Israel Tax Authority Proposes Higher Dividend Payouts and Property Tax

Israel's Tax Authority is considering two new measures for the 2027-2028 budget: increasing the mandatory profit distribution for closely held companies and reinstating property tax on vacant land. These proposals, presented by Tax Authority Director Shai Aharonovich, aim to generate revenue without raising VAT or income tax, especially as defense spending is expected to remain high.

The first proposal involves raising the required annual distribution of accumulated profits in small companies from 6% to 8%. This rule, set to take effect in early 2025, applies to companies with up to five shareholders and over 750,000 shekels in accumulated profits, primarily affecting professionals, executives, and family businesses. Currently, these companies can either distribute 5% or 6% of profits annually as dividends or pay a 2% tax on undistributed profits. The proposed increase to 8% would raise the tax burden on dividends for affected companies, potentially increasing annual tax payments by a third. The Tax Authority will review the measure's impact on growth in 2027, with possible adjustments.

The second proposal seeks to reintroduce property tax on vacant land, which has been at zero since 2000. The proposed tax would be 1.5% annually of the land's value, with exemptions for land valued below 60,000 shekels per dunam and a total exemption up to 250,000 shekels per taxpayer. The proposal also includes deductions for agricultural land. This measure is intended to incentivize construction or sale of land rather than holding it for appreciation. Private individuals hold approximately 300 billion shekels in land, while companies hold about 500 billion shekels. The proposal has faced criticism regarding its assessment mechanism and the lack of a supporting computer system, and it awaits legislation.

Both proposals are still distant from becoming law and will need to pass through the next government and the subsequent Arrangements Law, where significant opposition is expected from professional bodies, contractors, and Knesset members. Contractors argue that bureaucratic delays, not land hoarding, cause construction delays, and that the tax would be passed on to homebuyers. The Israel Electric Corporation has also warned that taxes on its land could lead to increased tariffs.