IsraelLawIsraeli Corporate Income Tax: A Complete Guide for Foreign-Owned Companies
Most foreign investors who set up an Israeli subsidiary think about the incorporation costs, the shareholders agreement, the bank account, and then receive their first Israeli tax bill with genuine surprise. Unlike many jurisdictions, Israel does not offer a lower introductory rate for startups, a participation exemption on subsidiary profits, or a territorial exemption for foreign-source income at the company level. An Israeli company that earns NIS 5 million in its first full year owes NIS 1.15 million in corporate tax, payable in monthly installments that start flowing before the profit is even recognized.
This guide covers the Israeli corporate income tax system as it applies to foreign-owned entities: the rate, the taxable base, how advance payments are calculated, how to file, what happens when profits are distributed to a foreign parent, and which reduced-rate regimes might apply to a qualifying technology or preferred enterprise. The rules described here apply to an Israeli company (hevra) registered with the Registrar of Companies. A foreign company operating in Israel through a branch faces similar but not identical rules, and branch taxation is addressed separately.
1. The 23% Corporate Tax Rate
Section 126(a) of the Income Tax Ordinance sets the corporate income tax rate at 23%. This rate has been stable since 2018, when it was reduced from 24%. It is a flat rate with no graduated brackets and no minimum tax. A company that earns NIS 50,000 pays 23% on that amount; a company that earns NIS 50 million pays 23% on that. For a foreign investor used to US federal corporate rates (21%) or UK rates (25%), Israeli corporate tax looks roughly comparable. It is higher than some competitor jurisdictions for technology investment (Ireland charges 12.5% on trading income), which is why Israel supplements the standard rate with several preferential regimes for qualifying companies.
The 23% rate applies to income from all sources: operating profits, capital gains, interest, dividends received from other companies, rental income, and foreign-source income to the extent it falls within Israeli jurisdiction. There is no separate capital gains tax at the corporate level. When an Israeli company sells a building, a patent, or its shareholding in another company, the gain is computed under the applicable rules (real property gains under the Land Taxation Law, securities gains under Section 91 of the Ordinance, etc.) and then taxed at 23% as part of ordinary corporate income. The distinction between income and capital, which drives significant planning in many countries, is less important in Israel than knowing whether a particular gain falls within Israeli corporate jurisdiction at all.
2. Who Pays Israeli Corporate Tax
Israel taxes companies on a residence basis. A company incorporated in Israel is an Israeli tax resident regardless of where its shareholders live, where its management decisions are made, or where its customers are located. An Israeli-registered company owned by a US, UK, German, or Australian parent owes Israeli corporate tax on its worldwide income from the date of incorporation.
A foreign company not incorporated in Israel can still become an Israeli tax resident if its management and control is exercised in Israel. "Management and control" is determined by where key business decisions are actually made: where the board meets, where senior executives work, where contracts are negotiated and signed. A foreign company whose CEO, CFO, and board are all physically based in Israel for substantially all of the year may be treated as an Israeli resident company even with no Israeli registered address. This risk is most acute for family-owned foreign holding companies managed by owners who make aliyah without restructuring the holding structure.
For non-resident foreign companies that do have a fixed place of business in Israel — a branch, a significant Israeli office, or Israeli employees with authority to conclude contracts — Israeli corporate tax may apply to profits attributable to the Israeli permanent establishment under Section 4A of the Ordinance. The PE rules are addressed in a separate guide; the focus here is on Israeli-incorporated companies.
Every Israeli company must register for a tax file with the ITA within 30 days of incorporation. The tax file is distinct from the company registration at the Companies Registrar (Rasham HaChavrot) and from VAT registration. All three are required for a company conducting any business activity. Failing to register with the ITA within the 30-day window does not eliminate the tax liability — it generates penalty assessments from the date registration should have occurred, at approximately 1% of tax payable per month of delay under Section 196 of the Ordinance.
3. What Counts as Taxable Income
Israeli taxable income starts with the company's accounting profit computed under Israeli Generally Accepted Accounting Principles (Israeli GAAP or IFRS as adopted for Israeli reporting). That accounting profit is then adjusted for tax purposes. Five adjustments come up in almost every foreign-owned company's first audit.
