Quick Answer: Foreign investors holding shares in Israeli companies are subject to Israeli withholding tax on dividends — typically 25% for minority shareholders, 30% for substantial shareholders — and potentially to Israeli capital gains tax when they sell. Tax treaty residents can often reduce the dividend withholding rate significantly, and some non-residents are exempt from Israeli CGT on gains from listed shares. The exact position depends on your country of residence, the type of company, and the size of your stake.

A US citizen holds 15% of an Israeli startup. The company declares a dividend after its first profitable year. Before the transfer reaches the investor's American bank account, the Israeli company must withhold 25% — and possibly more, depending on whether the investor's attorney obtained a reduced withholding certificate in advance. Most do not. The difference between the default 25% withholding and a treaty-reduced rate of 12.5% on a NIS 2,000,000 distribution is NIS 250,000 — and recovering the excess requires filing an Israeli tax return and waiting 12–24 months for a refund.

This guide covers the Israeli dividend tax rules for non-resident shareholders, the capital gains tax position on selling Israeli shares, the special Section 102 regime for startup employee equity, and how double taxation treaties reduce Israeli withholding. It is written for the non-specialist — whether you are a US diaspora investor, a UK-based angel in an Israeli startup, or a European family holding inherited company shares.

1. Overview: How Israel Taxes Investment Income

Israel's Income Tax Ordinance imposes tax on Israeli-source income regardless of where the recipient lives. For shareholders in Israeli companies, there are two main taxable events:

  • Dividends: When an Israeli company distributes profits to its shareholders, Israeli law requires the company to withhold tax on the dividend and remit it to the Israeli Tax Authority (רשות המיסים, Rashhut HaMisim) before paying the net amount to the shareholder.
  • Capital gains on sale: When you sell shares in an Israeli company at a profit, that gain may be subject to Israeli capital gains tax (מס רווח הון, mas revakh hon).

Both forms of tax can be reduced — and in some cases eliminated — by the double taxation treaty between Israel and your country of residence. Israel has treaties with over 50 countries including the United States, United Kingdom, Germany, France, Canada, Australia, and most EU member states. For a full explanation of how these treaties work generally, see our guide on double taxation treaties with Israel.

2. Withholding Tax on Dividends from Israeli Companies

The statutory Israeli withholding tax rates on dividends paid to non-residents are set out in Section 125B of the Income Tax Ordinance:

  • 25% for shareholders who hold less than a 10% stake in the distributing company (minority shareholders).
  • 30% for בעל מניות מהותי (substantial shareholders) — defined as anyone holding 10% or more of the shares, voting rights, or entitlement to profits, directly or together with relatives.

The withholding mechanism works as follows: before paying out any dividend, the Israeli company calculates the applicable withholding tax, deducts it from the gross distribution, and pays the net amount to the shareholder. The withheld tax is then remitted to the Israeli Tax Authority. From the shareholder's perspective, the dividend arrives already net of Israeli tax.

For publicly traded Israeli companies, the Israeli broker or bank custodian handles the withholding automatically. For private companies — the more common situation for startup investors and diaspora shareholders — the company's directors and accountants are responsible for correct withholding, and the shareholder has no direct control over whether it was done correctly.

One practical point: Israeli companies sometimes accumulate profits without distributing them for years. When a distribution finally occurs — including on a liquidation or deemed dividend — the full withholding obligation applies. Foreign shareholders in closely-held Israeli companies should confirm with the company's Israeli accountant that withholding will be handled correctly before any distribution is made.

In Practice: Foreign shareholders in Israeli private companies routinely receive two or three days' notice before a planned dividend distribution — not enough time to obtain a treaty residence certificate. The certificate, issued by the shareholder's home tax authority (for example, IRS Form 6166 for US residents, or an HMRC letter for UK residents), typically takes 4–8 weeks to obtain. If you are a shareholder in an Israeli company and your home country's treaty provides a reduced withholding rate, obtain a current certificate now and keep it updated — do not wait until you hear a distribution is being planned.

