Dear clients and friends,
We would like to update you that, on September 15, 2026, the Israel Tax Authority published the Income Tax Implementation Directive No. 9/2026, entitled “Undistributed Profits – Practical Reporting Guidance.”, (to view the Implementation Directive, please click here), (hereinafter: the “Implementation Directive”).
The Implementation Directive is operational in nature and complements the professional circulars published following Amendment No. 277 to the Income Tax Ordinance and the Economic Efficiency Law (Taxation of Undistributed Profits), 2024. It sets out the online reporting requirements applicable to closely held companies and their shareholders, including the relevant fields, forms, appendices and tables to be completed as part of the annual tax returns.
With respect to Section 62A of the Income Tax Ordinance, the Implementation Directive regulates the reporting of income attributed from a closely held company to its shareholders, where the relevant provisions apply. The company is required to report the income attributed to the shareholders online as part of its annual tax return, while the shareholder is required to report the attributed income through Appendix 1362 to the annual tax return, based on confirmation issued by the company.
With respect to a closely held company whose income is derived from personal-effort activities, the Implementation Directive addresses two possible reporting alternatives:
- Attributing the income to the active shareholders while recording a corresponding expense in the company; or
- The “dividend alternative“, under which the company reports the full income, pays corporate tax and distributes a dividend to all shareholders. The active shareholder reports the attributed income as income derived from personal effort, and not as dividend income, while receiving the relevant credits for the corporate tax paid and the withholding tax, as applicable.
The Implementation Directive also provides guidance regarding the reporting of undistributed profits under Sections 81A-81F of the Ordinance. A company to which these provisions apply is required to report its accumulated profits and excess profits, including through Appendix 1281 to the annual tax return and Form 1214B.
As a general rule, where the company’s accumulated profits are below NIS 750,000, Appendix 1281 need not be completed. In addition, where a dividend equal to at least 6% of the accumulated profits was distributed and that alternative was elected, or where the loss alternative was elected, the appendix need not be completed in full, other than the accumulated-profits data. Until the system is updated, the Implementation Directive states that NIS 1 may be entered in Field G4, which addresses the calculation of the additional tax on the undistributed profits of a closely held company.
The Implementation Directive also addresses the reporting of a “dividend on which tax was paid upon distribution,” including a notional dividend in intercompany distributions. In the relevant circumstances, the shareholder is required to report the notional dividend in the annual tax return through a designated wizard, referred to as the “pocket,” based on a confirmation received from the directly held company. The application of this mechanism depends, among other things, on the ownership structure and the dividend distribution route selected.
The Implementation Directive also includes reporting guidance concerning the temporary provision enacted under the Economic Efficiency Law, including reporting in connection with the liquidation of a closely held company or the transfer of assets to individual shareholders under the routes established by the temporary provision. These instructions relate to actions carried out under the temporary provision in 2025.
Particular attention should be given to the fact that a person who was required to file a return under Section 62A or Section 81B of the Ordinance, failed to do so, and subsequently submitted a request to amend the return to include the required reporting, may be regarded as having submitted a request for a “material amendment“. In such circumstances, the assessing officer may consider cancelling the return and requiring it to be refiled by the taxpayer or its representative. This may have implications, among other things, for the filing date and the manner in which the return is assessed.
The Implementation Directive is an important step in clarifying the reporting requirements under the new rules. However, its implementation requires attention both to the substantive aspects of the application of Sections 62A and 81A-81F of the Ordinance and to the operational aspects of online reporting, including the completion of the relevant forms and appendices and the information required by the reporting systems.
We recommend that closely held companies and their shareholders assess the applicability of the relevant rules in advance, collect the required information and prepare accordingly for the annual filing process.
Shibolet’s Tax Department is available to assist with assessing the implications of the Implementation Directive and preparing for the relevant reporting obligations.
This memorandum includes general information only and does not constitute legal advice or a substitute for legal advice. Each case should be considered on its individual merits.
