Background
Amendment No. 277 to the Income Tax Ordinance took effect on January 1, 2025. It expanded the circumstances in which income earned by a closely held company may be attributed to its individual owners and imposed a new 2% tax on profits that such a company elects not to distribute as dividends. The legislation principally targets “wallet companies” that use Israel’s two-stage corporate-tax system to defer part of the tax that would otherwise be payable.
Two petitions challenged the law’s constitutionality. On May 3, 2026, a three-justice Supreme Court panel unanimously rejected them, although the justices offered three different approaches to whether tax legislation infringes the constitutional right to property. Justice Ofer Grosskopf adopted an intermediate approach, Justice Alex Stein concluded that this tax did not infringe property rights, and Justice Ruth Ronnen reasoned that tax legislation always infringes property rights but ordinarily warrants only deferential constitutional review. All three agreed that the law was constitutional.
The applicants sought a further hearing, arguing that the panel had established novel rules permitting a statute to remain constitutional even when its overbreadth unjustifiably burdens taxpayers outside its intended target. They also challenged the rejection of a remedy that would have conceptually severed the law’s application to companies such as theirs.
The Court’s Holding
President Yitzhak Amit denied the application. A further hearing is an exceptional procedure reserved for a clear and express new rule that conflicts with prior Supreme Court precedent or whose importance, difficulty, or novelty warrants reconsideration. The underlying judgment announced no such rule.
The panel’s recognition that the law may reach closely held companies that are not wallet companies did not mean that it approved an unjustified constitutional violation. Justice Grosskopf addressed that breadth under the limitation clause’s less-restrictive-means inquiry and concluded that, from a practical and system-wide perspective, the broader coverage was necessary to achieve the law’s purpose to a comparable degree. That was an application of established proportionality doctrine, not a new rule allowing incidental constitutional harm without justification.
Nor did the earlier judgment establish a binding new rule on when tax legislation infringes the constitutional right to property. Because the three justices expressed materially different positions on that question, no majority rule emerged. The applicants’ remaining arguments, including those concerning the proper constitutional remedy, were appellate arguments in substance, and a further hearing is not an additional appeal. The application was therefore denied without costs because no response had been requested.
Key Takeaways
- A law may burden constitutional rights yet remain valid when the burden satisfies Israel’s limitation-clause requirements, including proportionality.
- The tax law’s application to some closely held companies that are not wallet companies was treated as part of the less-restrictive-means analysis, not as an automatically fatal defect.
- The May 2026 judgment created no binding rule on whether tax legislation infringes property rights because the three justices adopted different approaches.
Why It Matters
The decision leaves intact the ruling upholding Israel’s tax on undistributed profits and confirms that its possible application beyond classic wallet companies does not, by itself, justify renewed constitutional review.
More broadly, the Court preserved the unresolved status of a foundational constitutional-tax question: whether, and under what circumstances, taxation infringes the protected right to property. It also reinforced the demanding threshold for obtaining a further hearing, particularly where the asserted error concerns the application of settled doctrine rather than a clear new precedent.