Israel is very good at imposing surtax but not so good at collecting it. This causes problems for taxpayers, their lawyers, and their accountants alike.
Israeli tax law imposed a surtax
As part of the 2025 budget tax package, the Knesset passed an amendment that expands and increases what is sometimes known as the “Rich Man’s Tax” on high-income taxpayers. Ostensibly, this was done to help finance the Israel-Hamas War.
Until the end of 2024, the Israeli tax law imposed a surtax that increased the tax rate by an additional 3% on an individual’s annual taxable income above NIS 721,560. “Taxable income” includes income from all sources, such as capital gains and real-estate gains (“land appreciation”) net of inflation. Gains from the sale of Israeli homes, however, are only taxable if the sale consideration exceeds NIS 5,382,285 and no exemption applies.
Starting in 2025, the above rules were expanded. In addition to the existing 3% surtax, taxable income from “capital sources” will be liable to a further 2% surtax to the extent such taxable income from capital sources exceeds the threshold of NIS 721,560. Again, homes are only taxable if the sale consideration exceeds NIS 5,382,285 and no exemption applies
Income from capital sources means all taxable income EXCEPT business income and employment income, i.e., passive income, such as dividends, interest, capital gains, real-estate gains.
Assuming both surtaxes apply, this increases the top Israeli tax rates as follows:
• Business profit and employment income: income tax of 47% plus 3% surtax equals 50% tax. The 2% surtax is not applicable.
• Taxable income from most capital (passive) sources, net of deductible expenses: 25% tax plus 5% surtax equals 30% tax.
• Taxable income on dividends from companies in which the shareholder holds a 10% stake or more: 30% tax plus 5% surtax equals 35% tax.
Calculating the surtaxes: The two surtaxes are percentages of different numbers. Here is our take:
Example 1: Suppose an individual in 2025 has passive taxable income of NIS 1.5 million from securities of NIS 1.5m. and employment income of NIS 0.5m., total NS 2m. The 3% surtax is on excess total income over NIS 721,560 (NIS 2m. minus NIS 721,560 equals NIS 1,278,440). The 2% surtax is on excess passive income (NIS 1.5m. minus 721,560 equals NIS 778,440).
Those are just the surtaxes to add to the regular taxes.
Example 2: Same as example 1, but the NIS 1.5m. passive income was from the sale of an Israeli home for NIS 4m. The latter is under NIS 5,382,285, so no surtaxes are anticipated.
Example 3: Same as example 1, but the NIS 1.5m. passive income was from an Israeli home purchased for NIS 5m. and sold for NIS 6.5m. The latter is over NIS 5,382,285, so the surtaxes (5%) should be similar to Example 1.Comment: There is apparently no retroactive tax spreading tax.
When and how to pay the surtaxes
This is where surprises frequently occur. Normally if a real-estate property in Israel is sold, one of the conditions for the release of the sale proceeds is that land appreciation tax, if due, is paid.
However, the Real Estate Tax Department’s computer only knows how to collect land appreciation tax (mas shevach), and it is not yet programmed to assess and collect any surtax. Instead, sellers are expected to file an annual income-tax return after the tax year-end (December 31) and pay the surtax. Sometimes, the real-estate lawyer does not inform his client that surtax will fall due later.
Worse still, the lawyer holding sale proceeds in escrow could be personally liable to the tax authorities if he releases all real-estate sale proceeds without paying both the land appreciation tax and the surtax(es).
This problem becomes more acute for foreign resident sellers, because they can only pay the surtax if they first open an Israeli tax file and start filing annual income-tax returns.
‘Trapped profits’ amendment problems
The recent “trapped profits” amendment was another part of the 2025 budget package. This increases the tax on the current year’s profits of many companies from 23% to 50%, with another 2% tax on accumulated profits made in prior years.
Immigrants, investors, and foreign companies may all be affected, potentially resulting in double taxConsequently, seminars are scheduled in Jerusalem, Tel Aviv, and Haifa on February 6,11, and 17 to explain what is in the amendment and what to plan. Email us for details.
As always, consult experienced legal and tax advisers in each country at an early stage in specific cases.
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Gidon Cohen is a lawyer and notary based in Ramat Gan, specializing in commercial and real-estate law.Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax.
