breakdown. However, other sources involved in the negotiations claim that the talks with the IDF are actually being conducted under the mutual understanding of an attempt to avoid unnecessary harm to soldiers and reach an understanding. So far, the discussions have remained under the radar, but as they enter the final stretch, the pressures may lead to political intervention by Minister of Finance Bezalel Smotrich and Minister of Defense Israel Katz on the explosive issue.

No response to this report has been forthcoming from the Tax Authority and the IDF.

Published by Globes, Israel business news – en.globes.co.il – on May 29, 2025.

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