Accumulated Profits in a Company
There are quite a few ways to explain the continued increase in the State’s tax revenues. Part of the answer lies in a relatively strong labor market, part in the activity of large companies and the financial markets, and part in broad legislative changes. Alongside all of these, another trend has become clearer in recent years: tax law and enforcement processes are focusing not only on tax rates themselves, but also on the timing of tax payment, the route through which the tax is paid, and the ability of company owners to defer tax payment over time.
According to the budget document published by the Ministry of Finance in January 2026, revenues from taxes and fees in 2025 amounted to ₪519.5 billion, a real increase of 10.7% compared with 2024. The same document states that the tax revenue forecast for 2026 was updated to ₪553.4 billion, and the forecast for total revenues to ₪577.9 billion. Direct taxes alone increased from ₪255.3 billion in 2024 to ₪302.7 billion in 2025, while indirect taxes increased from ₪191.2 billion to ₪206.6 billion.
Taxation of Corporate Profits
Recently, the Israel Tax Authority has placed corporate taxation under closer scrutiny. In the past, controlling shareholders and certain company owners could leave profits inside the company and choose when to withdraw salary and when to distribute dividends. Today, that flexibility is no longer neutral from the Authority’s perspective. Instead of waiting years until the money leaves the company, it is creating mechanisms that make the deferral more expensive or less worthwhile.
As a general matter, tax on activity carried out through a company is built in two layers: corporate tax at the company level, followed by an additional tax at the shareholder level when the profit is actually distributed to the shareholder, for example as a dividend. As long as the money remains inside the company, the second stage can be deferred. For company owners, this was for many years a legitimate planning space, at least in some cases. From the State’s perspective, it is also an area in which tax revenues may be deferred for a long period of time.
As of January 1, 2025, the rate of Value Added Tax (VAT) increased from 17% to 18%, and during the same period an additional surtax of 2% was also imposed on income that is not employment income, including capital income. At the same time, a new arrangement was established for the taxation of undistributed profits. The Ministry of Finance itself linked these changes to the increase in tax collection, noting that revenues from indirect taxes increased in real terms by 4.8% during that period, among other things against the background of the VAT increase, and that the tax changes also included taxation of undistributed profits and an increase in the surtax on income that is not employment income.
The Law on Undistributed Profits
The Economic Efficiency Law concerning the taxation of undistributed profits was passed by the Knesset on December 31, 2024. According to the Knesset’s announcement and the text of the law published in the official law records, the mechanism is intended to address situations in which shareholders in closely held companies leave profits inside the company over time, sometimes even where there is no clear business need to do so, thereby deferring the tax applicable to them at the individual level. The Knesset explained that self-employed individuals and employees are required to pay the full tax applicable to them when the income is produced, whereas activity through a company allows the individual-level tax to be deferred until the profits are distributed.
Under the approved arrangement, in certain cases the company may be subject to an additional tax of 2% per year on undistributed profits, beyond a tax shield of ₪750,000 set for companies with genuine business activity. In addition, a route was established that reduces exposure where a dividend is distributed at a rate of 6% or more of the amount of accumulated profits at the end of the previous tax year, together with various exceptions and additional adjustment mechanisms. In other words, the State has not prohibited the accumulation of profits, but it has changed the cost of prolonged accumulation where it is not viewed as necessary for the business activity.
The budget document published by the Ministry of Finance states that the item titled “Taxation of Undistributed Profits and Professional Service Companies” is expected to add ₪4.8 billion to collections in 2026 and a further ₪1.5 billion in 2027, before gradually declining in the following years. This means that, even according to the official estimates, this is a measure that can account for additional annual tax collection of several billion shekels, within a range consistent with public estimates of ₪3-5 billion per year.
The importance of this figure is not only the amount itself. It lies in the fact that it reflects an expectation of a behavioral change. If companies were to continue operating exactly as they did before, it would be difficult to expect such significant collection. The practical meaning is that the State assumes that some company owners will prefer to distribute dividends, update their salary policy, or re-examine their corporate structure, rather than pay the additional tax on accumulation.
Not Only Dividends: Salary Withdrawals as Well
One of the important developments in the discussion around the law is that the debate does not stop at the question of whether a dividend was distributed. In practice, where a controlling shareholder generates most of the income through a company, withdraws a relatively low salary, and leaves substantial profits inside the company for years, the Israel Tax Authority may view this as an indication that the structure is intended, among other things, to defer tax. The new law therefore pushes not only toward the distribution of dividends, but also toward a renewed review of the appropriate salary of the controlling shareholder, the business justification for accumulating the funds, and the relationship between the company and its owners. This is one of the reasons why the law naturally connects to the discussion around wallet companies and activities that are heavily dependent on personal effort.
This side of the story is especially important for the broader public, because it makes clear that the goal is not to “punish” everyone who operates through a company. The goal is to reduce situations in which a person can choose for years whether to pay the second layer of tax, while someone who operates as an employee or self-employed individual pays it in real time. From the Israel Tax Authority’s perspective, this is a move toward aligning different forms of activity, even if in practice it mainly affects those who have until now enjoyed greater flexibility.
