The Knesset Finance Committee approved the major reform in the 2025 budget. After a lengthy campaign against the move by business organizations, a majority of Knesset members in the committee voted in favor of the complex law that will enable the state to collect taxes on an estimated NIS 150 billion in profits held in companies. Personal services.
“Retained earnings” are accumulated profits in companies on which only 23% corporation tax has been paid. Only if the profits are distributed as dividends will an additional tax of up to 30%, plus an additional tax in many cases, be paid as income tax.
The original proposal submitted by the Ministry of Finance had imposed a new tax of 2% annually on all retained profits. In the course of the discussions, an alternative path was added, mainly intended for holding companies, where the tax could be replaced by a dividend distribution, as a priority of 5% of the accumulated amount, and 6% from 2026.
“The Ministry of Finance wants to make up for the deficit caused by the war, so it is in effect forcing shareholders to pay dividends even if they are not planning to do so,” explains Ai Maman, partner at CPA. Rabinovich Even Maman Accounting Firm. “In addition, the Ministry of Finance has established a new method of calculating corporate tax that will be applied to companies from 2025, where two rates of tax will be applied to profits retained in the company: corporate tax on profits representing up to 25% of turnover and a rate The margin on profits exceeds this rate, which is equivalent to the tax rate payable by shareholders, and as a result of this method of calculation, the shareholders of the company will be able to accumulate much lower trapped profits in the coming years.
Which companies will the law apply to and which will be exempt?
“The new rules will apply to companies with up to five shareholders and an annual turnover of less than NIS 30 million, and holding or investment companies with significant negative shareholder equity. This includes personal services companies, the liberal professions, accountants and lawyers.” “Partnerships and medium-sized companies,” Maman says.
Which companies are worth choosing the alternative path to mandatory dividends, and which companies are best relative to the original path of a 2% tax on cumulative profits?
“Most companies will choose an annual dividend of 5-6%, because after paying tax they are also paying out money to shareholders, which means that financially this is just an early payment of tax. I don’t see any sense in choosing the 2% alternative, because this It constitutes a fine in any case, and will only erode shareholders’ equity. A few extraordinary companies may choose to use this option, but it is still unclear what proportion of the shareholders’ equity penalty must be paid if the account results in the payment of tax Remember, and then “There is a logic to her choice.”
What is the importance of increasing the tax on dividends, and is it beneficial for companies to distribute dividends before the end of 2024?
“The new additional tax of 2% will apply to capital gains only. It does not affect dividends from other income, and is only applied from NIS 720,000 annually. It is not clear why all types of companies rushed to pay dividends, because the new tax will not be Applying the additional tax on dividends In any case, the decision to pay dividends can be made until December 31, and notified to the authorities until January 15, 2025. So there is no sense in rushing to pay dividends just for the sake of reform.”
The complex new legislation has succeeded in confusing even experts. While Maman interprets the new surtax as not applying to dividends, others in the industry believe it will apply to them in relation to other capital income, with the exception of a certain exemption for the sale of a home.
How can companies properly prepare in the new situation regarding tax planning?
Maman: “There is no real tax planning that can be done at the moment, except for anyone who is self-employed (Filter axis) Who planned to set up a personal services limited company should think again. The question is whether it is still worthwhile under the new tax method, because maintaining a limited company is more expensive than being self-employed. In addition, capital market investors who own securities with profits exceeding NIS 720,000 should consider selling in 2024 and pay the current tax rates (25% on capital gains plus an additional 3% tax), instead of 30% applicable from 2025.”
Published by Globes, Israel Business News – en.globes.co.il – on December 29, 2024.
© Copyright Globes Publisher Itonut (1983) Ltd., 2024.
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