"Enacting the Taxation of Undistributed Profits Law was the right thing, regardless of the war and the budget. The need to increase state revenues contributed to it being expedited, but this reform is also right for ordinary times, and we would have advanced it regardless of the need to fill the state coffers," says Karim Kanaan, Chief of Staff to the Director of the Tax Authority, who led the legislation on behalf of the Tax Authority, and is currently in charge of its implementation.
Five months have passed since the Taxation of Undistributed Profits Law -- better known as the "trapped profits reform" -- came into effect, imposing a new tax on companies sitting on piles of cash instead of distributing it as dividends, and it seems that the economy still refuses to internalize it. The law, which caused a public uproar during the legislative stages, is still being criticized, and although it has already entered the statute book and is being implemented, from time to time the Authority still receives letters "threatening to turn to the High Court of Justice" against the legislation. Among them is a letter recently sent from the Association of Client Representatives in Israel, through Attorney Raz Nizri , a former deputy attorney general, claiming that the reform is illegal.
"We’re preparing a response to this letter, but in general it doesn't surprise me that the market had a hard time accepting it at first," says Kanaan. "It's not a simple matter to come down on a company and force it to distribute profits. When we advanced the legislation, client representatives told me it was 'reminiscent of a dictatorship.'"
And how did you answer them?
"That we were referring to cases in which even existing tax law, Section 77 of the Income Tax Ordinance, would have allowed for the forced distribution of profits, and that all of the conditions and exemptions we set out in the new legislation were intended to protect precisely those companies incorporated in advance to take advantage of the two-stage tax benefit, and are not abusing the law. We focused on those companies that are abusing the system."
"Implementation was cumbersome"
Kanaan (35), who came to the Tax Authority 12 years ago as a young accounting intern, and was appointed Chief of Staff to the Authority's director two years ago, not only led the trapped profits reform, he was also one of its initiators. A few years ago, he was responsible for implementing Section 77 and discovering how difficult the legislation was to implement. As part of the amendment to Section 77 of the Income Tax Ordinance, it was determined that the Tax Authority director would be able to require owners of companies sitting on mountains of cash, in the tens and hundreds of millions of shekels, to pay a high 50% tax on their accrued profits as if they had distributed them as dividends.
"We started implementing the Section and discovered there were many companies that had trapped profits, did not distribute them to shareholders and postponed the second phase of the dividend tax. However, applying the Section was cumbersome. The file had to be accessed, investigated, transferred to an advisory committee that took time to process the material, hold a hearing, and more. After the committee had finished its work, it had to recommend to the Tax Authority director how to act in each individual case, and then the procedure would restart with the Authority," explains Kanaan.
"In addition, we would go to a company and say, 'You need to distribute profits,' and then it would come to us with a business plan and show us where it wanted to invest in the next five years, which is where the Section blocked us. If the company had the intention of investing the funds, we couldn’t compel it to distribute. When we examined these cases retrospectively, it became clear that most of the companies did nothing, but they bought time, and the Authority didn’t have the tools to enforce dividend distribution."
"They made me mad"
The legislation was not simple, and Kanaan, who served as the Tax Authority's representative during the Finance Committee's deliberations, received plenty of criticism. "There was a personal element here on the part of those who attacked the legislation, because unlike regular legislation, which usually does not directly concern the lawyers and accountants, this legislation also affected partnerships of client representatives, and then, when a representative of the accountants or lawyers associations sits on the Finance Committee, he is also talking about his own case. It hit their wallets," says Kanaan, recalling how he lost his composure during one of the committee's deliberations: "The accountants put up a fight to not be included in the legislation. Shay (Tax Authority Director Shay Aharonovich, E.L-W.) himself came to one of the sessions, and the discussion blew up. "I'm a calm person, but they managed to make me mad, and there are photos of me shouting and raging, and Shay, too, because we had reached an understanding with them, and the next day, at the committee meeting, they reneged on it."
At that same session, Aharonovich said that withdrawing the legislation meant increasing VAT by 2% and not just 1%, and the hearing was closed without a decision. "I didn't get any sleep that night, because we were at a point, right at the end of the legislation, and I was afraid it wouldn't happen. This was something I’d worked on every day from eight in the morning till ten at night, sometimes even midnight, and suddenly we were afraid it would bomb. But in the end, we succeeded."