To understand how broad this approach is, it is worth looking at other measures taken by the Israel Tax Authority as well. The State Comptroller’s report from June 2026 on the “Israel Invoices” system describes a transition to a real-time control tool that makes it possible to identify irregular invoices, prevent the allocation of a number to a tax invoice, and block the use of that invoice for the purpose of deducting input tax until a full review is completed. According to the report, from January 1, 2025 through December 18, 2025, approximately 15 million invoices were issued through the system, with an aggregate amount of ₪763 billion. Of these, invoices with a monetary value of ₪42 billion were rejected, representing 5.5% of the monetary volume reviewed.
Here too, as with the law on undistributed profits, the Israel Tax Authority is not content with late-stage action after the event has already been completed. It is trying to intervene earlier, shape behavior, and prevent tax loss in real time.
So Who Are the “Wealthy Individuals” This Measure Actually Affects?
The measure mainly affects those who have control over the timing of tax. This may include a controlling shareholder in a private company, a professional operating through a closely held company, a veteran entrepreneur who has accumulated profits inside a company, or a family that holds activity and assets through a corporate structure. Not all of them are “wealthy” in the public sense of the word, but each of them may have greater flexibility in deciding whether to withdraw salary, whether to distribute dividends, and whether to leave profits in the company. It is precisely this flexibility that the State is now seeking to reduce.
Not Every Accumulation of Profits Is a Problem
It is also important to state the other side. Not every profit that remains in a company is “suspect,” and not every failure to distribute a dividend indicates aggressive tax planning. Many companies need capital for investments, expansion of activity, purchase of equipment, recruitment of employees, cash-flow management, or maintaining a safety cushion. The legislator itself recognized this by applying a complex mechanism rather than a blanket prohibition, and by establishing a tax shield and various exceptions. Therefore, the real question is not only whether profits have been accumulated, but why they were accumulated, what was done with them, whether there is a genuine business justification for leaving them in the company, and whether the rationale behind the decision can be documented.
Sometimes, the difference between legitimate accumulation and exposure begins with the small details: whether there is an orderly distribution policy, whether salary levels have been updated over the years, whether the funds are designated for a clear investment, and whether the documents reflect what is actually being done. In this reality, the risk is not only tax-related. It is also evidentiary, corporate, and sometimes familial or contractual, because funds that “feel private” remain, from a legal perspective, inside the company.
Illustrative Example Only
Assume a professional has been operating through a private company for years. The company has accumulated profits of ₪4 million, the salary he withdrew over the years remained relatively low, and dividends were barely distributed. From his perspective, this was a convenient way to keep money “on the side” until he decided what to do with it. In the past, this structure may have seemed reasonable to him. Today, the same choice is no longer self-evident. If the company falls within the relevant arrangement, a tax cost may arise simply from the non-distribution. In any event, questions will certainly arise as to whether the salary level, the distribution policy, and the business justification for the accumulation still fit the new regulatory reality. This is, of course, an illustrative example only, and each case requires an individual review.
What Should Be Understood from This?
The story here is broader than one law. The Israel Tax Authority is currently operating not only through assessments and audits, but also by shaping incentives. The increase in VAT to 18%, the additional 2% surtax on income that is not employment income, the taxation of undistributed profits, and real-time control mechanisms such as “Israel Invoices” all point to the same trend: less tolerance for tax deferral, a greater desire to see tax paid closer to the time the income is generated, and greater attention to structures that allow overly broad flexibility.
For the broader public, this does not mean that everyone who operates through a company should panic or rush to distribute a dividend. It does mean that old assumptions should be re-examined. What was acceptable or convenient a few years ago does not necessarily stand at the same point of balance today in terms of the law, enforcement, and risk.
Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team is composed of professionals with years of experience at the Israel Tax Authority, alongside experience at leading firms and law offices, bringing together a legal and economic perspective. We advise private and public companies, Israeli and foreign companies, global venture capital funds, and clients seeking focused advice in clear and accessible language. We also work with a professional network of accounting firms and law firms around the world, in order to provide a full support framework in cross-border matters.
If you operate through a company, have accumulated profits over the years, or wish to understand whether your existing activity structure still fits the current regulatory environment, it may be advisable to conduct an early review of salary policy, distributions, documentation, and potential exposure, before decisions are made under pressure and before friction with the Israel Tax Authority arises.
FAQ
Is every company with accumulated profits automatically subject to additional tax?
No. The liability depends on the type of company, the amount of profits, the exceptions under the law, and whether there is a business justification for the accumulation.
Does the law always require a dividend distribution?
No. The law creates a distribution incentive in certain cases, but it does not require every company to distribute in every situation.
Does this apply only to tycoons?
Not necessarily. The measure may also be relevant to owners of private companies, professionals, and entrepreneurs who operate through a company.
What should be reviewed now?
It is advisable to review salary policy, distributions, the purpose of the accumulation, documentation, and whether the current structure still fits the law and practice.