Depreciation. Israeli tax regulations prescribe fixed depreciation rates for each asset class under the Income Tax Regulations [Depreciation Rules], 5741-1941. Accounting depreciation may differ. Tax depreciation on computers and peripheral equipment runs 33% per year; on motor vehicles, 15%; on industrial buildings, 2-4%. The annual tax depreciation table (luach hpchata) issued by the ITA controls, not the accounting policy.
Disallowed expenses. Expenses that are not "wholly and exclusively" incurred to produce taxable income are not deductible under Section 17 of the Ordinance. Owner-managers of foreign-owned Israeli subsidiaries who charge management fees to the Israeli company must have a contemporaneous written services agreement and arm's length pricing. Excessive management fees are a standard ITA audit focus.
Related-party pricing. Section 85A of the Ordinance requires that transactions between the Israeli company and its foreign affiliates be priced at market (arm's length). Transfer pricing documentation is mandatory for Israeli companies whose intercompany transactions exceed NIS 30 million per year. The ITA's Transfer Pricing Regulations (Income Tax Regulations [Determination of Market Conditions], 5766-2006) follow OECD guidelines. Penalties for non-compliance reach 20% of the underpayment.
Shareholder loan interest. Interest paid by an Israeli subsidiary to its foreign parent on shareholder loans is deductible, but the ITA tests whether the amount is arm's length and whether the loan is genuine debt rather than disguised equity under the Economic Substance Regulations.
Indexation. Israel's corporate tax does not apply CPI indexation to ordinary income. Inflationary gains on monetary assets and certain real property gains carry specific indexation rules under the Land Taxation Law, but for most operating companies the standard income statement figures (adjusted for the items above) form the taxable base.
4. Advance Tax Payments (Mikdamot)
Israeli corporate tax is not collected solely at year-end. Section 175 of the Ordinance requires every company to make monthly advance tax payments throughout the tax year. These payments, called mikdamot, are calculated as a percentage of each month's turnover (revenues), not of estimated profit. The percentage is set by the ITA at the start of each year based on the company's profit-to-turnover ratio from the prior year's return.
A company in its first year of operation has no prior-year ratio, so the ITA assigns a default advance payment rate (typically 2-4% of monthly turnover for a services company, higher for trading companies with lower margins). Once the first return is filed, the ITA recalculates the rate for the following year. If a company's profitability drops significantly mid-year, it can apply to the ITA to reduce its advance payment rate through a bakshat haktatana (reduction application) — but if the company underestimates and ends up underpaying, the shortfall attracts interest at the ITA's statutory rate.
Advance payments are due by the 15th of the following month. A company with NIS 500,000 in monthly revenue and a 20% advance payment rate owes NIS 100,000 to the ITA by the 15th of the following month, every month. At year-end, the total advance payments are compared to the actual tax liability. A company that overpaid receives a refund (with interest under Section 160 of the Ordinance); one that underpaid settles the balance when it files.
5. Filing the Annual Corporate Tax Return
Every Israeli company must file an annual corporate income tax return — Form 1220 (Doch Shnati LeHevra) — with the ITA. For companies that use the calendar year (January 1 to December 31) as their tax year, the filing deadline is May 31 of the following year. Companies with a non-calendar fiscal year have a deadline five months after the close of their accounting period. Extensions are available but require application; the ITA rarely grants blanket extensions.
Form 1220 is filed electronically through the ITA's Shaam online system. The return must be accompanied by:
- Audited or reviewed financial statements for the year (Israeli GAAP or IFRS)
- A reconciliation of accounting profit to taxable income (bridge statement)
- Depreciation and capital allowance schedules
- A list of related-party transactions and transfer pricing summary (if applicable)
- Details of any tax losses carried forward from prior years
- Certification by a licensed Israeli certified public accountant (roa heshbon musmach)
Filing the return does not automatically trigger an audit. The ITA selects a portion of returns for examination each year under a risk-based model. A company that first files on time, has consistent advance payments close to actual liability, no related-party transactions above NIS 30 million, and no unusual deductions is unlikely to be selected in any given year. A company that regularly files late, shows large adjustments between accounting profit and taxable income, or has significant intercompany flows is more likely to receive an assessment notice within the ITA's statutory assessment window: three years from the filing date (or from the date the return was due, if not filed) under Section 145 of the Ordinance. That window extends to seven years where the ITA can show intentional omission of income.
