IL Corporate Tax

Dividend tax calculation for controlling shareholder

Company pre-tax profit: P Corporate tax (23%): P × 0.23 Distributable profit: P × 0.77 Dividend withholding tax (30%): P × 0.77 × 0.30 = P × 0.231 Net to shareholder: P × 0.77 × 0.70 = P × 0.539 Effective total tax rate: 46.1%Section 3.1

Surtax impact on dividends above threshold

If total annual income (including dividend) exceeds NIS 721,560: 3% surtax on excess (Section 121B); Additional 2% on non-labor income above threshold (effective 2025+); Total additional: 5% on dividend portion above threshold; Effective rate climbs to ~49.95% on portion above thresholdSection 121B

When dividend is optimal

Shareholder's salary already maximizes lower tax brackets; Amount is large enough that salary would push into 47%+ bracket; Company has sufficient retained earnings (Arvei Rvaachim — ערכי רווחים); No Bituach Leumi advantage left (salary already above NI ceiling)

When dividend is suboptimal

Shareholder draws no or low salary (wasting lower brackets and credit points); Amount is moderate (under ~NIS 200,000) and salary brackets not fully utilized; Company needs the cash for operations (dividend is irreversible)

Income tax brackets (2026)

| Annual income (NIS) | Rate | |---|---| | Up to 84,120 | 10% | | 84,121 – 120,720 | 14% | | 120,721 – 228,000 | 20% | | 228,001 – 301,200 | 31% | | 301,201 – 560,280 | 35% | | 560,281 – 721,560 | 47% | | Above 721,560 | 50% (47% + 3% surtax) |

Bituach Leumi for controlling shareholder employees (2026)

| Income range | Employee NI | Employee health | Employer NI | |---|---|---|---| | Up to NIS 7,703/month | 0.4% | 3.1% | 4.46% | | NIS 7,703 – NIS 51,910/month | 7.0% | 5.0% | 7.38% | | Above NIS 51,910/month | 0% (ceiling) | 0% (ceiling) | 0% (ceiling) |

NI rate difference from regular employees

Controlling shareholder NI rates (4.46%/7.38% employer) differ slightly from regular employees (4.51%/7.60%).

Salary advantages

Pension contributions (Hafrashat Pensia — הפרשת פנסיה) are tax-deductible up to ceiling; Keren Hishtalmut contributions (up to ceiling) are employer-deductible, tax-free to employee; Tax credit points reduce effective rate on first brackets; NI contributions build social security entitlements

Optimal salary level

The sweet spot is often drawing enough salary to utilize the lower tax brackets (up to ~NIS 228,000/year at 20% marginal rate) and maximize pension/Keren Hishtalmut deductions, then extracting additional amounts as dividends.

Minimum salary requirement

The Tax Authority expects controlling shareholders to draw a reasonable salary (~NIS 6,500+/month) before distributing dividends.

Section 3(tet) applicability

When a company lends money to a shareholder at below-market interest, Section 3(tet) rules apply.

Section 3(tet) rules table (2026)

| Rule | Detail | |---|---| | Deemed interest rate (2026) | 6.53% per year | | Treatment for controlling shareholders | Deemed interest classified as salary income, taxed at marginal rates | | Reporting obligation | Company must report deemed interest on Form 126 | | Section 3(yod) rate | 4.9% (for CPI-linked loans between related parties) |

Reclassification risks table

| Risk factor | Detail | |---|---| | Loan not repaid within reasonable time | ITA may reclassify as dividend (30% tax + penalties) | | Loan used for personal expenses | Strengthens reclassification risk | | No repayment schedule | Red flag for ITA | | Company has retained earnings | Increases risk of deemed-dividend reclassification |

Worked example — shareholder loan deemed interest

Loan amount: NIS 500,000 Annual deemed interest: NIS 500,000 × 6.53% = NIS 32,650 Tax on deemed interest: NIS 32,650 × 47% (marginal rate) = NIS 15,346 Net annual cost: NIS 15,346 (3.07% of loan)Section 5.3

