IsraelLawIf you own shares in an Israeli company and want to take profits out, you cannot simply move money from the company's bank account to your own. Israeli law treats a dividend as a regulated act it calls a "distribution" (chaluka), and the company has to clear two legal hurdles before a single shekel leaves the corporate account. Foreign shareholders are bound by exactly the same rules as Israeli ones, with an added layer of withholding tax and, in many cases, treaty paperwork.
This guide walks through how a dividend actually gets paid out of an Israeli private company: the test the directors have to apply, the board resolution behind it, what to do when the balance sheet does not support a dividend, the tax deducted at source, and the personal exposure that follows a payment made the wrong way. It is written for the non-resident owner or investor who holds shares in an Israeli chevra ba'am (limited company) and wants the money handled cleanly.
1. What Counts as a Distribution
The Companies Law, 5759-1999 governs how money leaves a company and reaches its shareholders. Section 301 defines a "distribution" broadly. It covers two things: paying a dividend, and the company buying back its own shares. Both reduce the pool of assets that would otherwise be available to creditors, so the law regulates them the same way.
A dividend is a payment to shareholders out of the company's profits, in cash or in kind, divided in proportion to their holdings unless the articles of association say otherwise. The key point for a foreign owner is that the company is a separate legal person. The cash in its account belongs to the company, not to you as shareholder. There are only three lawful ways for that money to reach you: as salary for work you actually perform, as repayment of a genuine loan you made to the company, or as a dividend that follows the rules below.
Paying yourself informally, by treating the company account as your own, is the fastest route to a tax problem and a corporate-law problem at the same time. The rest of this guide is about doing it properly.
A dividend and a shareholder loan repayment look identical in the bank statement but are taxed completely differently. Before any transfer, the company's accountant should classify the payment and, for a dividend, the directors should sign a resolution. Foreign owners sometimes wire themselves NIS 400,000 as a "loan" one year, only for the Israel Tax Authority (Rashut HaMisim) to reclassify it as an undeclared dividend two years later, with interest and linkage differentials added on top.
2. The Two-Part Distribution Test
Section 302 of the Companies Law sets the core rule. A company may make a distribution out of its profits, provided there is no reasonable concern that the distribution will prevent the company from meeting its existing and anticipated obligations as they fall due. That single sentence contains both tests.
The profit test (mivchan harevach) asks whether the company has profits to distribute. Section 302(b) defines "profits" as the higher of two figures: the balance of the company's surplus, or the surplus accumulated over the two most recent years. The number is read off the company's last financial statements, which must be audited or reviewed and prepared no more than six months before the distribution date. Surplus (odafim) means the amounts in shareholders' equity that come from the company's net profit under accepted accounting principles.
The solvency test (mivchan yecholet haperaon) is forward-looking. The directors have to conclude, on reasonable grounds, that after paying the dividend the company will still be able to meet its debts as they come due, both current liabilities and ones the company can already anticipate. In practice this is the test that does the real work. A company can show a healthy profit on paper and still fail solvency if most of that profit is tied up in receivables or if a large payment is coming.
Both tests must be satisfied for an ordinary dividend. The profit test can be waived by a court, as explained in section 4 below. The solvency test can never be waived, by anyone.
The six-month rule in Section 302(b) catches people out. If your last audited statements are dated December 31 and you want to distribute in September, those statements are too old, and you need updated reviewed figures before the directors can rely on the profit test. For a company with distributable surplus of, say, NIS 2,000,000, the board can approve up to that amount, but only after confirming the solvency test against a current cash-flow forecast, not last year's numbers.
3. Board Approval and Procedure
Under Section 307, the organ that decides on a distribution is the board of directors, unless the company's articles hand that power to the general meeting. This surprises many foreign investors who expect a shareholder vote. For a standard private company, the shareholders do not vote on an ordinary dividend. The directors resolve it, and they carry the legal responsibility for getting the test right.
A clean dividend runs through these steps:
- Obtain financial statements dated within the last six months and confirm the distributable profit figure.
- The directors apply both the profit test and the solvency test and record their reasoning in the minutes.
- The board passes a resolution stating the gross amount, the record date, and the payment date.
- The company deducts withholding tax and pays the net amount to each shareholder.
- The company keeps the resolution, the supporting financials, and the tax vouchers on file.
A company can pay interim dividends during the year, not only after the annual accounts close, as long as the articles permit it and each payment passes the test at the moment it is made. Dividends in kind, such as transferring an asset to shareholders instead of cash, are possible but carry their own tax consequences and need separate advice. An ordinary dividend does not get filed with the Companies Registrar (Rasham HaChevarot); it is an internal corporate act. It does have to appear in the annual financial statements and the company's tax return.
The board resolution is not a formality, it is the directors' insurance policy. A well-drafted resolution under Section 307 records the profit figure, references the financial statements it relied on, and states expressly that the directors examined solvency. When a distribution is later questioned, that document is the first thing a liquidator or a tax auditor asks for. The withholding tax the company deducts must be reported and paid to the Israel Tax Authority, as a rule by the 15th of the month following the payment.
4. When You Need Court Approval
Sometimes a company has real cash and a solid future but cannot satisfy the profit test, usually because of accumulated losses on the balance sheet. A startup that raised capital and burned through it during years of development is the classic example. It may now be cash-generative, yet its books still show a negative surplus.
Section 303 provides the route. A company that fails the profit test can apply to the District Court for approval of a distribution. The court can approve it if satisfied that the solvency test is met, meaning there is no reasonable concern the payment will stop the company from paying its debts. In the larger commercial centres the application goes to the Economic Division of the District Court.
