Israel Tax Authority Weighs Raising Retained Earnings Dividend Threshold to 8%
Israel Tax Authority considers raising the mandatory retained earnings dividend distribution threshold from 6% to 8% to boost state revenues, drawing criticism from business leaders.
Israel Tax Authority is considering raising the mandatory dividend distribution threshold under the retained earnings reform from 6% to 8%, according to recent discussions ahead of the upcoming state budget. The reform, which entered into force in January 2025, has significantly exceeded initial revenue projections, bringing in approximately 20 billion NIS in its first year alone—double initial forecasts.
Tax Authority Director Shay Aharonovich outlined the proposed tightening during a conference held by the Tax Advisers Chamber, noting that state budgetary pressures necessitate these measures. "We will need tough steps, and perhaps to raise the requirement in the retained earnings law to 8% rather than 6%, because the state has no money," Aharonovich stated, adding that the policy would be evaluated as part of preparations for the 2027-2028 budget framework.
Revenue Surpasses Projections
The contested provision, designated as Section 81, has effectively functioned as a revenue generator for the state. In 2025, tax collections from forced dividend distributions reached approximately 10 billion NIS, far surpassing the original estimates of around 5 billion NIS. Additional revenues are expected as remaining corporate filings are processed.
While business organizations and professional bodies—including chambers of accountants, tax advisers, and attorneys—have fiercely opposed the reform since its inception, arguing that it constitutes heavy government intervention in corporate financial planning, the High Court of Justice previously rejected legal petitions seeking to invalidate the legislation.
Industry Criticism and Future Outlook
Critics maintain that raising the mandatory distribution rate will further drain corporate investment capital. Yaron Gindi, president of the Tax Advisers Chamber, warned that escalating the enforcement of the retained earnings law would severely impair business growth and economic activity.
Advocate Roni Inbar echoed these concerns, emphasizing that the existing framework restricts companies from retaining cash reserves for operational flexibility, long-term investments, or economic downturns. Despite ongoing opposition, the Tax Authority maintains that insufficient time has passed to definitively assess the reform's long-term macroeconomic impact, signaling that further adjustments will likely proceed.
