Quick Answer: The Israeli surtax (mas yesef) is an extra layer of income tax under Section 121B of the Income Tax Ordinance. In 2026 it charges 3% on annual taxable income above NIS 721,560, and since January 2025 a further 2% applies to capital income above that same line, so investment and property income can carry 5%. It catches non-residents on their Israeli-source income, and it is usually not withheld at source on capital income, which means the bill arrives months later with the annual return.

Most people meet the surtax by accident. A foreign owner sells an apartment in Netanya, pays 25% betterment tax at the Real Estate Taxation Office, closes the file in their mind, and then hears from their accountant a year later that another NIS 60,000 is due. Nothing went wrong. The betterment tax and the surtax are collected by different parts of the Israel Tax Authority, at different times, and only one of them was settled at the closing.

The rule itself is short. Applying it to a cross-border situation is where things get interesting, because the surtax interacts with tax treaties, with the ten-year exemption for new immigrants, and with the way Israeli real estate gains are reported. This guide covers who pays, how the threshold works, what counts as capital income, and the planning points that actually move the number.

1. What the Israeli Surtax Actually Is

Section 121B of the Income Tax Ordinance imposes an additional tax on individuals whose annual taxable income exceeds a set threshold. The Knesset introduced it in 2013 at 2% on income above roughly NIS 800,000, then raised the rate to 3% and lowered the threshold from 2017. The current figure for the 2026 tax year is NIS 721,560, which is about NIS 60,130 a month.

Three features make it behave differently from the ordinary income tax brackets:

  • It applies to taxable income from all sources combined, not to employment income alone. Salary, business profits, rent, dividends, interest and capital gains are added together for the threshold test.
  • It sits on top of whatever rate already applies. A 25% capital gain does not become 28% instead; it becomes 25% plus the surtax on the excess above the threshold.
  • Only the portion above the threshold is charged. Someone with NIS 800,000 of taxable income pays surtax on NIS 78,440, not on the full amount.

The threshold is linked to the consumer price index and republished each January. Use the figure for the year the income arose, not the year you file. Gains realised in 2025 are tested against the 2025 threshold even if the return goes in during 2026.

In Practice — Which Authority Collects What: Foreign taxpayers often assume "the Israeli tax office" is one counter. It is not. The Assessing Officer (pakid shuma) at the Israel Tax Authority handles income tax returns, assessments and the surtax. The Real Estate Taxation Office (Misui Mekarkein), a separate ITA division, handles betterment tax and purchase tax on property transactions and issues the clearance certificates the Land Registry needs. The National Insurance Institute (Bituach Leumi) is a wholly separate agency with its own contribution ceiling and its own forms. A property sale can generate a filing obligation at all three, and settling one does not close the others. In practice the sequence is: Form 7000 to the Real Estate Taxation Office within 30 days of signing, betterment tax paid within 60 days of the sale, and the surtax reconciled in the annual return filed by 30 April of the following year.

2. The 2% Capital Income Surtax Added in 2025

The Economic Efficiency Law passed with the 2025 state budget added Section 121B(a1), which imposes an additional 2% surtax on capital income above the same threshold. It took effect on 1 January 2025. Capital income above NIS 721,560 therefore carries 5% of surtax in total, while ordinary income above the line still carries 3%.

Capital income for this purpose covers:

  • Capital gains, including gains on Israeli and foreign securities
  • Real estate betterment (mas shevach) on the sale of Israeli property
  • Dividends, including dividends from a company you control
  • Interest and index linkage differentials on deposits and bonds
  • Rental income, including residential rent taxed under the 10% track in Section 122
  • Royalties that are not part of an active business

Two points get missed. First, the 2% is charged on the capital portion of income above the threshold, so where a taxpayer has both salary and investment income, the ordering rules in the section determine how much of the excess is treated as capital. Second, income that is exempt is not taxable income at all, so it never enters the calculation. Residential rent within the small exemption ceiling (around NIS 5,600 a month in 2026, updated annually) stays out entirely, while rent taxed at 10% goes in.

