Key points
- From tax year 2025, an additional 2% tax applies to the excess profits of a closely held company (section 81B(a)).
- Excess profits are accumulated profits, less exempt accumulated profits and less the shield.
- A company that meets one of the exemption tests in section 81B(b) is not liable for the additional tax.
Amendment 277 to the Income Tax Ordinance added sections 81A–81F, which apply from tax year 2025. The sections impose an additional tax on a closely held company that accumulates profits and does not distribute them. The purpose is to encourage the distribution of profits that the business does not need, instead of leaving them in the company for years.
The main rules
A company to which the sections apply and which is left with "excess profits" is liable for an additional tax of 2% of the excess profits (section 81B(a)). The Israel Tax Authority published its guidance in Income Tax Circular 7/2025.
Computing excess profits
The starting point is the company's accumulated profits at the end of the previous tax year. Exempt accumulated profits (if any) are deducted, and then the "shield" — an amount the law allows the company to keep without additional tax. The balance is the excess profits.
- Accumulated profits — the lower of the accounting alternative (retained earnings in the balance sheet) and the tax alternative, if computed.
- Equity-method profits included in retained earnings are neutralized, as are amounts already attributed to the shareholders (for example under sections 3(t1), 62A, 64 and 64A).
- The shield — the highest of a fixed shield of ILS 750,000, the expenses shield and the assets shield (see the separate article).
The exemption tests
Even if the company has excess profits, it is not liable for the additional tax if one of the following applies in the tax year under review (section 81B(b)):
- The company distributed more than 50% of its excess profits.
- The company distributed at least 5% of its accumulated profits (tax year 2025), or at least 6% of them (from tax year 2026).
- The company has a tax loss exceeding 10% of its accumulated profits.
Example
A closely held company has accumulated profits of ILS 3,000,000 at the end of 2025 and no exempt accumulated profits. The highest shield is the fixed shield of ILS 750,000. For the purpose of the example only, and ignoring the transition rule:
- Excess profits: 3,000,000 − 750,000 = ILS 2,250,000.
- Additional tax if nothing is distributed: 2,250,000 × 2% = ILS 45,000.
- Exemption alternative A — distributing 6% of accumulated profits: 3,000,000 × 6% = ILS 180,000.
- Exemption alternative B — distributing more than half of the excess profits: ILS 1,125,001.
A dividend of ILS 180,000 paid on time is therefore enough to meet the exemption test.
Practical meaning for the firm
For every closely held company, it is recommended to review already during the tax year the expected excess profits and the distribution needed to meet the exemption test. A distribution for a given tax year can be made until the end of the following tax year, but early planning lets the company and its shareholders prepare properly.
Recommended work order
- Determine accumulated profits at the end of the previous tax year — the lower of the accounting and tax alternatives, after the required adjustments.
- Determine the exempt accumulated profits, if any.
- Compute the three shield alternatives and take the highest.
- Compute the excess profits.
- Review the exemption tests — a tax loss, distribution of the required share of accumulated profits, or distribution of more than half of the excess profits.
- Decide between distributing a dividend and paying the additional tax, comparing the overall tax burden.
Another example — the loss test
A company has accumulated profits of ILS 2,000,000, and in the tax year under review it has a tax loss of ILS 250,000.
- 10% of accumulated profits: 2,000,000 × 10% = ILS 200,000.
- The loss (ILS 250,000) exceeds 10% of accumulated profits, so the company is not liable for the additional tax this year — without having to compute the shields and the excess profits.
Frequently asked questions
Is the additional tax deductible? No. The additional tax is not deductible, and the excess profits remain in the company.
When is the additional tax due? The earlier of the filing date of the return for the tax year under review and 31 December of the following tax year.
Does every dividend count for the exemption tests? The dividend must actually be paid. Where a company is among the shareholders, the dividend from which tax was withheld must be examined — see the details in the calculator.
Notes
- For excess profits accumulated up to 31.12.2024, a transition rule applies for 2025–2030 — see the article on the transition rule.
- This article does not exhaust the conditions and exceptions in the sections; each case must be reviewed on its own merits.
Sources
- Income Tax Ordinance, sections 81A–81F
- Income Tax Circular 7/2025
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.