The court will normally direct the company to notify its creditors and give them a window to object, commonly around 30 days, and may order publication of the request. A creditor who objects is entitled to a hearing before the court decides. This creditor-protection step is the whole point of Section 303: the profit test exists to shield creditors, so when it is waived the court substitutes direct notice to those creditors instead.
A Section 303 application typically takes a few months from filing to a final order, depending on whether creditors object. Foreign investors in Israeli tech companies meet this rule often: the company has money from an exit or from strong revenue but carries accounting losses from its R&D years, so a straight board resolution will not work. Budget for the court timeline and the creditor-notice period of roughly 30 days before you promise investors a distribution date.
5. Withholding Tax for Foreign Shareholders
A dividend is paid from profits the company has already taxed. An Israeli company pays corporate tax, currently at 23%, on its earnings, and the dividend comes out of what is left. When that after-tax profit is distributed to a non-resident, a second layer of tax applies at the shareholder level.
The company must withhold tax at source on the dividend. The standard rate for a non-resident is 25%. It rises to 30% where the recipient is a "substantial shareholder," meaning someone who holds 10% or more of any means of control in the company, either at the time of the distribution or during the preceding twelve months. The company deducts this tax and pays only the net amount abroad.
A tax treaty can reduce the rate. Israel has treaties with around 60 countries. Under the Israel-United States treaty, for instance, the rate on a dividend to a US resident can fall below the domestic 25% or 30%, with the exact figure depending on the size of the holding and the type of company. The reduced rate is not automatic. To apply a treaty rate, the company generally needs a specific withholding approval from the Israel Tax Authority; deducting the lower rate without that approval leaves the company exposed if the position is challenged.
On the currency side, there is good news for foreign owners. Israel does not impose exchange-control restrictions on remitting dividends to non-residents, except for residents of states in conflict with Israel. The net dividend can be paid straight to a foreign bank account in foreign currency.
On a NIS 1,000,000 dividend to a foreign 100% owner, the company withholds NIS 300,000 at the 30% substantial-shareholder rate and remits NIS 700,000. If a treaty caps the rate at, say, 15%, the shareholder keeps NIS 850,000, but only if the company first secures a withholding certificate from the Israel Tax Authority before it pays. Apply for that certificate weeks ahead of the payment date, because the office does not issue it on the day you ask.
6. Shareholder Withdrawals and Deemed Dividends
A frequent mistake among owner-managers is pulling money out as a "shareholder loan" (meshichat be'alim) rather than declaring a formal dividend, on the theory that a loan is not taxable. Israeli tax law closed that door.
Section 3(i1) of the Income Tax Ordinance treats a shareholder's withdrawal as income if it is not repaid in time. The rule reaches cash drawn from the company and also company assets used privately, such as a company-owned apartment the shareholder lives in. If the withdrawal is not returned by the end of the tax year following the year it was taken, the tax authority deems it income and taxes it, as a dividend where the company has profits, or otherwise as salary or business income. The rule applies to withdrawals above a de-minimis figure, indexed annually and sitting at roughly NIS 100,000.
For a foreign owner, the practical lesson is that an informal draw against your Israeli company is not a way around dividend tax. It only postpones and complicates the tax, and it can trigger the deemed-dividend rule with interest and linkage attached. If you want profit out of the company, a documented dividend is cheaper and safer than a "loan" you never intend to repay.
The deadline under Section 3(i1) is the end of the year after the withdrawal. Money you took in 2026 must be repaid, or formally converted into a dividend or salary, by December 31, 2027, or the Israel Tax Authority will do the reclassification for you. For a foreign shareholder who withdrew NIS 250,000 as a loan and left it outstanding, the deemed dividend lands with the full withholding tax plus the arrears the company should have deducted at source.
7. Unlawful Distributions and Liability
The rules above have teeth, and the teeth point at both shareholders and directors.
Section 310 deals with shareholders. If a company makes a distribution that was not permitted, because it failed the test and had no court approval, a shareholder who received the money must return it to the company. There is one escape: a shareholder who did not know, and had no reason to know, that the distribution was prohibited is not required to repay it. A controlling shareholder, or anyone who set the dividend in motion, will rarely be able to claim that innocence.
Section 311 deals with directors. A director who approved a prohibited distribution is treated as having breached his duty to the company and is personally liable to restore the amount. A director can defend himself by showing that he opposed the distribution, or that he relied in good faith and on reasonable grounds on information that turned out to be wrong. Good faith alone is not enough; the reliance has to be reasonable.
These provisions matter most when a company later becomes insolvent. A liquidator or trustee can trace an unlawful distribution, claw it back from the shareholders who took it, and sue the directors who approved it. This is exactly why the board resolution documenting both tests is worth the effort. When the distribution is challenged years later, that paperwork is the directors' primary defence and often the difference between walking away and writing a personal cheque.
Under Sections 310 and 311, a foreign director who signs off on a NIS 3,000,000 dividend that later proves unlawful can be ordered by the court to restore that sum from personal funds, even if he never received a shekel of it. Insolvency proceedings under the Insolvency and Economic Rehabilitation Law, 5778-2018 can reopen distributions made in the years before collapse. A non-resident director sitting on the board of an Israeli subsidiary should never approve a dividend on the strength of a verbal "the accounts look fine" from the parent company; ask for the signed financial statements and a written solvency confirmation first.