When can an Israeli company legally distribute a dividend?

The profit test in Section 302(a) defines distributable profits as the company's retained earnings or its earnings accumulated over the most recent two years, taken from adjusted financial statements, whichever is higher. The solvency test asks whether, after the payout, the company can still satisfy its liabilities as they fall due. If a company has no qualifying profits but still wants to distribute, Section 303 lets it apply to the court for approval, which the court grants only if satisfied the solvency test is met. The board approves dividends under Section 307, and the Companies Law treats a distribution that breaches Section 302 as one made unlawfully, exposing the directors who approved it.

For a foreign shareholder in an Israeli company, these rules govern whether you can actually extract returns, separate from the tax due on the dividend once it is paid. A profitable subsidiary can generally distribute, but a company carrying accumulated losses or tight cash flow may be blocked even if cash is sitting in the account. Directors should document the profit and solvency analysis in the board resolution, because the law lets the company reclaim an unlawful distribution from a shareholder who knew or ought to have known it breached the test. Confirming the company's distributable profits before declaring a dividend, and keeping the supporting financial statements, is the step that protects both directors and shareholders. Our guide to directors' duties in Israel sets out the wider governance framework.

From the full guide: Corporate Governance in Israel: Directors' Duties

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