The Lutheran World Federation

Department for World Service

Jerusalem

STATUS OF ISRAELI TAX CASE

(March 2008)

The Lutheran World Federation has been serving the needs of Palestinian refugees in East Jerusalem and the West Bank for nearly 60 years, and through its humanitarian work continues to be an important expression of the Christian presence in the Holy Land.  The Lutheran World Federation, a nonprofit organization supported by its member churches, provides material aid, medical care, and rehabilitation services, such as vocational training and self-help projects, primarily to Palestinian refugees.

The Augusta Victoria Hospital (AVH), situated on the Mount of Olives, was established as a hospital after the war of 1948, initially under the control of the Red Cross and since 1950 under LWF ownership and management.  In addition to a number of other essential and unique healthcare services, AVH is the first and only hospital to provide radiation therapy for cancer patients in the Palestinian Territories.  The hospital continues to provide its specialty services, including the treatment of dialysis patients, but with great difficulty due to the construction of the Israeli separation wall.

The Vocational Training Program, with centers located in Beit Hanina and Ramallah, trained 223 Palestinian students and workers from Jerusalem and the West Bank in 2005.  The VTP trains students in the fields of electronics/telecommunications, plumbing/heating, auto mechanics, auto-electronics, metal work, and carpentry.

Doctors and nurses of the LWF Village Health Clinics see approximately 1,300 patients every month, despite closures, checkpoints, and various travel restrictions.  The services include physician consultation, basic laboratory, pharmacy and supplies, health education, and home health care.  In many cases the home visits are the only access that a home-bound patient has to a healthcare professional.

Overview of the Tax Case and its Impact

On December 22, 2002, the Israeli District Court in Jerusalem decided to revoke a tax exemption agreement between the State of Israel and The Lutheran World Federation.  The agreement was originally established with the Hashemite Kingdom of Jordan in 1966 and was then adopted by the State of Israel after the war of 1967.  The Israeli District Court’s decision confirmed that The Lutheran World Federation’s tax exemption agreement with the State of Israel was valid and comprehensive.  However, the Court also ruled that documents filed by the State of Israel in these proceedings in mid 2000 were tantamount to a notice of termination of the agreement.  The LWF has appealed the District Court decision to the Supreme Court of Israel and the State of Israel has counter-appealed.  A hearing of these appeals is currently scheduled for June 2007.   The LWF's position is that the State of Israel should reaffirm the LWF Jerusalem program’s comprehensive tax exemption as per the 1967 agreement.  However, negotiations between the LWF and the State of Israel are underway in order to reach a mutually satisfactory conclusion to this issue.

It is extremely important that Israel reaffirms the rights and privileges accorded the LWF under previous agreements with the Hashemite Kingdom of Jordan and the Israeli Ministry of Foreign Affairs.  Revocation of the tax exemption agreement would diminish substantially the LWF's capacity to provide humanitarian services to large sections of the population of Jerusalem and the West Bank.  If the District Court’s decision is upheld by the Israeli Supreme Court, and there is no intervention at the political level to restore the status quo ante, the LWF-operated Augusta Victoria Hospital, Vocational Training Center, and other essential health care and vocational training activities in Jerusalem and on the West Bank would be seriously jeopardized.

The Lutheran World Federation and four other international non-governmental organizations (NGOs) providing humanitarian services in the region--Catholic Relief Services (CRS), the Mennonite Central Committee (MCC), the International Christian Committee (ICC), and the Swedish Organization for Individual Relief (SOIR)-- have been tax exempt through written agreements since 1966.  These five organizations had been working in areas controlled by Jordan prior to 1967 and had treaties with the Jordanian Government which detailed their rights and privileges, including a tax exemption.  After the Six Day War, the Government of Israel asked these five organizations to continue their work in East Jerusalem, the West Bank, and Gaza, and by late 1967, Israel (through the Ministry of Foreign Affairs) had affirmed the prior Jordanian agreements with these international NGOs.  All five organizations provide Christian-supported humanitarian services to Palestinian constituencies and are based in disputed East Jerusalem.

Employees of the LWF Jerusalem programs pay their taxes, including income tax and national insurance.  Revocation of the tax exemption agreement would, however, result in the LWF being required to pay “employers tax,” a tax calculated as a percentage of the LWF’s Jerusalem program’s payroll.  Hundreds of thousands of dollars of charitable donations from around the world would have to be used to pay this additional tax each year, and the Government of Israel is also claiming tax arrears in an amount of several million dollars.

The LWF subsidizes its charitable and humanitarian programs in Jerusalem with over 1.5 million U.S. dollars per year through church support.  The LWF receives no subsidization from the State of Israel.

Further cuts of basic services to the Palestinian population will only foster more desperation and a more fertile environment for violent reactions to the Israeli occupation.  Recent political developments have reduced hopes for the resumption of negotiations and the humanitarian situation in the West Bank and Gaza remains at crisis point.  Israel's revocation of this tax agreement would further undermine those Palestinians who seek a peaceful negotiated resolution to the Palestinian-Israeli conflict.  A decision by the Israeli Government to drop this case and to reaffirm the LWF’s tax exemption would be in the best interest of both the Palestinians and the Israelis.

