Key points
- Tax rate: 25% for a shareholder who is not substantial, and 30% for a substantial shareholder (holding 10% or more).
- Surtax: 3%, plus 2% on income that is not from personal exertion, on the part above ILS 721,560 (2025–2026).
- On distribution, only the dividend tax is withheld at source; the surtax is paid with the annual return.
A dividend that a company distributes to an individual shareholder is taxable in the shareholder's hands, in addition to the corporate tax paid on the profit in the company. The rate depends on whether the shareholder is a "substantial shareholder".
Tax rates
- A shareholder who is not substantial (holding less than 10%) — 25%.
- A substantial shareholder (holding 10% or more) — 30%.
- A dividend from a preferred enterprise or preferred technological enterprise — as a rule, a reduced rate (see the article on trapped profits).
Surtax
A 3% surtax applies to the part of total annual income above ILS 721,560 (in 2025–2026). From tax year 2025, an additional 2% surtax applies to income that is not from personal exertion — such as dividends, interest and capital gains. So the part of the dividend above the threshold bears a total surtax of 5%.
Example
A substantial shareholder whose other income in the tax year is ILS 400,000 receives a dividend of ILS 1,000,000.
- Dividend tax: 1,000,000 × 30% = ILS 300,000.
- Total income: 400,000 + 1,000,000 = ILS 1,400,000.
- The part of the dividend above the threshold: 1,400,000 − 721,560 = ILS 678,440.
- Surtax: 678,440 × 5% = ILS 33,922.
- Total tax: 300,000 + 33,922 = ILS 333,922 — an effective rate of about 33.4%.
Withholding at source vs. the annual return
On distribution, the company withholds tax at the dividend tax rate only. The surtax is paid with the annual return or through advance payments — so the net amount the shareholder receives on the payment date is higher than the final net amount.
Another example — a shareholder who is not substantial
A shareholder holding 5% of the company receives a dividend of ILS 100,000, and their total income does not exceed the surtax threshold.
- Dividend tax: 100,000 × 25% = ILS 25,000.
- Surtax: none, since total income does not exceed the threshold.
- Net amount: 100,000 − 25,000 = ILS 75,000.
Recommended work order
- Check the shareholder's holding — is the shareholder substantial?
- Compute the dividend tax at the applicable rate.
- Estimate the shareholder's total income for the tax year, including the dividend.
- Compute the surtax on the part above the threshold.
- Plan the advance payments or the payment with the annual return.
Frequently asked questions
Who is a "substantial shareholder"? Someone who holds, directly or indirectly, alone or together with another, at least 10% of one of the means of control in the company.
Does withholding at source settle the tax liability? For the dividend tax — generally yes. The surtax is not withheld and is paid with the annual return or through advance payments.
Notes
- The surtax threshold is updated from time to time; the amount stated is correct for 2025–2026.
- Different rates may apply to a non-resident under a double taxation treaty.
Sources
- Income Tax Ordinance, sections 125B and 121B
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.