Israel Tax Authority Plans to Raise Mandatory Dividend Payout to 8%

The Israel Tax Authority is reportedly planning to increase the mandatory dividend payout for companies from the current 6% to 8%. This move, intended to bolster state coffers ahead of the 2027-2028 budget and settlement law preparations, directly contradicts calls from the business sector and experts to either abolish or ease the "trapped profits" reform, which is set to take effect in early 2025.

The Tax Authority anticipates this change will generate an additional 1 to 2 billion shekels annually, adding to the significant revenue already collected from the "trapped profits" reform, which yielded approximately 20 billion shekels in its first year, double initial estimates. About 10 billion shekels of this came from dividend distributions, with an expected additional 2 billion shekels before the 2025 fiscal year closes. The authority is also considering a temporary order to allow companies a transition period to distribute dividends at the old rate before the new percentage takes effect, a move expected to inject immediate liquidity into the treasury.

This new regulation specifically targets "closed companies" with up to five shareholders, which are currently required to distribute at least 6% of their accumulated profits annually as dividends or pay a 2% penalty tax on retained earnings. The Tax Authority aims to raise this mandatory threshold to 8% to secure additional funding amid a growing budget deficit.

Shai Aharonovich, Head of the Tax Authority, stated that "decisive and difficult steps" are necessary, potentially raising the distribution requirement to 8% from 6% due to insufficient state liquidity. He acknowledged the criticism but dismissed the idea of canceling the law, noting that the alternative would be to find funds from other sources, as the state is not heading towards years of financial surplus.

However, the proposed increase has sparked anger and opposition from professional committees and business representatives. Yaron Gindi, Head of the Tax Consultants Union, warned that these measures would "necessarily lead to the depletion of companies' investment allocations, harming future growth and economic activity." Legal and tax experts also cautioned that forcing companies to liquidate their cash reserves deprives them of building emergency funds and expanding operational investments, urging a distinction between profits withheld for tax evasion and those designated for business development and economic stability.