Crucial for Foreign Investors: The amendment explicitly excludes several types of companies from this regime, providing a safe harbor for certain international structures:

• Foreign Professional Company (as defined in Section 75B1).
• Controlled Foreign Corporation (CFC) (as defined in Section 75B(a)(1)).
• Preferred Company or Beneficiary Company (under the Law for the Encouragement of Capital Investments).
• Approved Enterprise (under the same Law).
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Taxation of Controlling Shareholder Income

The new Section 62A introduces three main taxation tracks designed to combat the deferral of personal tax via corporate structures:

1. Officer/Management Services Track: Income derived from acting as an officer or providing management services to another entity will be reclassified as personal exertion income of the controlling shareholder (taxed at marginal individual rates, up to 50%), unless the shareholder holds 25% or more of the recipient entity.
2. Employee-Employer Relationship Track: If 70% or more of the company's income derives from services provided to one person (or related party) for at least 22 months out of a 3-year period, the individual's activities will be deemed those of an employee.
3. Personal Exertion Track: Taxable income from activities requiring significant personal exertion will be attributed directly to the active shareholder.
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Taxation of Undistributed Profits (The "Surtax")

The reform introduces a new, automatic mechanism to tax profits trapped in Closely Held Companies that are not used for real business activity.
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The Mechanism (Sections 81A-81F):
A Surtax of 2% per year will be imposed on "Excess Profits" that are not distributed as dividends.
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How are "Excess Profits" Calculated?
The calculation is complex (detailed in Circular 7/2025), but essentially, it is the company's accumulated profits minus a deductible "Asset Shield."
The Asset Shield allows companies to retain profits tax-free if they are used for:

• Operational Expenses: The higher of current year expenses or the 3-year average.
• Real Assets: Investment in income-generating assets (equipment, inventory, active real estate).
• Note: Passive assets ("Special Assets") such as securities portfolios, luxurious apartments used by shareholders, or cash hoards do not count towards the shield.
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Transitional Provisions and "Safe Harbors"

The reform offers a window of opportunity for companies to release trapped profits or avoid the new surtax:

• Dividend Distribution Relief: Companies that distribute dividends by November 30, 2025, can secure an exemption from the 2% Surtax for future years (up to 2030), depending on the percentage of profits distributed.
• Liquidation / Asset Transfer: A temporary order allows for the liquidation of Closely Held Companies or the transfer of assets to shareholders in 2025 with significant tax reliefs (deferral of tax events). Deadlines for these requests are strict (agreements must be signed by Nov 30, 2025).
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Key Takeaways

• Review Your Classification: Foreign investors must immediately verify if their Israeli entity falls under the definition of a "Closely Held Company" or if it qualifies for an exclusion (e.g., CFC or Preferred Enterprise).
• The "Passive" Trap: If your Israeli company holds mostly passive assets (stocks, bonds, cash), it is highly exposed to the new 2% annual Surtax.
• November 2025 Deadline: There is a limited window to distribute dividends or restructure/liquidate the company under favorable terms. Missing this deadline could result in higher long-term tax costs.
• Operational Readiness: Companies must adjust accounting systems to track "Special Assets" and calculate the "Asset Shield" to report correctly in the annual tax return.
  
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FAQ

Q: Does this reform apply to companies owned entirely by foreign residents?
A: Yes. If the company is an Israeli resident company (incorporated or managed/controlled in Israel) and meets the definition of a Closely Held Company, the surtax applies regardless of the residency of its shareholders.

Q: What is a "Special Asset" (Neches Meyuchad)?
A: These are assets that the Tax Authority views as passive or personal, which do not protect profits from the Surtax. Examples include cash, marketable securities, crypto-currencies, and residential apartments used by the shareholder.

Q: Can I avoid the 2% Surtax without distributing dividends?
A: Yes, if the company reinvests its profits into "Real Assets" (like machinery, inventory, or active business expansion) or has high operational expenses that cover the accumulated profits. The tax targets passive hoarding of cash/securities.

Q: What happens if I ignore this?
A: The company will be liable for an additional 2% tax on its "Excess Profits" every single year. This is a compound cost that erodes the value of the investment over time.

Q: Is there a benefit to liquidating the company now?
A: Potentially. The temporary order allows for liquidation in 2025 with tax deferral mechanisms. If the company no longer serves a business purpose (e.g., it's just holding cash), liquidation might be the most tax-efficient exit strategy.

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