When shareholder loan makes sense

Short-term cash need (under 12 months) with clear repayment plan; Bridge financing until dividend declaration is approved; Company has a formal loan agreement with interest and repayment terms

When to avoid shareholder loans

Long-term extraction need (accumulates deemed interest annually); Company has distributable retained earnings; No documented loan agreement or repayment schedule

Management fees mechanism

1. Shareholder (or their management company) invoices the company for management services 2. Company deducts the fee as a business expense (no corporate tax) 3. Fee is subject to income tax as business income + VAT (18%) 4. If through a personal Osek Murshe: subject to self-employed NI rates

Self-employed NI rates (2026)

| Income range | NI rate | Health rate | Total | |---|---|---|---| | Up to NIS 7,703/month | 2.87% | 3.1% | 5.97% | | NIS 7,703 – NIS 51,910/month | 12.83% | 5.0% | 17.83% |

NI deductibility

52% of the NI amount is tax-deductible.

Management fees requirements and risks

Transfer pricing rules apply (Section 85A) — fees must reflect arm's length market rates; ITA may challenge "excessive" management fees as disguised dividends; Must issue Heshbonit Mas (tax invoice); Requires maintaining a separate business entity with bookkeeping; Properly documented service agreements requiredSection 85A

Decision matrix table

| Factor | Salary | Dividend | Loan | Management fees | |---|---|---|---|---| | Total effective tax rate | 10%–60% | 46.1%–52% | 6.53% deemed/year | Variable + 18% VAT | | Bituach Leumi | Yes (capped) | No | No | Yes (higher rates) | | Corporate tax deductible | Yes | No | N/A | Yes | | Pension benefits | Yes | No | No | Self-funded | | Reversible | No | No | Yes (repay loan) | No | | ITA scrutiny | Low | Low | High | Medium | | Timing flexibility | Monthly | Board resolution | Immediate | Per invoice |

Common optimal combinations table

| Scenario | Recommended approach | |---|---| | Small extraction (under NIS 200,000) | Salary up to the 20% bracket to maximize credit points and pension | | Medium extraction (NIS 200,000 – 500,000) | Salary to optimize brackets + dividend for the remainder | | Large extraction (NIS 500,000+) | Salary at optimal level + dividend; potentially short-term loan bridge | | One-time tax assessment | Short-term shareholder loan with 12-month repayment, funded by planned dividend |

Closely held company annual tax on undistributed profits

A closely held company is subject to a 2% annual tax on accumulated undistributed profits unless at least 6% of accumulated profits are distributed as dividends. This rule creates pressure to distribute regularly rather than accumulating profits indefinitely within the company.

Compliance checklist table

| Requirement | Check | |---|---| | Company has a CPA (Roe Cheshbon — רואה חשבון) | All strategies require professional filing | | Board resolution for dividends | Required before distribution, must be documented | | Loan agreement for shareholder loans | Written agreement with interest rate, repayment schedule, and signatures | | Minimum salary for controlling shareholder | ITA expects ~NIS 6,500+/month before dividends | | Withholding tax on dividends | Company must withhold 30% and deposit with ITA by the 15th of the following month | | Form 856 reporting | Payments to shareholders must be reported | | Section 3(tet) reporting | Deemed interest must be reported on Form 126 | | Transfer pricing for management fees | Fees must reflect market rates | | VAT invoice for management fees | Must issue Heshbonit Mas | | Surtax reporting | Include all income sources when calculating surtax threshold |

Reference material table

| Resource | Reference | |---|---| | Israeli Tax Authority | https://www.gov.il/he/departments/israel_tax_authority | | Income Tax Ordinance | https://www.nevo.co.il/law/70264 | | Bituach Leumi — contribution rates | https://www.btl.gov.il/Insurance/National%20Insurance/Pages/default.aspx | | Kol Zchut — income tax brackets | https://www.kolzchut.org.il/he/מדרגות_מס_הכנסה |