Israeli Tax Law now allocates most private company profits to the shareholders.
This Increases taxes from 23% to 50%. Action needed.
New regulations spell out how groups of family-owned companies can pay the new tax on past trapped profits. This will be relevant to many successful Israeli private companies that use different subsidiary companies to invest in different assets (e.g, real estate), ventures or locations.
Trapped Profits Taxation – Potted Summary:.
Trapped profits taxation refers to the Israeli government’s latest big time tax revenue raiser starting in 2025. Trapped profits are undistributed profits of closely held companies with 5 or fewer shareholders and their relatives.
Typically, the undistributed profits were ploughed back into the business. But the government has a war to finance and contends that family businesses “hoard” profits and pay “only” 23% company tax on them. The new rules raise that rate to around 50% by attributing profits to shareholders and taxing them too. This is done in two dollops: (1) A 2% surtax on past undistributed profits of many companies, including profits earned years ago, (2) Up to 50% tax for shareholders on current year profits made by various professional companies – not industry or hitech. (For US taxpayers, this is like deeming nearly every company to be an LLC where the profits flow through to the members/shareholders. But Israeli tax rates are higher than in the US).
The intention is to raise NIS 10 billion in tax revenues. A side effect seems to be double taxation at the international level. Olim and returnees may be affected. The rules are complex.
The new regulations for groups:
The new regulations issued on September 15, 2025 aim to sweep up profits of subsidiary companies for the purposes of the 2% surtax on past profits – including pre-2025 retained profits.
Private closely held companies have several choices.
First, they can pay the 2% surtax on undistributed profits.
Second, they can distribute a dividend of 6% of accumulated profits at the end of the previous year (5% in 2025).
Third, they can distribute a dividend of 20%-50% of accumulated “excess profits” at the end of the previous year, according to a detailed formula.
The new regulations specify two optional procedures for subsidiary companies to pay dividends up the chain of companies in the group to the shareholders and withhold 35% dividend withholding tax. And if the group needs the cash, it should be enough just to pay over the 35% withholding tax.
The two optional procedures are: (1) the lowest level company elects to withhold 35% tax, or (2) a higher up company receives an untaxed intercompany dividend and withholds the 35% withholding tax. If there are multiple tiers of companies, it is enough to withhold the 35% tax once.
The glue that holds all this together is paperwork. There will be a series of written confirmations that the various companies must issue before and after withholding the 35% tax. In this way other companies are informed and the ultimate individual shareholders get a confirmation that the 35% tax was indeed withheld somewhere within the group. This loosely resembles the K-1 forms for partnerships and LLCs in the USA.
The end result that if a closely held (family owned) group of companies wants to avoid the 2% surtax on past profits, they can receive actual dividends of 5%-50% of past profits as outlined above.
What’s the problem?
First we await clarification – do the trapped profits rules apply to foreign companies? Second, will Olim (immigrants) living in Israel face an unexpected tax bill in their ten year tax holiday?? The tax holiday only applies to foreign source income. Does income attributed to shareholders living in Israel count as foreign or Israeli source income?
The Israeli Tax Authority has yet to clarify the international reach of trapped profits taxation.
Action needed:
Israel is becoming a more taxing place to do business. However, there were similar rules in Britain some years ago, known there as “apportionment”. Company profits were apportioned to UK shareholders. The UK rules flopped due to drafting weaknesses – which are present in the current Israeli trapped profits law too.
Consequently, private Israeli companies should consider appropriate business, investment and tax planning that take such weaknesses into account. Now is the time to consider action. Doing nothing might not be the best thing to do.
Next Steps:
Olim and others who own companies abroad should definitely check out their situation. Profits of those companies may well be exposed to the new Israeli tax regime, but remedies exist.
More generally, shareholders of private Israeli and foreign companies should consult their advisors on how to address the new Israeli trapped profits tax rules
As always, consult experienced professional advisors in each country at an early stage in specific cases.
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The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.
© Leon Harris 30.11.25