The substantial shareholder

The term "substantial shareholder" is used in many provisions of the Income Tax Ordinance, above all in setting the tax rate on dividends. Misclassifying a shareholder may lead to withholding at the wrong rate.

The definition — section 88 of the Ordinance

A substantial shareholder is someone who holds, directly or indirectly, alone or together with another, at least ten percent of one or more of the means of control in the company — such as the right to profits, the right to appoint a director and the right to vote at the general meeting.

"Together with another" — relatives

Holding "together with another" includes holding together with a relative, and with someone who regularly cooperates with the holder under an agreement on material matters of the company. So two siblings each holding 6% are both substantial shareholders.

Main consequences

• Dividend tax: 30% for a substantial shareholder, compared with 25% for other shareholders.
• Section 3(t1): withdrawals by a substantial shareholder not repaid by the end of the following tax year may be treated as income.
• The "controlling shareholders" test for the turnover ceiling in section 62A(a1) — relatives count together.

Example

A shareholder holds 8% of the company and their brother holds 4%. The company distributes a dividend of ILS 100,000 to the shareholder.

• Holding together with a relative: 8% + 4% = 12% — a substantial shareholder.
• Dividend tax: 100,000 × 30% = ILS 30,000 (and not ILS 25,000).

Frequently asked questions

Is indirect holding included? Yes — holding through another company is also included in the test.

Is holding 10% of the right to profits alone enough? Yes — holding 10% of one of the means of control is enough.