Tax losses from one year are carried forward indefinitely and can offset taxable income in future years. There is no carryback of losses to prior years. A company that accumulates NIS 2 million in losses in its first two years does not receive a refund of tax paid by other group members — the losses sit in the Israeli entity and reduce future Israeli taxable income only. Group loss relief (the ability to transfer losses between affiliated Israeli companies) is permitted under specific conditions in Section 62 of the Ordinance.
6. Dividends and Withholding Tax
When an Israeli company distributes profits to its shareholders, it withholds Israeli dividend tax before remitting. The withholding rate depends on who receives the dividend:
For individual Israeli shareholders, the rate is 25% — or 30% for "substantial shareholders" who hold 10% or more of any means of control under Section 88 of the Ordinance. Israeli companies receiving dividends from other Israeli companies are generally exempt under the inter-corporate dividend exemption in Section 126(b), which prevents double corporate-level taxation within Israeli groups. Non-resident shareholders, whether individuals or companies, face 25-30%, but bilateral tax treaties can reduce that significantly.
For a foreign parent receiving dividends from its Israeli subsidiary, the starting point is 25% withholding (or 30% if the parent holds 10% or more of any means of control). Most Israeli bilateral tax treaties reduce this rate significantly — the US-Israel treaty reduces it to 12.5% for qualifying US corporate shareholders; the UK-Israel treaty to 10% for a UK company holding at least 25% of the Israeli company. To access the treaty rate, the foreign parent must obtain a reduced-withholding certificate (nikui memas mekorot) from the ITA's International Tax Unit before the dividend payment. An application submitted after the dividend is paid is processed as a refund claim, which typically takes twelve to eighteen months.
The economics of dividend distribution matter more than the withholding rate alone. An Israeli company with NIS 2 million in profits pays NIS 460,000 in corporate tax, leaving NIS 1,540,000 of distributable profit. If the foreign parent then receives a dividend of NIS 1,540,000 and is subject to 12.5% Israeli withholding, the Israeli subsidiary withholds NIS 192,500 and remits the net NIS 1,347,500 to the parent. The combined Israeli tax burden on that profit cycle is NIS 652,500 (460,000 + 192,500), an effective rate of 32.6% on the pre-tax profit. Whether the parent can claim a foreign tax credit for the Israeli corporate and withholding tax in its home jurisdiction depends on that jurisdiction's rules.
7. Reduced Rates for Qualifying Companies
Israel offers preferential corporate tax rates through the Law for the Encouragement of Capital Investments [New Version], 5719-1959, as substantially amended in 2011 and 2017. Three regimes are most relevant to foreign-owned companies:
Preferred Enterprise
An Israeli manufacturing or technology company that meets the qualifying activity and export conditions can apply for Preferred Enterprise status. The tax rate on "preferred income" (income from qualifying industrial activity) is 16% for companies in central Israel, and 7.5% for companies located in defined development areas (ezor pituach), primarily the Negev and Galilee. The standard 23% rate continues to apply to non-preferred income. Preferred Enterprise status requires application to and approval by the Israel Innovation Authority (Reshut HaHishtalmut v'HaChidush, formerly the Office of the Chief Scientist) only for grant purposes; the tax status itself is a declaration made in the annual return based on meeting the statutory criteria.
Preferred Technological Enterprise (PTE)
A company whose primary business is in a qualifying technological field — software, biotech, semiconductors, medical devices, agritech — and that derives at least 25% of its income from intellectual property it developed or substantially improved in Israel, can qualify as a Preferred Technological Enterprise. The PTE rate is 12% nationwide (not 16%) and drops to 6% in development areas. For a foreign investor whose Israeli subsidiary is developing software or a medical device, the PTE rate can be substantially more valuable than standard Preferred Enterprise status. The Ministry of Finance publishes an annual list of qualifying technological areas.