Following the reform, in December 2024, dividends were distributed in volumes larger than a normal average month, and the taxes collected on these (received in January 2025), amounted to over NIS 9 billion -- equivalent to the total annual collection on dividends in recent years. "We estimate that about NIS 5 billion more will come in each year as a result of this legislation. What we have seen now is one-time money, resulting both from the increase in the surtax, and from the fact that many companies that had been sitting on the fence, waiting for some dividend tax break, realized there was no chance of it happening, so they distributed dividends. Many companies that wanted to get down to the legislation’s minimum threshold, so that it wouldn’t apply to them, eroded their accumulated profits in order to get below NIS 750,000."
Or companies can engage in tax planning to evade the legislative requirements.
"As with any legislation, there is a tax planning aspect. However, once it crosses the line into cheating, it becomes a criminal matter-and we will take action against anyone who breaks the law. This reform is based on data that can be analyzed using the technologies at our disposal, so scams will be discovered. After all, how did we know there were NIS 700 billion in undistributed profits since 2013 alone? Thanks to the data available to the Tax Authority and our analysis."
Client representatives tell us that because of the Authority's staffing problem and inability to handle the case overload, their clients are taking more risks today out of a belief that you won't get to them.
"In any tax system, it's impossible to address 100 percent of cases, so I assume those who like taking a risk have done so. However, they are mistaken if they think they can rely on this to commit tax offenses or push the limits of what is legally allowed. It’s true there’s a personnel shortage at the Tax Authority, but technologies are constantly developing, and we are compensating for part of the problem through technology and through the collaborations we have with other authorities and government entities.
"For example, some of the internal procedures I’ve advanced include creating a platform for cooperation with the Prime Minister's Office and with the Chief of Staff at the Bureau for Combating Crime in Arab Society, and I created new cooperative arrangements with the Population and Immigration Authority, which until recently didn’t speak to the Tax Authority."
And how will you solve the problem of manpower and the Tax Authority’s empty corridors?
"There is a new salary agreement that increases the salary of new tax inspectors by about NIS 2,000 more than someone starting out in the private sector receives. The Tax Authority is the State of Israel’s best taxation school. I think we’ve regained our advantage, and that we’ll see the ranks filling up soon."
Giving up on the dream
Kanaan was born and raised in the Arab city of Kafr Qara, where he still lives today. His father tiled floors and his mother worked in odd jobs. He has two sisters, one of whom also studied accounting as well as law. She currently works with him at the Tax Authority. The other sister is a teacher.
You are all public servants.
"Yes. We see it as a mission. My sister works as a tax collector in Hadera and the other is a teacher who teaches in the south. My wife is also a public servant; she’s a social worker at the Kafr Qara municipality. I take care of the richest people and she takes care of the poorest people. A few years ago, I decided to leave the Authority. I had already signed a contract with a large firm that promised me a partnership after three years, so I could earn millions very quickly, but the Tax Authority director called and convinced me to stay in the position of Chief of Staff, and I don't regret it for a moment. The millions will come in the future."
As a child, he dreamed of becoming a farmer like his uncles and growing fruits and vegetables, but upon graduating from high school, he enrolled in accounting and economics studies. "I've always loved the land and agriculture, and it's still a hobby of mine today. I have an olive grove and many trees that I grow in the yard, but I realized that I had to give up my childhood dream to make a living. I got a 99 on my matriculation exam with 5 units in math, and I thought that accounting was related to math. In retrospect, I discovered that wasn't true."
Upon graduating with honors in accounting and economics, he was accepted for an internship at a Big Four accounting firm. Right before starting work, he discovered that a new tender had opened for interns at the Tax Authority. "I applied on the last day of the tender, and I almost wasn't accepted, because it turned out that I hadn't indicated whether I was from an affirmative action sector. They wanted to disqualify me because of that, but they agreed in advance that I would compete without affirmative action, and I was accepted.
"When I took the Tax Authority inspector course, I competed against 10,000 candidates. Today, it’s harder to recruit interns and accountants, not just at the Tax Authority but throughout the market; the firms also have problems. But this year we’ve seen students coming to us again. There is a recovery."
Published by Globes, Israel business news - en.globes.co.il - on May 25, 2025.
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