In Practice — The Withholding Gap That Creates Debt: Israeli payers withhold at flat rates on capital income: 25% or 30% on dividends depending on whether the shareholder holds 10% or more, 25% on most capital gains, 15% or 25% on interest depending on whether the deposit is index-linked. None of those withholdings include the surtax. A non-resident who receives a NIS 2 million dividend sees NIS 600,000 withheld at 30% and reasonably concludes the matter is closed. The remaining 5% on the excess above NIS 721,560, some NIS 63,900, only surfaces when the annual return is prepared. If the return is filed late or the assessment is issued later still, the ITA adds interest and index linkage under Section 159A of the Ordinance, which accrues from the end of the tax year in which the income arose, not from the date of the assessment. The gap between the withholding and the true liability is the single most common source of unexpected Israeli tax debt among foreign investors.

3. Who Pays: Residents, Non-Residents and Olim

Israeli residents are charged on worldwide taxable income, so the threshold test looks at everything: Israeli salary, foreign consulting fees, US dividends, a gain on a London flat. Foreign tax credits reduce the Israeli tax on that income, but they do not remove the income from the surtax base.

Non-residents are charged on income that is taxable in Israel. That covers Israeli rental income, gains on Israeli real estate, dividends and interest from Israeli payers, and gains on shares in Israeli companies where an exemption does not apply. Income with no Israeli source is irrelevant, which means a non-resident's threshold is effectively measured against their Israeli slice alone.

Treaty relief works in the ordinary way. Israel's treaties cover taxes on income, and the surtax is a tax on income, so where a treaty caps Israeli tax on a dividend at 15% or 12.5%, the domestic rate plus surtax cannot exceed that ceiling. Claiming the cap is a separate exercise: for many payment types it requires a certificate from the ITA's Withholding Tax Unit before payment, or a refund claim through the annual return afterwards. Real estate is the exception that matters most here. Every Israeli treaty allocates taxing rights over immovable property to the country where the property sits, so a French, British or American seller of an Israeli apartment gets no treaty protection from either the betterment tax or the surtax.

New immigrants and returning residents sit in a better position for their first decade. Income exempt under Section 14 of the Ordinance is not taxable income, so foreign dividends, foreign rent and foreign capital gains inside the ten-year window are outside the surtax base. What surprises people is the cliff at the end. The eleventh year converts a portfolio that produced no Israeli reporting obligation into fully taxable income, often pushing an oleh over the threshold for the first time.

In Practice — The Filing Trap for Non-Residents: Israel exempts many taxpayers from filing an annual return where tax has been fully withheld at source, under the Income Tax Regulations (Exemption from Filing a Return) 5748-1988. Surtax liability removes that exemption. A non-resident whose only Israeli income is a dividend or a property gain, and who has never filed anything in Israel, becomes obliged to open a tax file with the Assessing Officer, appoint a local representative, and file Form 1301 for that year. The practical sequence is: register the file at the regional Assessing Officer's office (allow 2 to 4 weeks), file Form 1301 by 30 April following the tax year, or 30 June if filing online, and pay the balance with the return. Late filing penalties start at roughly NIS 500 per month of delay under Section 188, and the ITA has been issuing them routinely since it began cross-checking property sale data against income tax files.

4. Property Sales and the NIS 5.38 Million Line

Real estate is where the surtax bites hardest, because a single transaction can produce a gain many times the annual threshold.

There is one significant carve-out. Betterment on the sale of a residential apartment is excluded from the surtax base where the sale consideration does not exceed NIS 5,382,285 (the 2026 figure, indexed each year). Sell at or below that price and the gain simply does not count for surtax purposes, even if you also have other income. Sell above it and the entire betterment amount enters the base, not just the part above the price line.

A draft bill circulated during the 2025 budget process proposed removing this carve-out and taxing residential gains below the threshold as well. It was not enacted. The exclusion applies only to residential apartments as defined in the Real Estate Taxation Law 5723-1963. Commercial premises, offices, agricultural land, and building plots have no equivalent relief, so a non-resident selling a Tel Aviv storefront at a NIS 3 million gain is in the surtax base from the first shekel above NIS 721,560.

