Is a dividend paid from one Israeli company to another subject to Israeli tax?

The logic is that Israeli corporate profits should carry one layer of company tax and one layer of shareholder tax, not a fresh charge at every tier of a group. Corporate tax is paid by the operating company, the dividend then passes untaxed to an Israeli parent under Section 126(b), and tax falls due only when the money leaves the corporate chain and reaches an individual or a non-resident. The source condition is what limits the relief. The exemption tracks income produced or accrued in Israel, so profits earned by a foreign subsidiary and pushed up through an Israeli holding company are caught by Section 126(c) instead.

For a foreign group this shapes how an Israeli structure is built. Stacking an Israeli holding company above an Israeli operating company costs nothing in tax on internal distributions, which makes it a common way to ring-fence a business or prepare it for sale. The tax event arrives at the exit point, where a distribution to a non-resident shareholder is generally charged at 25%, rising to 30% for a shareholder holding 10% or more, subject to reduction under an applicable treaty. Settle the withholding position with the Israel Tax Authority before the payment is made, because recovering over-withheld tax afterwards is slow.

From the full guide: Dividend and Capital Gains Tax on Israeli Shares: A Guide for Foreign Investors

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