Banks reacted with shock to Minister of Finance Bezalel Smotrich’s decision to double the revenue from a special tax to be imposed on them. Under Smotrich’s decision, a 15% tax will be levied on banks’ excess profits, compared with the recommendation of the special committee he appointed, which proposed a tax rate of only 7% to 9%.
The tax will be calculated based on 50% of the increase in profits of Israel’s five largest banks compared with their average profits between 2018 and 2022. As a result, tax collection is expected to reach 1.13 billion shekels in 2026 and at least 1.5 billion shekels each year starting in 2027. This is a permanent tax that will apply exclusively to banks, and not, for example, to high-tech companies or large food companies that also report high profits. The decision is expected to be challenged in the High Court of Justice, with banks likely to file petitions seeking to block the Minister of Finance’s move.
A senior Ministry of Finance official criticized the decision, saying that on one hand there will be a tax revenue loss of 2.25 billion shekels from Smotrich’s decision to double the VAT exemption on personal imports to 150 dollars, while on the other hand excess tax will be collected from the banks.
It should be noted that banks paid 2.5 billion shekels in special taxes in 2024 and 2025, under a different mechanism, to help finance the war. When that tax was imposed, the Treasury committed that no additional special tax would be collected from banks starting in 2026. The Minister of Finance has now violated that commitment.
The Banking Association said in a statement: “In complete contradiction to the position of the professional team he himself appointed, the Minister of Finance decided in the middle of the night to declare war on the public and impose a significant tax on it. Not only is the minister blatantly violating the promise he made just a year ago that no additional tax would be imposed, he is trampling the professional positions of his own ministry and the Bank of Israel and making arbitrary decisions with no economic logic and contrary to the public interest.
“The minister is not only reaching into the public’s pocket and imposing additional taxation on provident funds, pension funds and training funds, he is also harming state tax revenues and could significantly reduce the volume of credit available to the public. The public must understand that about 90% of bank shares are held by the public, so taxing banks ultimately means taxing the public. In addition, as determined by the professional team appointed by the minister, the tax will lead to a reduction in the supply of credit in the economy and higher interest rates, which means harm to the public. The minister is thus inflicting double harm on the public, both to its savings and to its ability to take out loans.”
Former president of the Institute of Certified Public Accountants, CPA Reuven Shiff, said: “The Minister of Finance’s desire to collect excess tax from the banking sector is a scandal. There is no precedent for imposing excess taxation on a specific sector simply because it posted high profits. Banks are a very important arm of the Israeli economy, and their financial stability is an asset to the state.
“Their enormous profits stem from the large gap between the interest rates they charge the public and the interest they pay on deposits. It is the role of the Bank of Israel to reduce that gap, not the Finance Ministry. The norm of imposing a higher tax rate on banks is flawed. This is a specific sector that also takes risks, and there is no place for such a tax. It constitutes selective and erroneous taxation with no place in a healthy economy.”
Smotrich said: “A large share of banks’ profits comes solely from the high interest rate environment, and in an unfair way this interest is passed on to the public quickly and in full through loans and overdrafts, but slowly and only partially through deposits. It is right that part of these profits be returned to the Israeli public, and for that reason I decided to impose a special tax on the banks and adopt the differential profit tax alternative proposed in the report.”