ISRAEL Law and Practice Contributed by: Yaron Mehulal, Nataly Davidai and Shalom Hershkovitz, FISCHER (FBC & Co.)
FISCHER (FBC & Co.) 146 Menachem Begin Rd Tel Aviv 6492103 Israel
Tel: +972 3694 4111 Fax: +972 3609 1116 Email: fbc@fbclawyers.com Web: www.fbclawyers.com
1. Tax 1.1 Tax Regimes
Capital Gains Israel levies a 25% capital gains tax on gains not derived from inflationary increase in value. Howev - er, when the capital gain is derived from the sale of shares by a person holding more than 10% of the entity shares, the rate increases to 30%. Corporate Tax Currently, the corporate income tax rate is 23%. In certain cases, a reduced tax rate is available, mainly to certain industrial companies defined as “approved enterprises”. In January 2025, new legislation aimed at reducing the ability of “closely held companies” (ie non-pub - lic companies held by five persons or less, in which the public has no significant interest) to accumulate profits was introduced. As per the new legislation, a closely held company retaining substantial profits rather than distributing dividends to its shareholders will be subject to a 2% penalty tax on its undistrib - uted profits, unless: (1) it demonstrates that its current losses exceed 10% of its accumulated profits; or (2) it distributes as dividend at least (a) 50% of its previ - ous year’s “excess profits” (ie, accumulated taxable income, as defined by the Israeli Income Tax Ordi - nance, minus certain exempted accumulate profits) or (b) 6% of its accumulated profits since incorporation (or 5%, if distributed no later than November 2025). It is important to note that the said penalty tax cannot be offset against other taxes. In addition, as of January 2025, the shareholders of “closely held companies” with high profitability are subject to marginal tax on their share of the com - pany’s taxable income from “personal exertion inten -
The State of Israel taxes individual residents on a per - sonal basis as per the taxpayer’s centre of life. Once tax residency is determined, Israeli tax residents are taxed on their worldwide income. In contrast, non- Israeli tax residents are taxed only on their Israeli- sourced income. The Israeli tax rates applying to individual taxpayers are set out below. Income Tax Israel levies personal income tax at a progressive rate, starting at 10% for a gross annual income (derived from personal effort) of approximately USD23,431, and increasing up to a maximum of 47% for a gross annual income of approximately USD156,066 and above. In addition, a surtax of 3% is levied on income exceed - ing an annual income of approximately USD200,000. Moreover, a surtax of 2% is applied on income not derived from personal labour or business activities – such as dividends, interest, real estate gains and other capital gains – if it surpasses an annual income of approximately USD200,000. Certain types of passive income are subject to reduced tax rates; for example, rental income from residential properties is subject to a 10% flat tax rate, dividends are subject to a 25% tax rate (if received by a person holding less than 10% of the entity’s shares; otherwise, a 30% tax rate applies), and interest income is subject to a 15% or 25% tax rate.
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