Does my non-resident-owned Israeli company pay tax on profits it keeps instead of distributing?

The old plan was simple: leave the profit inside the Israeli company, avoid the 25% to 30% dividend tax, and take it out someday. For a closely held company that plan no longer works cleanly. From 2025 Israel taxes the hoarding itself, and a non-resident owner sitting on retained earnings needs to know the rules changed under them.

---

Detailed Explanation

Start with the baseline. An Israeli company pays corporate tax at 23% on its profits whether it distributes them or not, so retaining earnings never avoided the company-level tax; it only deferred the second layer, the tax on the dividend when profit reached the shareholder. That deferral is exactly what the legislature moved against.

The tool has two parts. Section 77 of the Income Tax Ordinance has long allowed the Tax Authority's director to treat a closely held company's excess undistributed profits as if they had been distributed, forcing a deemed dividend. Amendment 277, enacted at the end of 2024 within the Arrangements Law and effective from 2025, sharpens this considerably. A "closely held company", defined in Section 76 as one controlled by up to five shareholders and not traded on the stock exchange, must each year either distribute roughly 6% of its accumulated profits, reduced to 5% for 2025, or pay a 2% annual tax on the excess retained earnings after permitted deductions. The target is the "wallet company" that parks profit indefinitely. The company-level rate and how it applies to foreign owners are covered in the note on the Israeli corporate tax rate for a foreign-owned company.

For a non-resident owner, the interaction with the dividend tax is the whole point. When profit is finally distributed, Israel withholds 25% on the dividend, or 30% for a shareholder holding 10% or more, reduced by an applicable treaty rate, as set out in the note on dividend withholding tax from an Israeli company. The 2% surtax and the forced-distribution threshold now pull against the instinct to retain, and the timing of a distribution also drives when you can claim a foreign tax credit at home. Some non-resident owners respond by taking part of the return as salary or management fees rather than leaving everything to accumulate, a trade-off that depends on the source rules and payroll withholding.

In Practice: Under Section 77 and the closely held company definition in Section 76 of the Income Tax Ordinance 1961, and the 2025 reform in Amendment 277, a company controlled by up to five shareholders must distribute about 5% to 6% of accumulated profits a year or pay a 2% annual tax on the excess. On NIS 5M of accumulated profit that is roughly NIS 100,000 a year in surtax, or a distribution of around NIS 300,000, assessed by the Israel Tax Authority for each tax year from 2025 onward, with the eventual dividend still carrying 25% to 30% withholding subject to treaty relief.

Key Considerations

• The 23% corporate tax applies to profits whether or not they are distributed.
• A closely held company is one controlled by up to five shareholders and not listed on the stock exchange.
• From 2025 it must distribute about 5% to 6% of accumulated profits yearly or pay a 2% surtax on the excess.
• Section 77 separately lets the Tax Authority force a deemed dividend from excess retained profits.
• Distribution triggers 25% to 30% dividend withholding, reduced by an applicable treaty.

When to Consult a Lawyer

This question typically requires professional legal advice when:

• Your Israeli company has accumulated significant profit and you need to decide between distributing and paying the surtax.
• The timing of a dividend affects when your home country grants a foreign tax credit.
• You are weighing salary or management fees against dividends to draw value out efficiently.

A qualified Israeli tax adviser should model the surtax, the withholding, and your home-country credit before you set a distribution policy.

---

Speak With an Israeli Attorney

We help non-resident owners of Israeli companies work through the closely held company rules, plan distributions against the 2% surtax, and coordinate withholding with home-country credits.

Contact us for a confidential initial consultation.