In the 10 days of penitence, we were reminded of the need for repentance, prayer and charity. But what is charity? For Israeli tax purposes, the situation has just been clarified by a circular from the Israeli Tax Authority (Circular 9/2015 of Sep 10, 2015, “Guidelines for Applying Section 46 of the Income tax Ordinance [ITO].”) Section 9(2) of the ITO exempts charities from Israeli tax on their income if they are “public institutions” that serve a “public purpose”. And Section 46 gives taxpayers a tax credit for donations to a “public institution” if it is approved as such by the Finance Minister and ratified by the Knesset Finance Committee.The Vipassana Case: For many years the Israeli Vipassana Society was exempted from tax on its income .Vipassana understood to be a Budhist meditation method. The Society proceeded to request a tax credit for its donors and was turned down. The Society found this unfair and appealed all the way to the Bagatz (Court of Equity) (the Israeli Vipassana Society vs. the Minister of Finance, case 10893/08 of August 23, 2012).The ITA and the finance minister refused allow a tax credit to its donor on the grounds that the purpose of Section 46 is to grant assistance to bodies that enjoy broad society acceptance.The Finance Ministry claimed that according to the tax expenditure approach, the normative tax base includes income foregone by the State, if there are non-tax considerations (society, economic or political) which justify financing such activity by way of tax relief to donors instead of handing out money.The Society claimed that the purpose of Section 46 tax credits is to support activity of limited means in order to advance pluralism even if the activity is not located in the mainstream of society. The court ruled that Section 46 tax credits requires a positive act of discretionary recognition by the finance minister and the Knesset Finance Committee. The tax expenditure approach justifies a narrow interpretation of “public purpose” when applying such discretion.However, the court also ruled the policy was not orderly and the criteria in an earlier circular (2/2001) were apparently being applied in an arbitrary fashion. The court gave the finance minister one year to come up with clearer criteria, hence this new circular (after three years not one….) We discuss all this below.What is a ‘public institution’?A “public institution” is defined in ITO Section 9(2) as an entity with at least seven members a majority of whom are unrelated to each other, or a “Hekdesh” (endowment trust) in which a majority of the trustees are unrelated to each other, existing and operating for a public purpose only – see below. The Public Institution must file an annual account regarding assets, income and expenses.What is a ‘public purpose’? A “public purpose” is defined in ITO Section 9(2) as relating to religion, culture, education, encouraging settlement, science, health, welfare, sport, or any other purpose approved by the Finance Minister as a public purpose.The finance minister has approved a number of public purposes including: defense, municipal services, preventing accidents, economic growth, Aliya, helping discharged soldiers, public sector order, protecting the environment, civil rights, promoting the voluntary sector, and training and hiring the underprivileged. Tax breaks for charitable donations: Donations to a “public institution” qualify for a 35% Israeli tax credit for donations between NIS 190 and NIS 9,295,000 per year (in 2015) in the case of donors who are individuals or a tax credit at the regular corporate tax rate (26.5% currently) in the case of corporate donors. There is no tax credit for donations exceeding 30% of taxable income. Any unused tax credit may be carried forward up to three tax years.What the new Circular adds to ‘public purpose’: The new Circular specifies additional ground rules for assessing whether a public purpose is served, including the following.First and foremost, the activity must advance public welfare, not a private or business activity or one which advances the interest of particular private individuals. There must be no discrimination, nor advancement of the welfare of closed society groups. The activity cannot run contrary to the values of the State of Israel as a democratic Jewish state, nor break its laws nor breach public order or security. The activity cannot assist any party-political purpose. The activity must generally be ongoing.What the new Circular adds to ‘Public Institution’:The new Circular specifies additional ground rules for assessing whether an applicant is a “public institution” including the following. The objectives must be stated in the formation documents, certificate of registration and constitution. All objectives must be public purposes, but up to 25% of the activity can be for business if separate accounts are kept and there are no ongoing business deficits. The applicant must hold good administration confirmation from the appropriate registry. No discrimination is permissible, and no favoring the interests of donors. Any assets and services sold as part of the ongoing public activity must be supplied substantially below market value.Operatives, employees and interested parties (not defined) may be paid no more than a reasonable salary. Also, employees and management may not be paid more than the maximum salary of a director general of a government ministry, unless a sectoral or collective agreement applies. All assets and monies are to be applied to public purposes and supplied according to objective criteria.All decisions must be taken by all managers equally. Surplus funds must be invested conservatively and an accountant must confirm this. Activities are to be financed by donations in cash or in kind or by volunteers.There should be no conflict of interests or indirect distribution of profits. The activity must have a link to Israel. Upon winding up, assets are to be transferred to another Section 46 public institution.Approval will be given to an institution clearly in the national interest (such as information) or of an urgent humanitarian nature after consultation with the Foreign Ministry.Supposing donor tax credits are not needed?Public Institutions that do not require donor tax credits under Section 46 need not apply for formal approval for income tax exemption under Section 9(2). But the ITA may review annual tax returns as a public institution according to the above criteria.Effective date: The new Circular replaces the old one immediately for new public institutions.Existing public institutions will need to comply with the new Circular upon renewing their Section 46 approval.The above is only a brief summary. As always, consult experienced tax advisers in each country at an early stage in specific firstname.lastname@example.org The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.