Israel Tax Regime

Israel taxes companies at a flat 23% on a classical basis, with a second layer at shareholder level on dividends, and taxes individuals at progressive rates of up to 47% plus a surtax. The system's most distinctive features sit at its edges: generous incentive regimes under the Encouragement of Capital Investments Law reduce corporate rates on qualifying industrial and technology income to as little as 6%, while a battery of recent measures targets closely held companies — service-income reclassification, an excess-profitability attribution and a 2% annual tax on undistributed profits. Israel is an OECD member, follows OECD transfer-pricing and treaty standards, and has legislated a qualified domestic minimum top-up tax applying the 15% Pillar Two floor to large groups for tax years beginning after 31 December 2025. There are no district or local taxes on corporate income.

1.1 Sources

Primary legislation includes the Income Tax Ordinance (New Version), the Encouragement of Capital Investments Law 1959, the Value Added Tax Law 1975, the Real Estate Taxation Law 1963 and the recent minimum-tax (QDMTT) legislation adopted by the Knesset.

1.2 Recent developments

The corporate rate remains 23% for 2026. The Knesset has enacted a qualified domestic minimum top-up tax for multinational groups with consolidated revenue of at least EUR 750 million, effective for tax years beginning after 31 December 2025, incorporating the OECD model rules and guidance — significant for incentive-regime companies taxed below 15%. From 2025, closely held companies face an annual 2% tax on certain accumulated profits (avoidable by prescribed dividend distributions), attribution of 'excess profitability' above a 25% margin to active shareholders at marginal rates, and look-through rules for partnership stakes; a temporary relief window encouraged liquidation of such companies through early 2026. VAT rose to 18% from 1 January 2025, the high-income surtax was augmented by an additional 2% on capital-source income, and mandatory e-invoice allocation numbers continue phasing in for input-VAT deduction.

Headline statutory corporate income tax rate for a resident company. Where sub-national (state, provincial, cantonal or municipal) corporate taxes apply, the combined rate reported by the OECD is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

Top marginal statutory personal income tax rate on employment income for a resident individual. Where sub-national (state, provincial, cantonal or municipal) income taxes are a standard part of the system, the combined top rate is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

2.1 Rates and residence

A company is Israeli-resident if it is incorporated in Israel or if its business is managed and controlled from Israel. Residents are taxed on worldwide income at 23%; non-resident entities are taxed only on income accrued or derived in Israel under statutory sourcing rules, including through a permanent establishment or branch. Capital gains of companies are taxed at the corporate rate on the real (inflation-adjusted) gain. There is no minimum corporate income tax outside the new QDMTT, and no local income taxes on companies, although municipalities levy the Arnona property rate on business premises.

Closely held companies — private companies controlled by five or fewer individuals — face special regimes: income from officer, management or employee-type services rendered by a controlling individual to a single entity is reclassified and taxed directly to the individual where 70% or more of the company's income derives from those services over the prescribed period; from 2025, business profitability above a 25% margin is attributed pro rata to active shareholders at marginal rates; and a 2% annual tax applies to certain accumulated profits unless a dividend of at least 6% of prior-year accumulated profits (or more than 50% of accumulated profits less deductions) is distributed.

2.2 Dividends and participation relief

Dividends paid between Israeli-resident companies out of Israeli-source income are excluded from the recipient's taxable income, so domestic corporate chains bear a single 23% charge until profits reach individuals or non-residents. Dividends from foreign subsidiaries are taxable at 23%, with a direct foreign tax credit and, on election, an underlying credit for corporate tax paid by 25%-or-greater subsidiaries (including second-tier holdings), applying a gross-up. There is no general participation exemption for foreign share gains — corporate capital gains on foreign subsidiaries are taxable real gains with foreign-tax credit relief — although treaty allocation and the (rarely used) holding-company provisions can modify outcomes.

