What happened?
In June 2026, the State Comptroller published a special economic report on the taxation of partnerships. The report follows an audit conducted by the Office of the State Comptroller between June and December 2025 regarding the taxation of partnerships, information on partnerships in the income tax systems, and the regulation of the partnership taxation model in Israel. The audit was conducted at the Israel Tax Authority and the Registrar of Partnerships. In this client update, we review the key recommendations made by the State Comptroller on the matter.
It should be noted that implementing some of the recommendations will require legislative amendments, including amendments regulating the taxation of partnerships under the Income Tax Ordinance.
Regulating the Partnership Taxation Model in Israel
Regulating Partnerships’ Reporting Obligations and Tax Assessment Audit Procedures
- The State Comptroller recommended that the Israel Tax Authority regulate partnerships’ reporting obligations and tax assessment audit procedures, and accordingly to promote, together with the Ministry of Finance, the drafting of a bill designed to ensure the collection of the tax properly due on their income. In formulating the bill, the State Comptroller recommended that the Israel Tax Authority and the Ministry of Finance provide that, similar to the practice in leading OECD countries, an income tax file will be opened for each partnership and the partnership will be required to file an annual tax return in respect of its income, in parallel with the partners’ reporting of their share of that income. The bill should also regulate the manner in which partnership assessments are determined and how changes to assessments are implemented in the partners’ tax files.
- In addition, after the regulation of partnerships’ reporting obligations and tax assessment audit procedures is completed, the State Comptroller recommended that the Authority consider providing that the obligation to file the financial statements schedule should apply to the partnership, based on the volume of its income, rather than to the partners.
- Pending completion of the regulation of partnerships’ reporting obligations and tax assessment audit procedures, when an assessment is issued to a partner in a partnership, the State Comptroller recommended that the Israel Tax Authority circulate an update with the details of the assessment issued, through the Partnerships System 83 or another system to be developed for that purpose, to all assessment coordinators responsible for the files of the other partners in the same partnership, whether at the same assessment office or at other assessment offices. This is for the purpose of issuing an assessment to all partners in respect of their income or, alternatively, issuing a partial assessment 84 for each partner’s share of the partnership income only.
- In addition, the State Comptroller recommended that the Authority conduct periodic controls to identify files that were not handled in accordance with such update, in order to complete their treatment.
The Need to Regulate Substantive Issues in Partnership Taxation
- The State Comptroller recommended that the Israel Tax Authority identify the substantive issues arising in partnership taxation and formulate its positions on them, and accordingly to work with the Ministry of Finance to draft a bill on the subject and promote legislative amendments in line with that bill.
- In formulating the bill, the State Comptroller recommended that the Israel Tax Authority and the Ministry of Finance consider defining its scope, including by considering whether to provide that the statutory provisions will not apply, in whole or in part, to certain types of partnerships, such as partnerships whose turnover is below a prescribed threshold, in order to reduce the regulatory burden and ensure proportionate implementation of the tax regime.
Information on Partnerships in the Income Tax Systems
Information on the existence of a partnership – the State Comptroller recommended that the Israel Tax Authority take the following actions:
- Require partners in partnerships to mark the relevant declaration box, so that without marking that declaration box, the taxpayer will not be able to proceed with completing the annual tax return in the filing system.
- Develop and implement an automated interface to ensure that taxpayers that are partners in partnerships are properly identified in the income tax systems, including by cross-checking information in the income tax systems against information held in the VAT systems.
Information on the partnership’s activity and the details of its partners – the State Comptroller recommended that the Israel Tax Authority take the following actions:
- Examine what information assessment officers require regarding partnerships in order to audit the partners’ tax files, including information for which the Authority has no other source, and update the schedule accordingly so that it includes that information.
- Develop and implement, in the return filing system, a dedicated computerized interface for the online filing of the partnership details schedule, and require every taxpayer who has declared that they are a partner in a partnership to complete that schedule in the system.
- After adapting the information required in the partnership details schedule to the needs of tax assessment audits and developing an interface for filing it online as described above, develop a partnerships system based on the partners’ online filings of the partnership details schedules. The system should include a database containing, among other things, details of the partnerships and their partners, including investment percentages, profit entitlement percentages, the partnership’s taxable income actually attributed to each partner, and additional information that may assist the Authority in conducting assessment audits of partners’ tax files, including relevant information from VAT systems.
Information on the partnership’s financial statements – the State Comptroller recommended that the Israel Tax Authority conduct a policy review to examine and characterize deficiencies in the completion of data in the financial statements schedule, formulate computerized controls to ensure the accuracy and completeness of the information reported in it, and implement those controls in the relevant systems for completing the schedule. These controls are expected to improve the Authority’s ability to rely on the information contained in the schedules and to enhance the assessment process.
Opening VAT Files for Unregistered Partnerships
The State Comptroller recommended that the Corporations Authority and the Israel Tax Authority, together with the Ministry of Justice, formulate an agreed framework and, if necessary, a proposal for legislative amendments, so that partnerships will be able to open a VAT file only if they have first been registered with the Registrar of Partnerships.
It is also recommended to establish guidelines regarding the tens of thousands of unregistered partnerships for which VAT files have already been opened in the past, whether by promoting legislative amendments or by establishing procedures. If no agreement is reached on the framework, it is recommended that the matter be brought before the Attorney General for resolution.
Enforcement Against Tax Offenses by Partners in Partnerships
The State Comptroller recommended that the Israel Tax Authority take the following actions:
- Initiate measures to collect and analyze intelligence in order to identify partners in partnerships who do not report their share of the partnership income, including the development and operation of interfaces for the systematic transfer of information between VAT systems, income tax systems, and the investigations division.
- Consider including the field of partnerships in the work plans of the various units of the investigations division, including the handling of partners’ non-reporting.
Enforcement of the Registration Obligation by the Registrar of Partnerships
The State Comptroller recommended that the Corporations Authority take the following actions:
- Together with the Ministry of Justice, conduct a policy review to define the powers of the Registrar of Partnerships and the tools required by the Registrar, including effective and implementable sanctions, and to act to confer those powers and tools in order to improve the completeness and currency of the partnerships register. This should be done, among other things, by identifying additional sources of information regarding unregistered partnerships and by creating effective outreach channels and convenient, rapid interfaces for registering the partners in those partnerships.
- Prepare a work plan to increase the scope of partnership registrations based on cooperation with the Israel Tax Authority and subsequently also on the findings of the policy review to be conducted together with the Ministry of Justice.
How can we help?
We would be pleased to assist in understanding these recommendations and their potential implications, and to provide tailored advice. Our firm is available to answer any questions you may have on this matter.
The above content is a summary provided for informational purposes only and does not constitute legal advice. It should not be relied upon without obtaining further professional legal counsel.
