The problem arises during the setup stages. A new bank requires massive investment in computing infrastructure, technology, information security, and personnel, long before it generates significant revenue.
Under Section 4 of the VAT Law in its current wording, a bank that incurred a loss in a certain tax year could offset that loss only against the "Wage Tax" paid in that same year. Since in the setup years, losses often exceed wage expenses by tenfold, a situation arose where the remaining loss simply went down the drain.
The practical implication was that a new bank paid "full price" for its expenses without the ability to recover the tax component, thus starting its business journey with an inherent disadvantage compared to any other business in the economy and compared to the established, profitable banks.
The Fiscal Solution: The "Carried Forward Loss" Mechanism
The new Memorandum of Law seeks to correct this distortion by creating a mechanism for "Carried Forward Losses." According to the proposal, a new bank will be able to accumulate the losses incurred during its first five years of activity. These losses will not be forfeited at the end of the tax year but will be kept in a "tax warehouse" and carried forward to subsequent years.
The major innovation lies in how these losses are utilized. Once the bank passes the setup stage and begins to show profitability, it will be entitled to offset the accumulated past losses against the "Profit Tax" it is required to pay. This mechanism transforms initial losses from a financial burden into a valuable Tax Asset, improving future cash flow and shortening the Return on Investment (ROI) period for entrepreneurs and investors.
The Broader Context: A Supportive Regulatory Envelope
The amendment to the VAT Law does not stand alone; it is part of a broader strategy formulated by the inter-ministerial team for promoting competition in banking, which published its recommendations in August 2025. The team identified that entry barriers are not solely financial, but also regulatory and structural.
Accordingly, alongside the tax benefit, the state is promoting a "Tiered Supervision" model. This means that small banks, whose market share does not exceed 5%, will enjoy lenient and tailored regulation, allowing them to operate a flexible and "leaner" business model. Additionally, the barrier that previously prevented institutional entities, such as insurance companies, from controlling banks has been removed. This move is designed to inject significant new capital into the industry and allow new banks to rely on strong financial backing in their competition against the major banks.
Summary and Future Implications
The combination of the new tax benefit and regulatory easing marks a fundamental shift in the state's approach. The recognition that tax laws must be synchronized with competition goals is significant news for fintech entrepreneurs and international investors.
The ability to offset past losses against future profits provides a financial safety net and places new banks on a more equal starting line compared to the rest of the business sector in Israel.
Now that the state has removed the tax and regulatory weights, the ball passes to the business court, with the hope of seeing new players exploiting the window of opportunity that has opened.