2.3 Income determination and deductions

Taxable income follows financial statements adjusted by the Ordinance and extensive case law: expenses are deductible if incurred wholly and exclusively in producing income. Depreciation is prescribed by regulation — industrial equipment commonly 7%–20% (accelerated rates for industrial enterprises and technology equipment), buildings typically 4%, with purchased goodwill amortisable at 10% per year in qualifying acquisitions. Research and development expenditure approved by the Innovation Authority is deductible currently (otherwise over three years). Non-deductible items include excess vehicle and entertainment costs, fines, and 'notional' expenses lacking documentation; inventory follows cost or market. Israel's partial inflation-adjustment heritage survives in the taxation of real rather than nominal capital gains.

2.4 Interest limitation

Israel has not adopted an ATAD-style EBITDA-based interest barrier or statutory thin-capitalisation ratio. Related-party financing is policed instead through transfer pricing under section 85A — the rate and terms of intercompany debt must be arm's length — through recharacterisation doctrine, and through withholding obligations on interest. Interest incurred to produce exempt or preferred income may be allocated against that income, and back-to-back and hybrid financing structures attract scrutiny under the general anti-avoidance provision. For large groups the QDMTT now backstops aggressive interest planning that would depress the Israeli effective rate below 15%.

2.5 Losses

Business losses offset any income and capital gains in the current year and carry forward indefinitely against business income and business-connected capital gains; there is no carryback. Capital losses offset capital gains (with limited application against interest and dividends from the same security) and carry forward indefinitely. Passive-source losses follow schedular rules — rental losses against rental income, and so on. Loss trafficking is attacked under case law where shares are acquired predominantly to exploit accumulated losses without business continuity, and the Israel Tax Authority applies the general anti-avoidance provision to artificial loss utilisation.

2.6 Group taxation

Israel has no general fiscal-unity regime. A narrow exception allows an Israeli industrial holding company and its Israeli industrial subsidiaries in the same line of production to file consolidated returns on approval, pooling profits and losses. Otherwise each company is assessed separately, with the inter-company dividend exclusion (section 2.2) preventing cascading tax within domestic groups. VAT grouping is similarly limited. Reorganisation provisions (section 2.11) rather than consolidation carry the burden of tax-neutral group restructuring.

2.7 Controlled foreign companies

Under the CFC regime, an Israeli controlling shareholder (generally 10% or more of a means of control) of a controlled foreign corporation is taxed on a deemed dividend of its share of the CFC's undistributed passive profits, where more than 50% of the foreign company's income or profits are passive, the applicable foreign tax rate does not exceed 15%, and Israeli residents hold more than 50% of the means of control. Foreign tax credits are preserved through a notional-credit mechanism on actual distribution. A companion 'foreign occupational company' rule taxes Israeli professionals' service income earned through foreign companies as if earned in Israel.

2.8 Transfer pricing

Section 85A of the Ordinance requires related-party cross-border transactions to be at arm's length, applying methods consistent with the OECD Transfer Pricing Guidelines. Documentation follows the three-tier architecture: contemporaneous local documentation (with a prescribed study to shift the burden of proof), master file obligations for groups above revenue thresholds (NIS 150 million), and country-by-country reporting for groups at the EUR 750 million standard, exchanged under OECD frameworks. The Israel Tax Authority operates active transfer-pricing audit teams — business restructurings and IP migrations out of Israel are a marked enforcement focus, frequently litigated — and pre-rulings and advance pricing agreements are available.

2.9 Incentives

The Encouragement of Capital Investments Law is the centrepiece. A Preferred Enterprise (industrial or qualifying export activity) pays 7.5% in national priority Development Area A and 16% elsewhere. A Preferred Technology Enterprise (PTE) pays 7.5% in Area A or 12% elsewhere on qualifying IP-based income under a nexus approach, and a Special Preferred Technology Enterprise (SPTE) — very large groups — pays 6% on the Israeli-developed IP portion. Dividends from preferred income bear reduced 20% withholding (as low as 4% to significant foreign parents in SPTE structures). Capital grants are available for Area A investments, the Innovation Authority funds approved R&D, and an accelerated-depreciation and angel-investor toolkit supports the technology sector. From 2026 the QDMTT claws large groups back to a 15% floor, so incentive economics must be re-modelled for in-scope multinationals.