3. Reducing Dividend Withholding via Tax Treaties

Most Israeli double taxation treaties set a lower withholding rate than the domestic 25%/30%. The treaty rate typically depends on the size of the shareholding:

  • United States: Under the US-Israel treaty, dividends are generally taxed at 25%, reduced to 12.5% for US companies holding at least 10% of the Israeli company's voting shares. US individual investors generally remain at 25% under the treaty, though they can offset the Israeli tax against their US federal tax liability.
  • United Kingdom: The UK-Israel treaty provides for a maximum of 15% withholding on dividends in most cases.
  • Germany, France, Netherlands and most EU states: Treaty rates of 10%–15% are common for individual shareholders.
  • Canada: 15% in most circumstances under the Canada-Israel treaty.

To benefit from a reduced treaty rate, the non-resident shareholder must take steps before the dividend is paid:

  1. Obtain a certificate of tax residence (*אישור תושבות לצרכי מס*, ishur toshavut le-tzorkhei mas) from your home country tax authority (for example, the IRS for US residents, HMRC for UK residents).
  2. Submit the certificate to the Israeli company (for private companies) or to your Israeli broker (for listed shares), who can then apply the reduced treaty rate.
  3. Alternatively, the company or its Israeli tax advisor may apply to the Israeli Tax Authority for a withholding exemption or reduction certificate before the distribution.

If the statutory rate was withheld and you are entitled to a lower treaty rate, you can file a refund claim (*בקשה להחזר מס*) with the Israeli Tax Authority. The process is straightforward in principle but requires documentation and can take several months. It is always better to arrange the reduced rate in advance.

4. Capital Gains Tax on Selling Israeli Shares

The Israeli CGT rate on share disposals for both residents and non-residents is 25% on the real (inflation-adjusted) gain. Substantial shareholders (10%+) pay 30%. The gain is calculated as the sale price minus the original cost basis, adjusted for Israeli inflation.

However, non-resident shareholders may benefit from an exemption or treaty relief:

Exemption for non-residents under Section 97(b3)

Israeli domestic law provides a CGT exemption for non-residents selling shares in Israeli companies, subject to conditions:

  • The shareholder must be a resident of a country that has a tax treaty with Israel.
  • The Israeli company must not be a חברת נדל"ן (real-estate company) — that is, a company whose primary assets are Israeli land or rights in land.
  • The gain must not be attributable to a permanent establishment the shareholder has in Israel.

For foreign investors in Israeli tech startups, venture funds, and operating businesses, this exemption frequently applies. For foreign investors in Israeli real estate holding companies, it does not — gains from such companies are taxed in Israel.

Private company shares — practical process

When selling private Israeli company shares, the buyer is typically required to withhold CGT at source (or the Israeli Tax Authority may issue a tax assessment). In practice, on a startup exit or secondary sale, the transaction lawyers will request a withholding exemption certificate (*פטור מניכוי מס במקור*) from the Israeli Tax Authority on behalf of the selling shareholder. Processing this certificate takes several weeks, so it should be requested early in any transaction process.

Foreign founders and investors in Israeli startups should verify their CGT position before agreeing sale terms — the net-of-tax proceeds can differ materially from expectations if treaty exemptions are not arranged in advance.

A Singapore-based investment fund held a 12% stake in an Israeli software company and agreed to sell that stake to a US strategic buyer for NIS 8,400,000. As a resident of Singapore — a country with a tax treaty with Israel — the fund applied to the Israel Tax Authority for a withholding exemption certificate under the Section 97(b3) domestic exemption. The application, submitted by Israeli counsel six weeks before the anticipated closing date, was approved two weeks before closing, confirming the gain was exempt from Israeli CGT because Singapore was a treaty country and the Israeli company held no real estate assets. Without the exemption certificate, the buyer would have been required to withhold 25% of the gross proceeds — NIS 2,100,000 — pending a refund claim that typically takes twelve to eighteen months. The lesson: exemption certificate applications must be filed well before a transaction closes; Israeli tax counsel should be engaged at the term-sheet stage, not at signing.

5. Employee and Founder Equity: Section 102

Section 102 of the Income Tax Ordinance is Israel's dedicated regime for employee stock option plans (*תוכנית אופציות לעובדים*, tokhnit optzyot le-ovdim). It is widely used by Israeli tech companies and provides significant tax advantages for employees who receive equity.

