A special order introduced on November 15 2021, allowing Israeli companies to release trapped profits as a dividend at a reduced tax rate has earned the state NIS 2.9 billion in tax revenues on overall dividends of NIS 35 billion, as of November 13 2022, two days before the order expires. This amount is nearly three times higher than the NIS 1 billion that the government had expected to collect.
Trapped profits are undistributed income exempt from corporate income tax under the Encouragement of Capital Investments Law. Much of the money has been paid at the last moment. As of November 9 2022, NIS 2 billion had been paid in tax on dividends worth NIS 23 billion, and in September "Globes" reported that NIS 1.35 billion had been paid in tax from trapped profits on dividends worth NIS 12.7 billion.
Among the companies that took advantage of the opportunity to pay reduced taxes was Elbit Systems Ltd. (Nasdaq: ESLT; TASE:ESLT), which announced in February that it was bringing forward a payment of $80 million (NIS 250 million), while Rafael Advanced Defense Systems paid NIS 450 million in trapped profits and Israel Aerospace Industries notified the Tel Aviv Stock Exchange it had paid NIS 574.1 million ($164 million).
In the previous trapped profits order in 2012, the Israeli government collected NIS 4.3 billion from NIS 60 billion dividends of 204 companies.
Despite the large amount of tax received by the state from this order, the amount is only a drop in the ocean of the billions held by the companies. There was a chapter in the State Comptroller's Report in 2020 devoted to "undistributed profits." The State Comptroller described these profit as a tax breach used by controlling shareholders as a 'wallet company,' for the capital accumulated, while the Israel Tax Authority lost huge amounts in tax. According to the report companies had trapped profits of more than NIS 600 billion in 2018.
Published by Globes, Israel business news - en.globes.co.il - on December 5, 2022.
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