2.10 Pillar Two

Israel has legislated the domestic leg of Pillar Two: a qualified domestic minimum top-up tax applies for tax years beginning after 31 December 2025 to multinational groups with annual consolidated revenue of at least EUR 750 million whose Israeli operations show a GloBE effective rate below 15%. The legislation incorporates the OECD model rules, commentary and administrative guidance, with future updates to be absorbed through regulations, and carries its own computation and reporting obligations. Israel has not, at this stage, enacted an income inclusion rule or undertaxed profits rule of its own, but Israeli-parented groups face those rules abroad. The practical effect is to raise the floor under the 6%–12% incentive regimes for in-scope groups, while preserving full benefits for groups below the revenue threshold.

2.11 Branch income and reorganisations

A branch of a foreign company pays corporate tax at 23% on Israeli-source profits; there is no branch profits or remittance tax, so after-tax branch profits can be repatriated without further Israeli charge — a structural difference from the dividend withholding borne by subsidiaries. Reorganisations under Part E2 of the Ordinance — mergers, share exchanges, demergers and asset transfers to companies against shares — can be effected tax-free with Israel Tax Authority approval or under self-executing conditions, subject to continuity-of-interest and holding-period requirements (generally two years) and to preservation of the Israeli tax base. Exit taxation under section 100A applies to companies and individuals ceasing residence, deeming assets sold at market value with deferral elections.

3.1 Residence and rates

Individual residence turns on the centre-of-life test, supported by day-count presumptions (183 days in a year, or 30 days plus a 425-day three-year aggregate). Residents are taxed on worldwide income; non-residents on Israeli-source income. Employment and business income is taxed at progressive rates from 10% to 47% (the 47% band beginning at roughly NIS 580,000 of annual income in 2026, brackets indexed), plus a 3% surtax on total taxable income above approximately NIS 720,000 — and from 2025 an additional 2% surtax on capital-source income above that threshold, bringing top capital rates to as much as 30% + 5%. Personal credit points (worth about NIS 2,900 each per year) reduce tax directly, with additional points for parents, new immigrants and discharged soldiers.

3.2 Capital income and real estate

Individuals pay 25% on real capital gains and dividends, rising to 30% for substantial shareholders (10% or more of any means of control), plus the surtaxes for high earners; interest is taxed at 25% (15% on unindexed instruments). Residential rental income enjoys a monthly exemption (around NIS 5,600) or an elective flat 10% on gross rents without deductions. Real estate is governed by the Real Estate Taxation Law: land appreciation tax applies capital-gains-style rates to real gains on Israeli property, with exemptions and linear reliefs for qualifying residential sales, while purchasers pay acquisition tax on progressive schedules (higher brackets for investors and foreign buyers). Gains on listed securities are generally collected by broker withholding.

3.3 Social security and payroll

National Insurance and health contributions apply to employment income at combined employee rates of up to roughly 12% (7% National Insurance plus 5% health at the higher band) and employer rates of 3.55% rising to 7.6% above the lower threshold, up to a monthly income ceiling of about NIS 50,700. Employers withhold income tax, contributions and mandatory pension (employer around 12.5% including severance, employee 6%) monthly, remitting by mid-month. The self-employed pay their own National Insurance on a similar scale. Employer-provided benefits are broadly taxable, with company cars imputed under prescribed values; approved share-option plans under section 102 (trustee capital-gains track) tax employee equity at 25% instead of marginal rates.

3.4 Inbound individuals

New immigrants (olim) and qualifying senior returning residents enjoy a ten-year exemption on foreign-source income and gains; for arrivals from 2025-2026 onward the exemption endures but reporting of foreign income and assets is required, aligning Israel with transparency standards. Foreign experts and approved specialists can access deduction and rate reliefs for limited periods. Exit tax under section 100A deems an emigrating individual to have sold worldwide assets at departure, with an election to defer payment until actual sale and pro-rate the gain. Israel has no inheritance, estate or gift tax and no net wealth tax, making pre-immigration and generational planning comparatively simple, though real estate transactions remain separately taxed.

