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Corporate Law

Can an Israeli company return capital to its shareholders by reducing its share capital?

Yes, with a court order. Section 302 of the Companies Law 5759-1999 lets a company distribute money to shareholders out of its profits, provided there is no reasonable concern that the payment will stop it meeting its existing and expected obligations. A company with cash but no distributable profits must instead apply to the District Court under Section 303 for approval of the distribution. Creditors are given notice and a window to object, and the court will approve only if that solvency test is satisfied. Directors who authorise a distribution outside these rules face personal liability to repay it.

Israeli company law treats every payment from a company to its shareholders as a distribution, whether it is labelled a dividend, a share buyback, or a return of capital. The Companies Law applies two filters. The profit test asks whether the money is coming out of accumulated or recent earnings. The solvency test asks whether the company can still pay what it owes after the money leaves. Section 303 exists for the common situation where the second test is comfortably met but the first is not, typically a company that raised significant equity, spent little of it, and now wants to hand the surplus back rather than sit on it.

Foreign shareholders reach for this route when a subsidiary is over-capitalised or a venture is winding down without a formal liquidation. The application is filed by the company, supported by audited or reviewed financial statements and a directors' declaration on solvency, and known creditors are notified so they can object. Tax treatment is the part most often underestimated. The Israel Tax Authority will look at whether the payment is in substance a dividend, which for a non-resident shareholder attracts Israeli withholding tax, so a pre-ruling is commonly obtained before any money moves.

⚖ In Practice
  • Governing law: Sections 302 and 303, Companies Law 5759-1999; director and shareholder liability for an unlawful distribution follows in the sections immediately after
  • Competent authority: District Court, in practice the Economic Division of the Tel Aviv District Court for most commercial companies; the Companies Registrar (Rasham HaChavarot) records the change
  • Test applied: no reasonable concern that the distribution will prevent the company meeting its existing and anticipated obligations when they fall due
  • Creditor protection: known creditors receive notice and are given a set period, commonly 30 days, to file an objection before the court rules
  • Timeline: 3 to 6 months from filing to approval where no creditor objects; longer if an objection is filed
  • Tax step: an advance ruling from the Israel Tax Authority is usually sought so the payment is not recharacterised as a dividend subject to withholding at source

From the full guide: Company Formation in Israel: A Guide for Foreign Founders

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Get a Free Consultation with Adv. Eli ShimonyPrepared under the direction of Adv. Eli Shimony, Eli Shimony Law Office · Editorial policy

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