Key points
- A dividend that an Israeli company receives from an Israeli company, sourced in income produced or received in Israel, is not included in its taxable income (section 126(b)).
- The tax on the dividend applies only when the profits are distributed to an individual — at 25% or 30%.
- In a holding structure, sections 81 and 62A must also be reviewed at the level of the holding company.
A structure in which the controlling shareholder holds the operating company through a holding company is common in Israel. The key question is when the tax on the profits applies — when they pass from the operating company to the holding company, or only on distribution to the individual.
The rule — section 126(b)
Income from a distribution of profits that an Israeli-resident company receives from another company liable to corporate tax, sourced in income produced or received in Israel, is not included in its taxable income. In other words, the dividend passes to the holding company without further tax.
The tax on distribution to an individual
When the holding company distributes the profits to an individual, they are liable for dividend tax at 25%, or 30% for a substantial shareholder, and for surtax according to their total income.
Example
An operating company distributes ILS 1,000,000 to a holding company owned by an individual (100%). The holding company distributes ILS 600,000 to the individual in the same year.
- Tax in the holding company on the dividend received: none (section 126(b)).
- Dividend tax for the individual: 600,000 × 30% = ILS 180,000.
- Balance in the holding company: 1,000,000 − 600,000 = ILS 400,000 — with no further tax until it is distributed.
Sections 81 and 62A in a holding chain
- Section 81 — undistributed profits: the section must also be reviewed at the level of the holding company, together with the effect of the intercompany dividend on the accumulated profits of each company.
- Section 62A(a1) — applies to individual shareholders holding directly or indirectly. An individual who holds the operating company through a holding company is therefore not outside the scope of the section.
- The fixed shield under section 81 is shared between companies under identical control.
Frequently asked questions
Does the exemption apply to every intercompany dividend? It applies to a dividend from a company liable to corporate tax, sourced in income produced or received in Israel. Dividends from foreign sources are subject to other rules.
Does a holding company avoid section 81? No — the section must be reviewed for every company in the chain.
Notes
- Different rules may apply to a dividend from a foreign source or from preferred income.
- Each holding structure must be reviewed on its own merits.
Sources
- Income Tax Ordinance, sections 126(b), 125B, 81A–81F and 62A
Rates and amounts are correct as of the update date. This is a translation of the Hebrew article; in case of a discrepancy, the Hebrew version prevails.
This article is for general information only. It does not constitute tax advice or a professional opinion, and does not replace a specific review of each case.