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Trapped Profits Law enacted in 2024:

02/04/2025
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The Trapped Profits Law, enacted at the end of 2024 and effective from January 1, 2025, represents a significant change in the taxation of closely held companies in Israel. The law aims to release "trapped" profits accumulated in companies over the years and increase the state's tax revenues.

Key Points of the Law

    1. Options for Companies: The law presents two main options:

  • Payment of an annual tax of 2% on undistributed profits.

  • Distribution of dividends at a rate of 6% of profits (5% in 2025) and exemption from the annual tax.

    2. Dividend Taxation: The tax on dividend distribution stands at 35% (including surtax), without offsetting of losses.

    3. Expansion of Section 62a: The law expands the provisions of Section 62a of the Income Tax Ordinance, dealing with taxation of substantial shareholders in closely held companies.

Scope of the Law

The law applies to:

  • Closely held companies (up to 5 shareholders) with turnover less than 30 million shekels

  • Holding and investment companies with significant passive equity

  • Professional service companies and freelancers

  • Medium-sized businesses

The law does not apply to public companies, industrial companies, construction ventures, and companies under the Law for the Encouragement of Capital Investments.

Additional Benefits and Conditions

  1. Safety Net: Tax liability will only apply to accumulated profits above 750,000 shekels.

  2. 2025 Benefit: Option to distribute only 5% dividend (instead of 6%) in 2025.

Impact on Various Sectors

  1. Real Estate Sector: Expected impact on the nature of real estate companies' activities, with a possible shift from income-producing properties to residential construction.

  2. Alternative Investments: Dividend funds may flow into the residential real estate market or other investment channels.

Criticism of the Law

  • Claims that the law taxes legitimate business companies that did not intend aggressive tax planning.

  • Concerns about passing tax costs to customers, potentially leading to price increases in the economy.

The Trapped Profits Law represents a significant change in the Israeli tax system, aiming to increase state revenues and change company behavior regarding profit distribution. Its long-term effects on the economy are still not entirely clear, and further developments on this issue should be monitored.

The abovementioned is not a recommendation. Any specific matter should be addressed privately.