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 2025 (same rate as in 2024).

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).

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 company that is directly or indirectly held or controlled by no more than five individuals (taking into account certain relatives). 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 his 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 employment income classification 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.

Closely held companies - excess profitability

As of 2025, when the profitability of a closely held company (defined as taxable income divided by gross income) from active 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 active 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 each controlling shareholder's taxable income and subject to tax at the controlling shareholder's marginal tax rate.

Closely held companies - tax on accumulated profits

As of 2025, closely held companies are generally required to pay an annual tax of 2% on certain accumulated profits.  A closely held company is generally defined as a 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). 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 during 2025) 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.

Closely held companies - winding up the structures

In light of the reduced attractiveness, for Israeli tax purposes, of the utilization of closely held companies, and in order to incentivize the liquidation of such companies, a temporary provision has been enacted which 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 November 30, 2025, with the tax relief offered thereby contingent upon the tax liabilities arising from the transaction being paid by December 31, 2025.

Local income taxes

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