What Tax Does a Foreign Shareholder Pay on Dividends from an Israeli Company?

A non-resident who owns shares in an Israeli company — whether a technology startup, a trading vehicle, or a property holding company — encounters Israeli withholding tax the moment the company distributes profits. The tax is deducted at source by the Israeli company before the dividend reaches the shareholder: the company pays the withheld amount directly to the Israel Tax Authority and transfers only the net dividend abroad. The shareholder receives less than they might expect, for reasons that are not always clearly explained at the time of investment. Two variables determine the exact rate: how large the shareholding is relative to the company's total equity, and whether the shareholder's home country has a tax treaty with Israel that reduces the domestic rate. Understanding both before the first distribution — and providing the correct documentation to the Israeli company's accountant before the dividend is declared — is the difference between paying 12.5% and paying 30% on the same income.

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Detailed Answer

Section 125B of the Income Tax Ordinance 1961 (Pekudat Mas Hachnasa) sets the withholding rates on dividends paid to non-resident shareholders. The standard rate for a non-resident individual who is not a "substantial shareholder" (baal shem muvhak) is 25%. A substantial shareholder is defined under Section 88 of the Ordinance as a person who holds, alone or together with a related person, 10% or more of any class of the company's means of control — which includes shares, voting rights, profit entitlement, or liquidation rights. The threshold is assessed at any point during the 12 months immediately before the dividend distribution date, not only on the distribution date itself. A shareholder who held 10% of the company briefly three months before a dividend and subsequently sold down to 8% is still a substantial shareholder for that distribution, paying 30% rather than 25%.

For non-resident companies receiving dividends from Israeli companies (as distinct from individuals), the same 25%/30% rates apply based on the same substantial shareholder threshold.

Treaty reductions are the most significant variable for many non-resident shareholders. Israel has bilateral tax treaties with over 55 countries, and most of those treaties set a lower maximum withholding rate on dividends:

| Country | Non-substantial shareholder | Substantial shareholder | |---------|----------------------------|------------------------| | United States | 12.5% | 12.5% | | United Kingdom | 15% | 15% | | Canada | 15% | 5% (>25% holding) | | Germany | 25% | 10% (>25% holding) | | France | 15% | 5% (>10% holding) | | Netherlands | 15% | 5% (>25% holding) | | Australia | No treaty — 25%/30% domestic rate | No treaty — 30% |

The treaty rate does not apply automatically. To receive the reduced withholding, the shareholder must provide the Israeli company — specifically, the company's accountant who manages the withholding — with a certificate of tax residency (teudat tahkum) issued by their home country's tax authority confirming that they are a resident of the treaty country for the relevant tax year. Without this certificate, most Israeli companies withhold at the domestic rate. The residency certificate is typically valid for 12–24 months and must be renewed. Providing the certificate after the fact — after the distribution was already made at the full 25% rate — requires the shareholder to file a refund claim directly with the Israel Tax Authority.

In Practice: Under Section 125B of the Income Tax Ordinance 1961, a US-resident individual holding 8% of an Israeli technology company receives a dividend of NIS 500,000 gross. Without a US tax residency certificate on file, the Israeli company withholds 25% (NIS 125,000) and remits it to the Israel Tax Authority (Rashut HaMasim) within 7 days of the distribution date, transferring NIS 375,000 to the shareholder. With a valid IRS-issued residency certificate (Form 6166) on file with the Israeli company's accountant, the applicable US-Israel treaty rate of 12.5% applies — withholding drops to NIS 62,500, and the shareholder receives NIS 437,500 net. The IRS-issued Form 6166 costs USD 85 and takes 4–6 weeks to obtain; submitting it to the Israeli company's accountant before the dividend declaration eliminates the refund process entirely.

Preferred Enterprise dividends are subject to a different rate. Companies that were classified as a "Preferred Enterprise" (mifal muchdaf) under Israel's Investment Encouragement Law and its successors may distribute dividends from tax-exempt preferred income at a flat 20% withholding rate — not 25% or 30% — regardless of the shareholder's country of residence or treaty status. This rate does not require a residency certificate. Companies structured to take advantage of Israel's technology tax incentives frequently qualify for this treatment, and the effective combined withholding (20% on preferred income, at a corporate level that may already have enjoyed a reduced 7%–16% corporate tax rate) makes Israeli tech companies particularly attractive for non-resident investors from treaty and non-treaty countries alike.

After the Israeli withholding is deducted, the non-resident shareholder reports the gross dividend (not just the net received) as income in their home country and typically claims a foreign tax credit for the Israeli withholding paid. The interaction with home-country tax depends entirely on the applicable treaty and domestic credit rules. A US shareholder claims the Israeli withholding on Form 1116; a UK shareholder on the self-assessment foreign income pages; a Canadian shareholder on Schedule T2209. For those whose home country has no treaty with Israel — Australian shareholders being the most common example — the full domestic Israeli rate applies, and home-country relief is available only through the domestic foreign tax offset mechanism, which may not fully absorb the Israeli tax depending on the home-country effective rate. For an overview of how the business registration process works before dividends are ever declared, see our guide on registering a company in Israel as a foreigner.

When to Consult a Lawyer

• The Israeli company distributed a dividend and withheld at the 25% standard rate when you were entitled to a lower treaty rate — you have four years from the distribution date under Section 159A of the Income Tax Ordinance to file a refund claim (tviaat hekhzer) with the Israel Tax Authority, but the claim requires a valid residency certificate and documentation of the distribution, and the ITA's processing of refund claims from non-residents averages 6–12 months
• Your shareholding in the Israeli company fluctuates around the 10% substantial shareholder threshold due to new shares being issued to other investors or options being exercised, and you want to understand exactly when and whether you cross into the 30% bracket — the calculation under Section 88 aggregates related-party holdings and includes options and convertible instruments, which in growth-stage companies can produce surprising results relative to nominal percentage ownership
• You are structuring a new investment in an Israeli company and want to compare the after-tax dividend yield under a direct shareholding structure against a foreign holding company structure — in some cases, interposing a holding company in a treaty country with more favorable dividend provisions (5% substantial shareholder rate versus 12.5%) produces a materially better net return, though anti-avoidance provisions under Section 86 of the Income Tax Ordinance and the OECD BEPS framework limit aggressive structuring

A qualified Israeli tax attorney can confirm the withholding rate applicable to your specific shareholding, prepare the documentation required for a treaty rate certificate, and advise on dividend timing relative to shareholding threshold movements.

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Speak With an Israeli Attorney

The Israeli withholding tax on dividends is deducted before you see the money — which means the time to address the rate is before the distribution, not after. A residency certificate obtained in advance and provided to the Israeli company's accountant costs a modest administrative effort and preserves the treaty benefit in full. A refund claim filed after the fact costs considerably more time and professional fees, and the ITA processes them slowly.

Contact us for a confidential initial consultation.