Israel's trapped-profits trap snaps shut.
From 1 January 2025, Section 81 of Israel's Income Tax Ordinance subjects every closely-held company with accumulated retained earnings above NIS 750,000 (≈€185,000) to a four-pathway annual choice: distribute a 6% dividend, distribute more than half of excess profits, prove the company has none, or absorb a 2% surtax. The choice repeats every fiscal year, and the surtax cannot be offset against any other tax in any future year.
01The pain
Seven hundred and fifty thousand shekels. That is where the trap snaps shut. Above NIS 750,000 (≈€185,000) of accumulated retained earnings, every closely-held Israeli company (five-or-fewer shareholders, not public, not a subsidiary) must pick a pathway by 31 December or pay a 2% surtax on what the Israel Tax Authority (ITA) calls "excess profits".1 Section 81 of the Income Tax Ordinance took effect 1 January 2025.2
The choice repeats every fiscal year. Distribute a dividend of 6% of accumulated profits (5% only in 2025). Distribute more than half of excess profits. Prove the company has none. Or absorb the 2% hit, uncreditable and undeductible.3 The Treasury (Israel's Ministry of Finance) is targeting NIS 10 billion (≈€2.5 billion) in fresh revenue.1 Self-employed incorporations under NIS 30M turnover face a parallel trap: profitability above 25% of revenue classifies the firm a "profitable closely-held company" under Section 62A and triggers a 50% marginal rate on the excess.2 Draft regulations defining "bad surpluses" landed 20 January 2025.3
Wrong pathway is unrecoverable. Once paid, the 2% cannot be offset against any other tax in any future year. Tens of thousands of holding vehicles, family businesses and one-person professional incorporations now run a four-way optimisation each December, with foreign shareholders recalculating whether their foreign-tax-credit relief survives the move.4
Further reading
- 1 Jerusalem Post, business & finance — coverage of the Economic Efficiency Act amendments to Israel's Income Tax Ordinance, the NIS 10 billion Treasury revenue target, and the four pathways for closely-held companies (English): jpost.com
- 2 Barnea Jaffa Lande — "Israeli Tax Reform for 'Closely Held Companies'" (Section 81 effective date, four pathways, NIS 750,000 retained-earnings threshold, Section 62A 50% marginal rate above 25% profitability for sub-NIS-30M turnover, English): barlaw.co.il
- 3 Herzog Fox & Neeman — "Taxation of Undistributed Profits and Personal Service Companies" (4-pathway mechanics, "bad surpluses" classification under draft regulations 20 January 2025, uncreditable 2% surtax structure, English): herzoglaw.co.il
- 4 CWS Israel — "Israeli tax changes 2026: complete guide" (foreign-shareholder foreign-tax-credit interaction, 2026 phase-in, English): cwsisrael.com
02Who solves this today
Three Israeli tax practices that publish dedicated client updates on the Section 81 trapped-profits regime on their own websites and offer their tax department to advise closely-held companies on the pathway choice — the route an Israeli founder or family-business CFO actually takes when the Q4 deadline approaches. Each was checked live on the date of writing. The list is intentionally narrow.
Listed providers publicly market to the Israel Section 81 / closely-held-company / trapped-profits / 2% surtax planning niche on their own client-update or news pages. Inclusion is not endorsement. Adjacent vendors and firms were considered and excluded where their public homepage did not explicitly name the niche at the date of writing — CWS Israel (cwsisrael.com) returned HTTP 200 but the homepage marketed Employer-of-Record, payroll outsourcing and digital-reporting compliance services rather than closely-held-company tax planning, so it is referenced in section 01 as a trade-press citation rather than listed as a third-party solution; KPMG Israel (kpmg.com/il) returned HTTP 200 but the tax-services page surfaced only generic international-tax / transfer-pricing / global-mobility lines with no Section 81 / closely-held-company / trapped-profits service line, so it was dropped; Deloitte Israel (deloitte.com/il) returned HTTP 200 but the tax-services page covered only Corporate / International / Indirect / Transfer Pricing taxation with no Section 81 reference, so it was dropped; PwC Israel (pwc.com/il) returned HTTP 403 on the tax-services page probed and the niche could not be confirmed at the front-page level, so it was dropped pending re-check; EY Israel (ey.com/en_il/services/tax) returned HTTP 404 on the tax-services page probed, so it was dropped pending re-check; Pearl Cohen tax (pearlcohen.com/practices/tax) returned HTTP 200 but the page focused on transfer-pricing and Domestic Tax with no Section 81 / closely-held reference, so it was dropped; Shibolet (shibolet.com/practice/tax) returned HTTP 200 but the practice page referenced civil/criminal/income/VAT/international tax broadly with no closely-held-company or trapped-profits language, so it was dropped; FBC & Co. (fbclawyers.com/practices/tax) returned HTTP 200 but listed only coronavirus-relief, municipal-tax-discount, real-estate professional-activity, bad-debt-deductions and ESOP updates with no Section 81 reference, so it was dropped; Goldfarb Seligman (goldfarb.com/practices/tax) returned HTTP 403, Yigal Arnon (yigalarnon.com/practices/tax) returned ECONNREFUSED, Doron Tikotzky Kantor Gutman (dtkgmlaw.com) returned ECONNREFUSED, Meitar (meitar.com/Practice/Detail/3) returned HTTP 404 — all four dropped pending re-check; Trullion, Hyp, Sweep, Sumit, Komo, Papaya Global IL, Deel IL, Hashavshevet, Rivhit, Priority and Hilan were considered as tax-tech / accounting-platform candidates but did not surface a public closely-held-company / Section 81 / trapped-profits / 2% surtax / 6% deemed-dividend planning module on their homepages at the date of writing, so all were dropped pending re-check (the niche today is professional-services advisory, not a packaged software offering — which is precisely the wedge the third TL;DR bullet describes). The Israel Tax Authority and Ministry of Finance — the rule-makers publishing Section 81 guidance, draft "bad surpluses" regulations and the April 2026 digital-reporting API — are referenced in section 01 as the regulators rather than listed as third-party solution providers. Jerusalem Post is referenced in section 01 as a trade-press citation; Barnea, Herzog Fox & Neeman and S. Horowitz double as solution providers because their own front-line client updates self-market specific Section 81 advisory capabilities.
Listed companies — manage your entry. If you are one of the providers above and anything here is wrong, missing, or out of date — or you'd rather not be listed — write to us. Removal within 24 hours; corrections within 7 business days. We do not contact listed companies first; we publish what your own public marketing claims and respond when you reach out. Email contact@aikraft.com.