This case may seem to be a small matter in the overall effort to break the cycle of violence between Palestinians and Israelis and to rebuild confidence so that peace talks may resume, but the just resolution of cases such as this one opens doors for further dialogue between Palestinians and Israelis and bolsters those among them who are willing to take risks for peace.

Distinctions between AVH and Israeli Non-Governmental Hospitals

The LWF programs in the Middle East have earned much respect from many governments and international bodies due to the clear apolitical philosophy of the LWF and its steadfast commitment to professional humanitarian work in the areas of health, education, and social services.  However, in the current circumstances in the region, the AVH today stands in a totally different economic situation from that of Israeli hospitals, whether public or private. The following points should be taken into consideration by the Israeli Authorities when reviewing the tax case of the LWF.

1. Unlike the patients of the Israeli private hospitals (e.g. Hadassah Ein Karem and Shaare Zedek) the majority of patients of the AVH are not covered by Israeli National Health Insurance or any other national insurance. Therefore, the funds raised by the LWF subsidize the treatment for such patients, and in the event that the tax is imposed there would not be enough funds to subsidize the ongoing operation of the AVH.  The AVH would be forced to cease operations. In that event, the burden of treating the patients of AVH (who are not covered by the Israeli National Health Insurance) would fall solely on the shoulders of the State of Israel, especially for services that are available only at AVH. The AVH is the only institution that provides Palestinian people with certain special (and relatively expensive) medical treatments such as pediatric kidney dialysis and some cancer treatment protocols,  which are not available in the West Bank and the Gaza Strip.

2. Neither the patients nor the families of the patients of the AVH enjoy the benefits of the Israeli Social Security System and thus unlike the population that enjoys the services of Israeli private hospitals, they do not have the financial resources to finance their medical treatment. Therefore the donations that the LWF manages to raise are used solely to finance those treatments and, unfortunately, there is no surplus to cover tax payments. 

3. Due to its location and the economic status of the specific population that it serves, the AVH, unlike the Israeli private hospitals, cannot operate a private health care center in parallel to its day to day activities. Therefore, the AVH cannot generate another source of income from such operations (which in the case of Israeli private hospitals is very substantial). The AVH can only rely on donations and cannot afford to pay the taxes.

4. The donors to the AVH do not donate the money for the purpose of tax payments, but rather for the treatment of patients.  Donations are specific to the treatment of patients and the hospital has to account for every dollar that is spent on patient treatment.  In the event the donors would discover that the donations are raised for purposes other than the treatment of patients, the ability of the LWF to raise the donations would be severely reduced and thus the operations of the AVH would have to be reduced or terminated.  The private Israeli hospitals do not "suffer" from such a problem.

5. Private Israeli hospitals enjoy certain benefits from the Ministry of Immigrant Absorption which subsidizes some of the salaries of new immigrant doctors who work in the hospitals. By doing so, the Ministry of Immigrant Absorption helps to reduce the burden of salary payments from the hospitals.  The AVH does not enjoy such benefits and there is no prospect that it will ever be able to enjoy such benefits as no new immigrants are likely to work in East Jerusalem and at the AVH. This subsidy given to Israeli hospitals is included in the yearly budget of the Ministry of Immigrant Absorption and not in the budget of the Ministry of Health. Therefore, under no circumstances can the AVH, if taxed, expect to receive equal treatment to Israeli hospitals.

6. Most of the Israeli private hospitals are University hospitals and thus receive certain grants and financing from Universities, e.g. for research purposes etc.  The AVH is not so recognized and has no prospect of being recognized as a University hospital. Therefore, the AVH can only depend on the donations which only cover the minimum necessary costs associated with providing the medical care to the patients and cannot cover any additional expenses, such as tax payments.

Present status of the LWF tax case

Both the LWF and the Israeli Tax Department have appealed the District Court decision.

A meeting took place in September 2003 between senior LWF executives, the LWF’s attorneys, and representatives of a number of the Israeli Ministries (Ministry of Foreign Affairs, Ministry of Labor and Social Affairs, Attorney General’s Office, and the Ministry of Finance). The outcome of the meeting was an agreement to open a dialogue and to delay any Supreme Court hearing until September 2004. A negotiated solution which keeps the hospital open is in the best interest of Israel as well as the Palestinians and the LWF.

In light of further attempts to continue this dialogue, the Israeli Supreme Court, in a decision of April 21, 2004, confirmed that the hearing scheduled for September 8, 2004,  had been re-scheduled for February 2005.  On August 25, 2004, and then again in November 2004, the LWF was informed that the Supreme Court accepted the motions of the LWF attorneys to postpone the hearing date. 

The hearing has been rescheduled once again to December 17, 2008.  Representatives of the LWF met with representatives of the Government of Israel in May and September 2006 and again in October 2007 in order to move forward with a negotiated solution.

For more information

Write to Rev. Mark B. Brown, Regional Representative, The Lutheran World Federation, P.O. Box 19178, Jerusalem 91191; phone +972-2-628-2289; send an email to mark@lwfjerusalem.org; or visit our website: www.lwfjerusalem.org.