Key points
- The transition rule applies only to excess profits accumulated up to 31.12.2024.
- In tax year 2025 — distributing 20% of them is enough, instead of more than 50%.
- In 2026–2030 — a separate computation: 20% of the remaining old profits, and 50% of profits accumulated from 2025.
Many companies accumulated profits for years before sections 81A–81F came into force. So that they would not have to distribute large amounts at once, a transition rule was set for 2025–2030.
Scope
The transition rule applies to every company to which the sections apply, and it relates only to excess profits accumulated up to 31.12.2024.
Tax year 2025
In the exemption test of distributing excess profits, instead of distributing more than 50% of them, it is enough to distribute 20% of the excess profits accumulated up to the end of 2024.
Tax years 2026–2030
The computation is made separately for two components:
- Excess profits accumulated up to 31.12.2024, less the dividend already distributed from them when applying the section in previous years — a distribution of 20% is required.
- Excess profits accumulated from 1.1.2025 — a distribution of more than 50% is required, as usual.
Example
A company has excess profits of ILS 1,000,000 as at 31.12.2024.
- 2025: required distribution under the transition rule — 1,000,000 × 20% = ILS 200,000. The company distributed this amount.
- 2026: remaining old excess profits — 1,000,000 − 200,000 = ILS 800,000; required distribution for them — 800,000 × 20% = ILS 160,000.
- In addition, new excess profits of ILS 300,000 accumulated in 2025; the required distribution for them is more than 50%, i.e. ILS 150,001.
- Total distribution required in 2026 under the transition rule: 160,000 + 150,001 = ILS 310,001.
Note that the company may also use the exemption alternative of distributing 6% of accumulated profits, and may meet the lower of the two.
Required documentation
For a correct computation in later years, the balance of excess profits as at 31.12.2024 and the dividend distributed from it should be kept every year. In the calculator, these figures are saved in the client file from year to year.
Continuing the example — 2027
Continuing the example above, assume the company distributed the full required amount in 2026.
- Remaining excess profits accumulated up to 31.12.2024: 800,000 − 160,000 = ILS 640,000.
- Required distribution for them in 2027: 640,000 × 20% = ILS 128,000.
- To this, add a distribution of more than half of the excess profits accumulated from 1.1.2025, as computed for 2027.
Recommended work order
- Determine the balance of excess profits as at 31.12.2024 — from the computation for tax year 2025.
- Record the dividends distributed from it each year when applying the section.
- Compute the balance at the start of the year under review.
- Compute the required distribution: 20% of the balance, plus more than half of the new excess profits.
- Compare with the exemption alternative of 6% of accumulated profits, and choose the lower.
Frequently asked questions
Does the transition rule apply only to certain companies? No. It applies to every company to which sections 81A–81F apply, as long as the excess profits were accumulated up to 31.12.2024.
What happens after 2030? The transition rule applies only in 2025–2030; afterwards the regular exemption tests apply.
Sources
- Income Tax Ordinance, sections 81A–81F (Amendment 277) — transition rule
- 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.