Key points
- Gross dividend = requested net amount ÷ (1 − dividend tax rate).
- Profit before tax needed in the company = dividend ÷ (1 − 23%).
- Above the surtax threshold, a larger distribution is needed to receive the same net amount.
A common client question is how large a dividend the company must distribute so that the shareholder receives a certain net amount. The reverse computation — from the net amount to the gross amount — is called grossing up.
The basic computation
Gross dividend = requested net amount ÷ (1 − dividend tax rate). Profit before tax needed in the company = gross dividend ÷ (1 − corporate tax rate).
Example
A substantial shareholder (30% dividend tax) wants to receive ILS 700,000 net, and their total income does not exceed the surtax threshold.
- Gross dividend: 700,000 ÷ 70% = ILS 1,000,000.
- Dividend tax: 1,000,000 × 30% = ILS 300,000.
- Profit before tax needed in the company: 1,000,000 ÷ 77% = ILS 1,298,701.
The effect of the surtax
If the shareholder's annual income (including the dividend) exceeds the surtax threshold, a 5% surtax applies to the part above the threshold — so a larger distribution is needed to receive the same final net amount.
Net on the distribution date vs. final net
The company withholds tax at the dividend tax rate only. The surtax is paid with the annual return or through advance payments — so the amount the shareholder receives on the distribution date is higher than what they will finally keep.
Another example — a shareholder who is not substantial
A shareholder who is not substantial (25% dividend tax) wants to receive ILS 750,000 net, and their total income does not exceed the surtax threshold.
- Gross dividend: 750,000 ÷ 75% = ILS 1,000,000.
- Dividend tax: 1,000,000 × 25% = ILS 250,000.
- Profit before tax needed in the company: 1,000,000 ÷ 77% = ILS 1,298,701.
Recommended work order
- Set the requested net amount.
- Determine the dividend tax rate that applies to the shareholder.
- Estimate the shareholder's total income, to review the surtax.
- Compute the gross dividend and the profit before tax needed in the company.
- Review the company's ability to distribute — the profit test and the solvency test.
Frequently asked questions
Why is the amount received higher than the final amount? The company withholds only the dividend tax, and the surtax is paid later.
Does the gross-up take corporate tax into account? Yes — when computing the profit before tax needed in the company, the corporate tax rate is taken into account.
Sources
- Income Tax Ordinance, sections 121B, 125B and 126
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.