How Section 102 works

Under the capital gains track — the most common structure — options or shares are deposited with an approved Israeli trustee at grant. If the employee holds the options or resulting shares through the trustee for at least 24 months from the date of grant, the entire gain (from grant price to sale price) is taxed at the flat 25% CGT rate rather than at marginal income tax rates (which can reach 50% in Israel).

For non-resident employees of Israeli companies

Section 102 is available to non-resident employees working for Israeli companies. The Israeli company manages the trust structure and the tax is withheld on the eventual sale. The key practical points for non-residents:

  • The 24-month holding period begins from grant, not from exercise — timing matters for planning a departure or exit.
  • Upon sale, the Israeli trustee withholds CGT at 25% before transferring proceeds.
  • The gain is also taxable in the employee's home country (as employment income or capital gain, depending on local rules). Many countries grant a credit for the Israeli CGT paid, but this must be verified with a home-country tax advisor.
  • US employees face particular complexity: Section 102 does not qualify as an ISO (incentive stock option) under US tax law, and there may be ordinary income inclusion in the US at vesting. US employees of Israeli startups should take specialist US-Israeli tax advice before their options vest.
In Practice: A US employee of an Israeli startup who participates in a Section 102 plan gains Israeli tax certainty — the full gain is taxed at 25% CGT after the 24-month trustee hold. But the US side can produce an unpleasant surprise: the IRS may treat the option as a non-qualified stock option, meaning the spread at exercise is US ordinary income subject to federal income tax (and possibly self-employment tax) in the year of exercise — regardless of the Israeli trustee lock-up. The net effective rate across both systems can significantly exceed 25%. US employees should model both legs of the tax before accepting equity in an Israeli company.

Founders and early investors

Section 102 applies only to employees and directors. Founders who hold shares directly from incorporation — rather than through an options plan — are not covered by Section 102. On an exit, their gain is taxed as straightforward Israeli CGT at 25% (or 30% if they hold 10%+), subject to the non-resident exemption discussed above.

6. Investing in TASE-Listed Israeli Shares

The Tel Aviv Stock Exchange lists hundreds of Israeli public companies across technology, real estate, financial services, and other sectors. For foreign portfolio investors buying TASE-listed shares through an Israeli or international broker, the tax mechanics are largely automated:

  • Dividends: The paying company or its Israeli transfer agent withholds at the standard 25% rate unless you have provided your broker with a treaty residence certificate. If you hold TASE shares through an international custodian, confirm with them how Israeli withholding is handled — some custodians apply for reduced treaty rates on your behalf, others do not.
  • Capital gains: Foreign residents may benefit from the Section 97(b3) exemption on gains from TASE shares (excluding real-estate companies). Israeli brokers are required to request CGT withholding unless the investor provides documentation establishing their non-resident status and treaty eligibility.

Foreign investors trading TASE shares through a non-Israeli broker may not have withholding applied at all in some situations — but this does not mean the tax is not legally owed. If the exemption does not apply, the investor remains liable for Israeli CGT and may need to file.

7. Reporting and Compliance for Non-Resident Shareholders

For most non-residents whose only Israeli income is dividends with correctly withheld Israeli tax, there is no obligation to file an Israeli annual income tax return. Israeli withholding is treated as the final Israeli tax on dividend income for non-residents.

However, you may need to engage with the Israeli Tax Authority in these situations:

  • You want to claim a refund of excess withholding (where the statutory rate was applied but a treaty rate applies).
  • You are selling private Israeli company shares and need a withholding exemption certificate before the transaction closes.
  • You realise a capital gain that is not covered by an exemption and Israeli CGT is due.
  • You have Israeli-source income beyond dividends (salary, royalties, rental income) that collectively exceeds the filing threshold.

Separately, you must report Israeli dividend and capital gains income to your home country tax authority. For US investors, this includes potential PFIC (Passive Foreign Investment Company) considerations if you hold interests in Israeli venture funds or certain Israeli holding companies — see our guide on FATCA, FBAR, and Israeli financial assets for US persons. For guidance on the overall Israeli tax picture for non-residents, see our overview of Israeli income tax for non-residents.