Domestic withholding on payments to non-residents applies at 25%/30% on dividends (20% on dividends from preferred-enterprise income, and as low as 4%–5% for significant foreign parents in special technology structures), 23% on interest paid to foreign companies (25% for individuals), and 23%/25% on royalties. Payments for services to non-residents are subject to broad withholding-at-source machinery unless an exemption or reduced-rate certificate is obtained from the Israel Tax Authority — a practical gating item in cross-border contracting. Israel's roughly 60 treaties typically reduce dividends to 5%–15%, interest to 5%–10% and royalties to 0%–10%; the multilateral instrument's principal-purpose test applies, and treaty relief is administered through certificates rather than self-assessment.

Withholding compliance is certificate-driven: Israeli payers (and banks executing foreign remittances) must withhold at statutory rates unless the recipient presents a valid exemption or reduced-rate certificate, and refund claims are slow, so certificates should be secured before payment flows begin. Dividend planning must layer the corporate regime, the shareholder's status and the surtaxes: a substantial-shareholder individual bears 30% plus up to 5% surtax, while treaty-protected corporate parents of preferred enterprises can reach materially lower combined burdens. The absence of a branch remittance tax keeps branch structures attractive for finite projects.

5.1 General anti-abuse and reporting positions

Section 86 of the Ordinance empowers the assessing officer to disregard artificial or fictitious transactions, or transactions whose principal purposes include improper tax avoidance — a general anti-avoidance rule developed through extensive Supreme Court doctrine on substance, business purpose and step transactions. Statutory disclosure regimes require flagging of 'reportable tax positions' contrary to published Israel Tax Authority positions above monetary thresholds, of certain opinions received, and of prescribed 'reportable transactions'. Treaty benefits are subject to the principal-purpose test via the multilateral instrument, and beneficial-ownership analysis is applied to conduit dividend and royalty structures.

5.2 CFC, exit and information exchange

The CFC and foreign-occupational-company regimes (section 2.7) bring low-taxed passive and professional-service income home currently; the exit tax (section 100A) protects the base on emigration of individuals and companies; and IP-migration and business-restructuring transactions are tested for full arm's-length consideration, often producing headline assessments. Israel exchanges information under the Common Reporting Standard and FATCA, participates in country-by-country exchange, and increasingly conditions rulings on transparency. Trusts are subject to a dedicated taxation chapter attributing income by settlor and beneficiary residence — a regime that inbound families must map carefully.

6.1 VAT

VAT applies at a standard rate of 18% (from 1 January 2025) on most supplies of goods and services and on imports. Exports of goods and many services to non-residents, fresh produce and supplies in Eilat are zero-rated; financial institutions pay a parallel wage-and-profit tax at 18% in lieu of VAT, and not-for-profits pay a wage tax at 7.5%. Registration is required for businesses above the small-dealer (osek patur) turnover threshold of roughly NIS 120,000. Returns are monthly (bimonthly for smaller dealers), due by the 15th (extended for online filers) with payment; the digital invoice-allocation-number regime conditions input-VAT deduction on ITA-issued numbers for invoices above descending thresholds. Reverse-charge applies to imported services and specified domestic supplies.

6.2 Transaction, payroll and other taxes

Real estate bears its own code: purchasers pay acquisition tax at progressive rates (0%–10% for a sole residence, 8%–10% for investors, 6% for commercial property), and sellers pay land appreciation tax on real gains with residential exemptions. Municipal Arnona is a significant annual occupancy charge on business and residential premises. Excise and purchase taxes apply to fuel, tobacco, alcohol and vehicles (vehicle purchase tax is steep, with green-tax gradations); customs duties follow Israel's free-trade network. There is no stamp duty, no net wealth tax and no inheritance tax. Employers bear no general payroll tax beyond National Insurance, except in the financial and non-profit sectors' VAT-substitute wage taxes.

7.1 Filing, assessment and audit

The tax year is the calendar year; a deviating year is available mainly to subsidiaries of foreign-listed groups on approval. Corporate returns are due within five months of year-end (31 May for calendar-year companies), with extensions under the practitioners' arrangement; audited financial statements accompany the return. Companies pay monthly advances, generally a fixed percentage of turnover set from the last assessment, by the 15th of the following month, with supplementary payments to stop interest and linkage differentials. The assessing officer may issue a best-judgment assessment generally within four years of the return year (extendable), and audits concentrate on transfer pricing, incentive qualification, closely held companies and real estate. Individuals file by 30 April/31 May (online), though most employees are covered by withholding without filing.