Advanced Preferred Technological Enterprise (APTE)
Companies with global revenues exceeding NIS 10 billion (roughly USD 2.7 billion) can apply for APTE status, reducing the rate to 6% (or 5% in development areas) on preferred technological income. The APTE regime was designed to attract the Israeli operations of large multinationals to develop their most significant technology activity in Israel rather than in lower-tax jurisdictions. The application process involves demonstrating that the relevant IP, R&D activity, and key decision-making genuinely sit in the Israeli entity.
For all three preferential regimes, dividends distributed from preferential income are subject to a reduced withholding rate of 20% (instead of 25-30%) when paid to non-resident shareholders. Combined with the lower corporate rate, the PTE regime can reduce the total Israeli tax on a dividend cycle from approximately 32-37% to approximately 29-30% (12% corporate + 20% of remaining, applied to qualifying income only).
Frequently Asked Questions
A foreign parent that is not incorporated in Israel and does not have a permanent establishment in Israel does not itself owe Israeli corporate tax on its own profits. It may owe Israeli withholding tax when it receives dividends, interest, or royalties from its Israeli subsidiary. The Israeli subsidiary pays corporate tax at 23% on its own profits; the parent pays withholding tax (25-30%, reduced by treaty) only when the subsidiary distributes those profits. Where no tax treaty exists and the parent is in a high-tax jurisdiction, the combined Israeli corporate and withholding tax burden is often lower than the parent's home tax, and the parent can credit the Israeli tax against its domestic liability.
Yes, salaries paid directly by the Israeli company to employees — including employees seconded from the foreign parent — are deductible under Section 17 of the Income Tax Ordinance, provided the salaries are market-rate for the role, the employees perform genuine services for the Israeli entity, and the arrangement is documented. Where the foreign parent continues to pay the salary and then invoices the Israeli subsidiary for a cost-recharge, the same deductibility applies, but the ITA will scrutinize the pricing to confirm it matches what the subsidiary would pay an independent service provider. Secondment arrangements where the employee remains employed by the parent but works entirely for the Israeli subsidiary for more than 12 months frequently generate questions from the ITA about whether the parent has created a permanent establishment in Israel.
A late filing triggers a penalty of 0.5% of the assessed tax for each week of delay, up to 15% of the tax (approximately 30 weeks of delay), under Section 191(b) of the Income Tax Ordinance. The ITA also issues a best-estimate assessment (shuma al pi meitav hashpita) based on available information — typically the company's VAT returns, bank data, and prior returns — if no return is filed within three months of the due date. The ITA's estimated assessment is usually conservative (i.e., high), as it is designed to motivate filing. Late-payment interest on any unpaid balance accrues at the prime interest rate plus 3% per year. In practice, companies that file late but before an assessment is issued typically face only the 0.5%-per-week late-filing penalty and interest on any balance; companies that do not file at all face both the interest and potential criminal referral after persistent non-compliance.
There is no minimum income tax for inactive Israeli companies. A company with no activity in a given year owes zero income tax. However, an inactive company still owes the annual fee to the Registrar of Companies (NIS 1,498 in 2026) and must still file a nil tax return by May 31 if the company is not formally dissolved. An undissolved Israeli company that stops filing returns and paying the Registrar fee will accumulate penalties and eventually be classified as a "violating company" (hevra mefaret) by the Registrar, at which point its directors face personal liability for the accrued fees. If a foreign parent's Israeli subsidiary has ceased operations, the correct approach is to formally dissolve the company rather than simply allowing it to go dormant.
Yes. Tax losses can be carried forward indefinitely under Section 28 of the Income Tax Ordinance. There is no carryback mechanism. A loss from operating activities can offset operating income in future years without limit. Capital losses may only offset capital gains, not ordinary income, so they are tracked separately. When an Israeli company with accumulated losses is acquired, the ITA scrutinizes whether the acquisition was primarily motivated by access to the loss carryforward — an arrangement that can be challenged under the anti-avoidance rules in Section 86 of the Ordinance. If a change of ownership is accompanied by a substantial change in the company's business, the ITA may disallow the carryforward for the pre-acquisition losses.