The reporting split is what causes the trouble. Betterment tax is self-assessed on Form 7000 and filed with the Real Estate Taxation Office within 30 days of signing the sale agreement, with payment due within 60 days. That office does not assess or collect surtax. The gain then has to be carried into the income tax return for the same year, where the surtax is calculated. If nobody carries it across, the ITA's own data matching usually does the job eventually, with interest attached.

In Practice — Spreading the Gain Under Section 48A(e): The Real Estate Taxation Law lets an individual seller ask to spread the real appreciation over a period of up to four tax years ending in the year of sale. The request goes to the Real Estate Taxation Office, usually with the Form 7000 filing, and it is not granted automatically. Where the seller had little or no other Israeli income in the earlier years, spreading a NIS 2.4 million gain across four years can place NIS 600,000 in each year, below the NIS 721,560 threshold in every one of them, and reduce the surtax to zero. The same technique is worth checking against the ordinary betterment tax brackets, since the spread can also reduce the headline rate for older properties held under the linear calculation. This is a live planning option for exactly the kind of seller who reads this page: a non-resident with a single Israeli asset and no other Israeli income. It has to be claimed at the time of the sale, and reopening a closed assessment to add it later is a genuine fight.

5. Three Worked Examples

A salaried employee in Tel Aviv. Gross annual salary of NIS 900,000, no other income. Taxable income exceeds the threshold by NIS 178,440. Because salary is ordinary income, the rate is 3%, giving a surtax of NIS 5,353. The employer's payroll software withholds this month by month once cumulative pay crosses NIS 60,130, so nothing further is due when the return is filed.

A foreign investor selling an Israeli apartment. A Canadian owner sells a Herzliya apartment for NIS 7.5 million with real appreciation of NIS 2 million. The sale price exceeds NIS 5,382,285, so the residential carve-out does not apply. Betterment tax at 25% is NIS 500,000. For the surtax, the excess over the threshold is NIS 1,278,440, charged at 5% because betterment is capital income, producing NIS 63,922. Total Israeli tax on the gain is NIS 563,922, an effective rate of about 28.2%. The Canada-Israel treaty does not reduce either figure, because Israel keeps taxing rights over Israeli immovable property.

An oleh in year eleven. A new immigrant from the UK finishes the ten-year Section 14 exemption. Foreign portfolio dividends of NIS 400,000 and foreign rental income of NIS 500,000, previously exempt, are now taxable in Israel alongside an Israeli salary of NIS 300,000. Taxable income reaches NIS 1.2 million. The excess over the threshold is NIS 478,440, and because most of it is capital income, much of it attracts 5% rather than 3%. UK tax paid on the rent generates a foreign tax credit against the Israeli income tax, but the credit does not shrink the surtax base. The surtax bill in the first post-exemption year is typically between NIS 15,000 and NIS 24,000 depending on the mix, and it is not withheld anywhere.

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6. How the Surtax Is Collected and Reported

For salaried employees the mechanism is invisible. Israeli payroll systems calculate the surtax monthly against one twelfth of the annual threshold, and the employer remits it with the regular income tax withholding. An employee with two jobs, or with a mid-year job change, can end up under-withheld, which is one of the few situations where a salaried Israeli resident owes surtax at the end of the year.

Everyone else settles through the annual return. The mechanics:

  • Form 1301 is the individual annual return. The Israeli tax year is the calendar year.
  • The deadline is 30 April following the tax year, extended to 30 June for online filers. Accountants and lawyers holding an ITA representative licence receive collective extensions for their clients, often running to the following January or later.
  • Taxpayers with recurring capital income may be placed on advance payments (mikdamot), calculated from the previous year's assessment and paid monthly or bi-monthly.
  • Underpayments carry interest plus index linkage under Section 159A, running from the end of the tax year. Israeli statutory interest is meaningful, so a two-year delay adds a real amount to the bill.
  • The Assessing Officer can open an assessment within four years from the end of the year in which the return was filed, under Section 145 of the Ordinance.

