Israel

Israel-incorporated companies and foreign companies that have a branch presence in Israel are both subject to Israeli corporate tax. An Israeli-resident entity is subject to Israeli corporate tax on worldwide income while a non-resident entity is subject to Israeli corporate tax only on income accrued or derived in Israel. Income sourcing rules determine when income is to be considered from an Israeli source.

The corporate tax rate is 23% in 2026 (same rate as in 2025).

Business operations qualifying under the Encouragement of Capital Investments Law are entitled to reduced rates of tax depending upon their location and other conditions (see the Tax credits and incentives section), although a qualifying domestic minimum top-up tax (QDMTT) shall apply for relevant groups for tax years beginning after December 31, 2025 (see below).

Pillar Two

In accordance with the OECD's Pillar Two recommendations, the Knesset (the Israeli parliament) recently passed a law which will implement a qualifying domestic minimum top-up tax (QDMTT) for multinational enterprise (MNE) groups with annual global revenue of at least EUR 750 million. Such MNE groups will be required to pay a top-up tax where their Israeli operations have an effective tax rate of less than 15%. The QDMTT shall apply for tax years beginning after December 31, 2025. The QDMTT legislation incorporates the OECD Model rules, together with OECD Guidance and Commentary to date. Future updates to the OECD Model rules, Guidance and Commentary, as well as Israel-specific rules, are expected to be incorporated into the QDMTT legislation via regulations. Detailed rules apply regarding the implementation of the QDMTT legislation, including with respect to the calculation and the reporting requirements.  

Closely held companies

Tax on current income

A provision in Israeli tax law effectively lifts the corporate tax veil of a closely held company that provides services to another company (the ‘other company’) in certain circumstances. A closely held company is generally defined as a private company that is directly or indirectly held or controlled by no more than five individuals (with certain relatives or partners in a partnership viewed as a single individual). This provision is generally intended for situations when an individual controlling shareholder in the closely held company (‘individual’) is providing officer or management type services to the other company or services that are of the type that are generally performed by an employee for one's employer. In such a case, the income shall not be taxed to the closely held company but, rather, shall be taxed to the individual as employment income, business income, or other income, depending upon the circumstances. The income reclassification shall apply if 70% or more of the total income or taxable income of the closely held company in the tax year is sourced from the services performed by the individual or the individual's relatives for a single entity during a period of at least 22 months during a three-year period. Certain exclusions apply.

Excess profitability

As of 2025, when the profitability (defined as taxable income divided by revenue) of a closely held company (as defined above) from business activity (i.e. income from any source other than interest, dividends, rent, consideration for the sale of assets, income from securities that constitute business inventory, consideration from the sale of real estate in Israel or abroad, or the shares of real estate companies) exceeds 25%, an active shareholder's (defined as a shareholder holding 30% or more of at least one of the means of control of the closely held company or a shareholder holding less than 30% thereof who is involved in generating the business income of the closely held company or involved in the management of the closely held company) pro-rata share of the income constituting the excess profitability (i.e. exceeding 25%) is included in the active shareholder's taxable income and subject to tax at the active shareholder's marginal tax rate.

Another new provision applicable as of 2025 applies with respect to a closely held company that holds a stake in a partnership. In this respect, to the extent that the closely held company holds at least 10% in the partnership, the company's pro-rata share of the partnership's income and expenses is taken into account for purposes of the company's calculation of whether its profitability exceeds 25%. If, however, the closely held company holds less than 10% in the partnership, 55% of the closely held company's pro-rata share of the profits of the partnership is included in the controlling shareholders' taxable income and subject to tax at the controlling shareholders' marginal tax rates.

Tax on accumulated profits

As of 2025, closely held companies (as defined above) are generally required to pay an annual tax of 2% on certain accumulated profits. The tax on undistributed profits may be avoided if the company distributes a dividend equal to: (i) at least 6% (5% in 2025 – so long as the tax is paid by 15 January 2026) of its accumulated profits as of the end of the prior tax year or (ii) more than 50% of its accumulated profits less certain deductions. Detailed rules apply.

Winding up the structures

In light of the reduced attractiveness, for Israeli tax purposes, of the utilisation of closely held companies (as defined above), and in order to incentivise the liquidation of such companies, a temporary provision has been enacted that provides certain tax relief with respect to the liquidation of closely held companies or the non-liquidation transfer of assets (be they real estate assets or non-real estate assets) therefrom. This temporary provision is in force through 30 November 2025, with the tax relief offered thereby contingent upon the tax liabilities arising from the transaction being paid by shortly after the approval mentioned below is obtained (the deadline for liquidations has been extended to 31 January 2026). The implementation of the temporary provision is subject to the approval of the requisite application that must be submitted by the taxpayer to the Israel Tax Authority (ITA) and the subsequent fulfilment of certain reporting requirements. 

Local income taxes

Israel does not impose district or local taxes on corporate income.