Compensation for direct and indirect damage according to the Property Tax and Compensation Fund Law, 5721-1961
Mar 12, 2026
By: Adv. Dror Shalov, Law Offices of Gluzman, Chovers, Lahat & Co.
The basic legal framework governing compensation for war damage is set out in the Real Estate Tax and Compensation Fund Law, 5721-1961 (hereinafter: "the Real Estate Tax Law") and the regulations enacted thereunder. Sections 35 and 36 of the Real Estate Tax Law establish that compensation shall be paid for war damage, defined as "damage caused to the body of an asset as a result of military actions by the enemy's regular armies, or as a result of other hostile actions against Israel, or as a result of military actions by the Israel Defense Forces."
The Real Estate Tax Law distinguishes between two main types of damage: direct damage and indirect damage.
Regarding direct damage (meaning damage resulting from a direct physical impact on an asset, whether movable or immovable property) — the law defines this as "damage caused to the body of an asset as a result of military actions by the enemy's regular armies, or as a result of other hostile actions against Israel, or as a result of military actions by the Israel Defense Forces."
Entitlement to compensation for direct damage applies anywhere within the State of Israel, including in Area C (and even Area B) in Judea and Samaria. The purpose and objective of the law is to restore the situation to its prior state — that is, to repair the damage or indemnify the injured party as if the damage had never occurred. (As a side note, with respect to damage to household contents, the legislator has imposed a cap on compensation based on the number of occupants in the dwelling where the movable property was destroyed; in any case, works of art, jewelry, and cash are excluded.)
Indirect damage
Regarding indirect damage — this refers to loss or deprivation of profit resulting from war damage in a border settlement area, or due to the inability to utilize assets located in a border settlement area, as a result of military actions by the enemy's regular armies, other hostile actions against Israel, or military actions by the Israel Defense Forces.
In other words, the baseline assumption in the law is that only a business located in a border settlement is entitled to compensation for what is defined as indirect damage.
From time to time, following combat events and wars, the government decides to allow — as a temporary provision — businesses in areas that are not necessarily border settlements (on the permanent border settlement list) to receive compensation for indirect damage. For example, following the rounds of fighting in the Gaza Strip (prior to the Iron Swords War), the government allowed businesses within 40 km of the Gaza border to claim indirect damages through what are known as "green tracks," such as the revenue track or the payroll track, as well as a dedicated track for farmers. However, compensation under the green tracks is subject to a compensation ceiling and is generally calculated according to a formula set by the legislator.
We should note that, in addition to filing claims in the green tracks, the legislature maintained the right of businesses in Sefer settlements to file claims in what is called the red track, where on the one hand there is no limit on the amount of the claim or the manner in which the claim can be filed, as a claim in the green track is limited, but on the other hand the burden of proving damage in a claim in the red track is greater.
Following the outbreak of the Iron Sword War, the law was amended in a way that also allowed businesses not in Sefer settlements, and in fact in large parts of Israel, to file claims for compensation through the green channels, although in some cases in a very limited manner, for example - claims in which the state compensates only for part of the business's fixed expenses (and even then, provided that threshold conditions are met).
The ruling states that the reasons for the difference in compensation payments for indirect damage between businesses in the Sefer area and businesses in other localities in the country lie in budget limitations, with the guiding principles for giving priority to businesses located in Sefer areas being the proximity of these localities and their exposure to security threats with greater frequency and significance, and the desire to financially strengthen the businesses that operate permanently or over time in these localities.
Thus, although the purpose of the compensation arrangements for war damages includes compensation for anyone who suffered direct war damage, this is not the case for indirect damages caused as a result of the war.
Filing claims
In the 'Iron Swords' War, three main compensation tracks were actually established for indirect damages caused as a result of the war:
The Red Track – a track for examining applications for compensation for businesses that are registered in one of the Sefer settlements (and in particular Sefer settlements that have been evacuated) and that meet the requirements of the law (Chapter Eight) and the Property Tax and Compensation Fund (Payment of Compensation) Regulations (War Damage and Indirect Damage), 1973.
