Israel's High-Income Surtax for Non-Residents

Sell one Tel Aviv apartment in a year and the tax is predictable. Sell a second, or take a large dividend in the same twelve months, and a levy that most foreign owners have never heard of quietly attaches to the top slice of the income. It is not a new tax on a new thing. It is an extra percentage that switches on only when a good year becomes a very good one, and because nothing deducts it at the moment the money arrives, the first a non-resident usually hears of it is an assessment that lands long after.

Israel taxes a non-resident on income sourced in Israel, and it does so at the same rates a resident pays. That single principle is why the surtax reaches across the border. If your Israeli rent, dividends, interest, or a gain on an Israeli asset push your Israeli-source income for the year over a set ceiling, the surtax applies to the excess exactly as it would for someone living in Ramat Gan.

What the Surtax Is and What It Costs

The surtax, in Hebrew mas yesef (מס יסף), lives in Section 121B of the Income Tax Ordinance [New Version] 1961. Its base rate is 3%, and it applies to an individual's taxable income above an annual ceiling that stands at NIS 721,560 for 2026 and is linked to the index each year. Income below the ceiling never meets it. Income above the ceiling carries the extra 3%.

From 2025 the levy grew a second layer. An additional 2% now attaches specifically to capital income above the same ceiling. Capital income is defined broadly and includes dividends, interest, linkage differentials, rental income taxed on the marginal track, royalties, and capital gains. The effect is a split. Capital income above NIS 721,560 carries a combined surtax of 5%. Ordinary earned income above the ceiling stays at 3%. For most non-residents, whose Israeli income is almost entirely capital in nature, the 5% figure is the one that matters.

There is a deliberate exception for the family home. A real gain on the sale of a residential apartment is left out of the surtax base, but only where the sale price does not exceed NIS 5,382,285. Cross that line, and the gain is pulled back in. For a non-resident selling a high-value apartment in central Tel Aviv or Jerusalem, this carve-out often does not apply, and the surtax sits on top of the ordinary capital gains tax on an Israeli property sale.

In Practice: Section 121B of the Income Tax Ordinance 1961 sets the surtax at 3% on taxable income over NIS 721,560 (2026), with an extra 2% on capital income above the same ceiling, so a non-resident's dividends, marginal-track rent and capital gains above the ceiling carry 5%. On a taxable Israeli gain of NIS 1,200,000 (about USD 325,000), the slice above NIS 721,560 is roughly NIS 478,000, and the 5% surtax on it is about NIS 24,000, payable to the Israel Tax Authority (Rashut HaMasim) as a balancing payment on the annual return, generally due by 30 April following the tax year.

Which Israeli Income Feeds the Ceiling

The surtax turns on the aggregate for the year, not on any single payment, and that aggregation is where non-residents most often misjudge their position. Several Israeli income streams are added together against one ceiling:

• Dividends from an Israeli company
• Interest from an Israeli payer
• Rental income taxed on the marginal track
• Royalties from an Israeli source
• Capital gains on Israeli assets, including shares and, above the price threshold, property

Because these are summed, a person whose rent alone sits comfortably below the ceiling can still be caught in a year they also sell an asset. The reverse is also true: spreading two disposals across two tax years can keep each year under the ceiling, which is a planning point rather than an afterthought.

Consider how the aggregation plays out in numbers. A non-resident owns two Tel Aviv apartments held on the marginal track and a modest Israeli share portfolio. In an ordinary year the combined rent and dividends come to about NIS 400,000, comfortably below the ceiling, and no surtax arises at all. Then in one year she sells the smaller apartment for a taxable gain of NIS 900,000. Her Israeli-source income for that year jumps to roughly NIS 1,300,000, the slice above NIS 721,560 is about NIS 578,000, and the 5% capital-income surtax on it is close to NIS 29,000 that nothing deducted along the way. Had she completed that sale in January, and the second disposal she was already planning in the following January, each year's income would likely have stayed under the ceiling and the surtax would not have arisen. The point is not that the surtax can always be sidestepped. It is that the levy responds to timing, and the timing of a disposal is one of the few levers a non-resident genuinely controls.

One Israeli rule cuts the other way and helps landlords. Rent that a non-resident elects to tax under the 10% final track in Section 122 of the Income Tax Ordinance sits outside the ordinary taxable-income base. The surtax generally bites on marginal-track rent, dividends, interest, and gains, rather than on 10%-track rent, though the interaction deserves confirmation for a given year and a given mix of income. The wider picture of how these streams are taxed is set out in the guide to Israeli income tax for non-residents.

In Practice: A non-resident who elects the 10% final rental track under Section 122 keeps that rent out of the Section 121B taxable-income base, so on NIS 300,000 of annual Tel Aviv rent taxed at 10%, the surtax generally does not apply to the rent itself. The election is made on the annual return filed with the Israel Tax Authority, and the 10% is due within 30 days of the end of the tax year unless paid through the return. A landlord who instead reports rent on the marginal track brings that income into the surtax calculation.

The Feature That Catches Non-Residents Out

The surtax is not captured by withholding at source. A bank or company that withholds on an Israeli dividend or a rent payment deducts the base rate, not the surtax. A buyer of Israeli property and the seller's tax agent settle the capital gains tax, not the surtax. So the extra 3% or 5% is a debt that materializes only when the year is totted up on a return, which a non-resident with reportable Israeli income files on Form 1301, generally by 30 April of the following year. The gap between when the income arrives and when the surtax is assessed is often a year or more.

Common Mistake: A non-resident sells an Israeli asset, sees the capital gains tax settled at closing, assumes the Israeli tax on the deal is finished, and moves the net proceeds abroad. Months later an assessment arrives for the surtax on the slice of the gain above NIS 721,560, and the money is gone. Because the surtax was never withheld, the shortfall carries interest and index linkage from the original due date, and reopening the position from abroad through an Israeli representative typically adds several weeks and further cost. The surtax should be modelled and set aside at the time of the sale, not discovered afterward.

The Home-Country Side

The surtax is Israeli income tax, so it is generally creditable against your home-country tax on the same income, whether through a double-tax treaty or your country's domestic foreign tax credit. A US, UK, Canadian, Australian, or French resident who pays the Israeli surtax on an Israeli gain can normally use it to reduce home-country tax on that gain, up to the home-country tax on that income. The friction is timing. Israel frequently assesses the surtax in a later year than the one in which the foreign tax on the underlying income was paid, and matching the credit across two systems and two calendars is where the coordination between your Israeli and home-country advisers earns its keep. This is the same reckoning that arises when a former resident settles Israeli tax on ceasing residency, discussed in the note on the Israeli exit tax on ceasing residency.

Practical Checklist

• Add up all your Israeli-source income for the year, because the surtax turns on the total, not on any one payment
• Treat the NIS 721,560 ceiling as a live figure and confirm the current year's index-linked amount
• Remember that capital income above the ceiling carries 5%, not 3%, from 2025 onward
• Check whether a residential-apartment sale exceeds NIS 5,382,285, which removes the carve-out
• Consider spreading two disposals across two tax years to keep each below the ceiling
• Set aside the surtax at the time of a large gain, since nothing withholds it for you
• Coordinate the timing of the Israeli surtax with your home-country foreign tax credit

Speak With an Israeli Attorney

The surtax is easy to miss precisely because nothing deducts it at source, and the first sign of it is often an assessment long after the money has left Israel. We model the exposure before a disposal or a large dividend so it is priced into the decision, and we coordinate the Israeli assessment with your home-country credit so the same income is not taxed twice.

Contact us for a confidential initial consultation.