One structural point for foreign taxpayers: an Israeli tax file requires a local address for service. Non-residents typically appoint their Israeli attorney or accountant as representative, which also lets the ITA correspond in Hebrew with someone who can act on it. Correspondence sent to an overseas address and left unanswered is still valid service.

In Practice — Married Couples and Jointly Held Assets: The threshold is personal. Each spouse has their own NIS 721,560, and there is no joint filing threshold that doubles the number for the household. Where an Israeli property or securities portfolio is held jointly, the income is attributed between the spouses according to their ownership shares, which can bring both of them under the line where a single owner would have been well over it. Registration is what counts. Where an apartment is registered at the Land Registry in one spouse's name alone, the whole gain is that spouse's for surtax purposes, even if the couple funded it together and treat it as joint property. For couples planning a purchase, or an oleh couple restructuring before the ten-year exemption ends, registering in both names is a one-time decision at the Land Registry that can permanently double the household's surtax-free band on that asset. Changing the registration later is itself a taxable transfer, though inter-spousal transfers benefit from specific relief under Section 62 of the Real Estate Taxation Law.

7. Legitimate Ways to Reduce the Bill

The surtax is a blunt instrument, which limits the options. These are the ones that work in practice.

Timing. Because the threshold resets each calendar year, splitting a large realisation across two tax years gives two thresholds. Selling half a securities position in December and half in January is a legitimate and simple move. Contract dates matter for property: the taxable event for betterment purposes is the date of the sale agreement, not the closing or the payment.

Spreading a property gain. The Section 48A(e) request described above, made at the time of the Form 7000 filing.

Spreading severance and pension lump sums. Section 8(c) of the Ordinance allows certain lump sums, including severance pay and commuted pension amounts, to be spread forward or back across several tax years with the Assessing Officer's approval. Someone leaving Israel with a large accumulated pitzuim balance can often keep each year's income under the threshold.

Ownership structure. The surtax applies to individuals, not to companies. Israeli corporate tax is 23%, but the surtax reappears on distribution, since a dividend to an individual shareholder is capital income. Holding Israeli assets through a company rarely helps a passive investor and adds annual compliance costs of roughly NIS 6,000 to NIS 15,000. For an active business with reinvested profits the analysis is different, and worth running properly rather than assuming.

Charitable donations. The Section 46 credit reduces the tax payable, and the credit can be applied against the surtax as well as the base tax where the donation is made to an approved Israeli institution.

What does not work: attempting to characterise Israeli rental income as exempt when it exceeds the exemption ceiling, splitting a sale into artificial instalments, or transferring an asset to a relative shortly before a sale. The ITA's anti-avoidance power in Section 86 of the Ordinance lets the Assessing Officer disregard a transaction whose main purpose was to reduce tax improperly, and property transfers between family members are already flagged in the Real Estate Taxation system.

In Practice — Getting the Number Before You Sign: The most useful thing a seller can do is model the tax before the sale agreement is signed, while the price and the closing date are still negotiable. A pre-transaction calculation covering betterment tax, surtax, and the position under the relevant treaty typically costs NIS 2,500 to NIS 6,000 and takes a few days. Where the numbers are large or the treatment is genuinely uncertain, the ITA also offers a pre-ruling procedure (hachlatat misui mikdamit) under Section 158B, in which the Authority commits in advance to a position on the transaction. Ruling applications carry a statutory fee, currently in the range of a few thousand shekels, and the Professional Division typically responds within 90 to 180 days. That timetable rules it out for a quick sale, but for a large commercial disposal, a company reorganisation, or an oleh planning around the end of the exemption period, the certainty is usually worth the wait.

The surtax is not going away, and the 2025 amendment suggests the direction of travel is upward rather than down. For anyone with Israeli income above roughly NIS 60,000 a month, or a single large Israeli gain, it belongs in the calculation from the start rather than as a correction a year later. Figures cited here are the published 2026 amounts and are updated annually. Confirm the current threshold and the position on your specific transaction with an Israeli tax adviser before acting.