Israel’s Knesset has passed the Trapped Profits Law (tax on excess undistributed profits) on 29 December 2024.
The law imposes a 2% tax on excess undistributed profits of closely held holding companies (entities with five or fewer shareholders), applicable from 2025.
‘Trapped profits’ are company profits taxed at 23% but face additional income tax of up to 30% (plus surtax) if distributed as dividends.
Companies can avoid the 2% tax by distributing at least 6% of the previous year’s profits, or 5% for 2025, if the distribution is made by November 2025 and the tax paid by December 2025.
Privately held companies may distribute 50% of the previous year’s excess profits instead. The surtax won’t apply in years with losses exceeding 10% of the previous year’s profits. Certain profits are also exempt from ‘Trapped profits,’ including income from preferred enterprises, Israeli industrial companies, long-term construction projects, and financial institutions.
