We would like to bring to your attention that on February 18, 2025, a Proposed Law for Regulating Securitization Transactions, 5785-2025 (the “Proposed Law”), was published in the Official Gazette of the State of Israel (Reshumot). The Proposed Law is based on the report of the Inter-Ministerial Team for the Promotion of Securitization in Israel, and its purpose is to provide legal, regulatory and tax certainty for securitization transactions, which are not currently specifically regulated under Israeli law.

Pursuant to the existing Israeli legal framework, there is no special legal arrangement for securitization transactions. The lack of regulation in the field (including taxation and legal-accounting) constitutes a significant hurdle with respect to the development of a proper securitization market due to uncertainty. The purpose of the proposed legislation is to provide legal and economic certainty to ensure the proper operation of the credit market in Israel, including by securitization transactions.

A securitization transaction is a transaction in which at least two tranches of notes are issued, the repayment of which is guaranteed by a predictable and defined cash flow deriving from a credit portfolio. The issuer of the notes is a special purpose company, the sole purpose of which is operating the securitization transaction, purchasing the portfolio of underlying assets by way of a true sale from the seller of the portfolio, and repaying the notes. The issuance of the notes by a special purpose company enables exposure of the note holders only to the underlying credit portfolio, without the risk involved in an overall investment in the originator. The securitization transaction is structured to be legally and economically separate from the originator and not subject to its insolvency risk.

Due to the above, securitization transactions are an important financial instrument in the global debt and capital markets, enabling the development of a non-bank credit market, both through institutional entities and financial companies, and through real companies that can securitize assets and raise debt directly in the capital market, instead of using the banking system.

The Proposed Law, which reflects, among other things, insights from European regulation on securitization and developments in financial regulation in Israel, is based on the principles discussed in the report of the Team for the Promotion of Securitization in Israel published in November 2015, as well as on discussions held in the years that followed between the Israel Securities Authority, the Bank of Israel, the Capital Market Authority, the Ministry of Finance, the Tax Authority, and the Ministry of Justice.

The main points of the Proposed Law:

1. Regulating a securitization transaction as a true sale and its legal consequences – The Proposed Law defines a securitization transaction as a transaction in which a special purpose company purchases a portfolio of credit obligations and issues at least two different tranches of notes, the return of which derives from the cash flow of those assets. It was determined that a transaction meeting the legal requirements specified in the Proposed Law, will be deemed a true sale, ensuring that the underlying portfolio of assets is isolated from the originator’s insolvency risk.
2. Regulating the public offering of the securitization notes that are issued by the special purpose company, under the Securities Law – It is proposed to amend the Securities Law, 5728-1968, in order to regulate the manner in which the securitization notes issued by the special purpose company are offered to the public, while adjusting the disclosure and transparency requirements of the issuers in order to ensure proper risk management.

• The Special Purpose Company’s Activity – The Proposed Law states that a special purpose company, that meets the conditions set out in the Proposed Law will not be subject to the licensing requirements that applies to banking corporations or to credit providers. Rules have also been established for its activity, including reporting and risk management obligations.

1. Regulating the tax aspects of securitization transactions – The Proposed Law includes an amendment to the Income Tax Ordinance and the Value Added Tax Law, in order to prevent undesirable tax consequences at the time of the transfer of the portfolio of assets and to adapt a tax analysis which is similar to provisions that exist in other countries with a developed securitization market.

Effective Date and Transitional Provisions:

The Proposed Law stipulates that the law will take effect nine months after the date of its publication, and the Minister of Finance or the Minister of Justice may postpone the commencement date for up to six additional months, if it is found that this is necessary in order to prepare for its implementation.

The Proposed Law also stipulates that its provisions will apply to securitization transactions as of the date of its effective date, but such transaction may include a portfolio of debt transactions that were created even before the effective date.

For the Proposed Law (available in Hebrew)>> click here.

The Proposed Law aims to develop the securitization market in Israel, encourage competition in the credit market, and improve the allocation of capital in the Israeli economy, while maintaining financial stability and protecting investors. Our firm continues to examine the Proposed Law and its legal and regulatory implications, and we will be happy to assist you in providing clarifications and examining the implications of the legislation on your activities.

Banking & Finance Department

Herzog Fox & Neeman