7.2 Rulings, appeals and penalties

The Israel Tax Authority's professional division issues advance rulings — binding when given as a 'ruling by agreement' — routinely used for reorganisations, incentive-regime qualification, option plans and international questions. Disputes proceed from objection before the assessing officer to appeal before the District Court (sitting as a tax court) and onward to the Supreme Court. Deficiency penalties apply to substantial understatements (15%–30% in aggravated cases), with civil fines for late filing and reporting failures, criminal exposure for evasion, and interest plus CPI linkage on unpaid tax. Voluntary-disclosure programmes reopen periodically; mutual agreement procedures under treaties address double taxation, though Israel has no arbitration commitment in most treaties.

Advance-payment true-ups matter: unpaid balances accrue interest and CPI linkage from year-end, so companies typically top up within the statutory grace windows (30/60/90 days after year-end capture graduated relief). Withholding certificates and invoice allocation numbers are the two administrative chokepoints for cross-border groups — both should be renewed annually before January payment cycles.

9.1 Entity choice

The private company limited by shares (Ltd) under the Companies Law is the default vehicle — no minimum capital, one shareholder and one director suffice — and captures the 23% rate and, where qualifying, the Encouragement Law regimes. Public companies list on the Tel Aviv Stock Exchange or abroad. Partnerships (general and limited) are effectively transparent for income tax and standard in venture capital and real estate; the limited partnership is the fund vehicle of choice, supported by dedicated ITA ruling practice for foreign investors. A branch of a foreign company suits finite projects — no dividend withholding on repatriation — while a subsidiary is generally preferred for incentive qualification and commercial ring-fencing. Closely held owner-service companies ('wallet companies') have lost most of their attraction under the 2025 measures.

9.2 Structuring and incentives

Technology groups should qualify income as Preferred Technology Enterprise income early — the 12%/7.5% (or 6% SPTE) rates plus 20% (or 4%–5%) dividend withholding produce among the lowest lawful combined burdens in the OECD for sub-threshold groups, while EUR 750 million-plus groups must re-run the numbers against the QDMTT's 15% floor from 2026. Inbound investors should secure withholding certificates and, for funds, limited-partnership rulings before deployment; IP should be located and priced deliberately, because migrations out of Israel are the flagship audit exposure. Owner-managers must weigh salary versus dividends under the closely held company rules — the 2% accumulated-profits tax and excess-profitability attribution penalise passive accumulation — and section 102 trustee plans remain the efficient equity-compensation route.

9.3 Worked effective-rate illustration

An Israeli technology company (below the Pillar Two threshold) earns taxable income of NIS 10,000,000, all qualifying Preferred Technology Enterprise income from operations outside Development Area A. Corporate tax at 12% is NIS 1,200,000, leaving NIS 8,800,000. A full distribution to its founder (a substantial shareholder holding via the trustee-approved structure at the preferred-dividend rate) bears withholding of 20% × 8,800,000 = NIS 1,760,000. The combined burden is 1,200,000 + 1,760,000 = NIS 2,960,000, i.e. 2,960,000 / 10,000,000 = 29.6% of pre-tax profit. Under the ordinary regime the same profit would bear 23% corporate tax (NIS 2,300,000) plus 30% dividend tax on the NIS 7,700,000 balance (NIS 2,310,000) — 4,610,000 in total, or 46.1% before surtax (roughly 48% after the 3% + 2% surtaxes). The incentive regime therefore saves about 16.5 percentage points on fully distributed profits, before considering the founder's surtax position.

9.4 Compliance

Expect audited financial statements with the corporate return, monthly advance, VAT and payroll cycles, certificate management for every cross-border payment stream, and transfer-pricing documentation with the burden-shifting study for material intercompany flows. Incentive-regime companies must track qualifying income, nexus ratios and export conditions annually; closely held companies must monitor the accumulated-profits and profitability tests before year-end dividend decisions. Groups in QDMTT scope face GloBE data collection from 2026, and reportable-position and reportable-transaction disclosures should be reviewed with each filing. Rulings are widely used and materially de-risk reorganisations, option plans and fund structures.