The Green Track (Cycle Track) – A track based on a fixed compensation formula for examining applications for compensation for businesses for a fixed period, when it comes to businesses listed in the list that appears in the various temporary orders that were issued (depending on the events of the war and the intensity of the fighting). The regulations relevant to the cycle track during the 'Iron Swords' war are the Property Tax and Compensation Fund (Payment of Compensation) (War Damage and Indirect Damage) (Iron Swords) Regulations (Temporary Order), 2023. These regulations specify the eligibility conditions, the specific eligibility periods for different regions and different months, as well as the method of calculating compensation based on the difference in cycles and the additional saved expenditure, while setting compensation ceilings and additional adjustments for the state of emergency.
Three compensation tracks - red, green, blue
A track for examining applications for compensation for businesses from all over the country that meet the requirements of the Property Tax and Compensation Fund Law 5721-1961, and especially the provisions of Chapter Eight 2.
After the outbreak of the 'Am Kalavi' war, the definition of indirect damage in the law was changed in Chapter Eight 2 regarding the period between June 12, 2025 and June 24, 2025, in such a way that businesses throughout the country could file claims for indirect damage, however, this right was limited to specific compensation according to specific outlines established in the law and not for all damages such as loss of profits and the like.
It is expected that even following the outbreak of the 'Harry's Roar' war, the state will allow compensation to be provided to businesses throughout the country and not just to businesses in the field of book settlements, similar to the outlines approved after the 'Am Kalavi' war, while on the other hand, businesses in the field of book settlements will be able to choose to file a claim through the normal channels available to them.
The national route
Let's assume that a building is damaged as a result of a direct missile hit during a war event, the owner of the building will be entitled to full compensation for the physical damage (direct damage) to the building by virtue of Section 35 of the Law. However, the compensation path (and the amount of compensation) for indirect damage , to the extent caused, will vary depending on the geographical location of the building and the period in which the damage was caused, all in accordance with the provisions of the Law and the regulations established pursuant to it.
Let's assume that the damaged building is located in Tel Aviv, the owner of the building is entitled to file a claim for full compensation for the physical damage, and will be entitled to limited compensation (depending on the war event) for the indirect damages. In the case where the building is located in one of the settlements of the book, the owner of the building will be entitled to full compensation for both the direct damage and the indirect damage.
We note that after the War of the Dog, the Property Tax Law was amended in such a way that private apartment owners throughout the country whose apartments were damaged as a result of direct damage during the War of the Dog, are entitled, if the conditions set out in the law are met, to receive compensation for loss of rent for the period in which use cannot be made, but this compensation is granted to private owners and not to the dealer. This is a specific example of an amendment made to the law in order to correct a distortion that existed in it, since at the time of the said amendment, apartment owners who were affected were not entitled to compensation for loss of rent, which is, in fact, a type of indirect damage caused as a result of direct damage.
Practical examples
In conclusion
Suppose a building is struck directly by a missile during a war event. The building's owners would be entitled to full compensation for the physical (direct) damage to the structure under Section 35 of the Law. However, the compensation track — and the amount of compensation — for any indirect damage incurred will vary according to the building's geographic location and the period in which the damage occurred, all in accordance with the provisions of the Law and the regulations enacted thereunder.
If that same damaged building is located in Tel Aviv, the owner would be entitled to file a claim for full compensation for the physical damage, and would be entitled to limited compensation (depending on the specific war event) for indirect damages. By contrast, if the building is located in one of the border settlements, the owner would be entitled to full compensation for both direct and indirect damage.
It should be noted that following the Iron Swords War, the Real Estate Tax Law was amended so that private apartment owners throughout the country whose apartments suffered direct damage during the Iron Swords War are entitled — subject to the conditions established in the Law — to receive compensation for lost rental income for the period during which the property could not be used. This compensation, however, is granted to private owners and not to businesses. This is a specific example of a legislative amendment introduced to correct a distortion that previously existed in the Law, whereby owners of damaged apartments had not been entitled to compensation for lost rental income — which is, in effect, a form of indirect damage resulting from direct damage.
Document for download - War Compensation Department Brochure
