Trapped Profits: What to Report Under Executive Directive 9/2026 and When

The tax on trapped profits (Amendment 277 to the Income Tax Ordinance) applies from 1.1.2025, and Income Tax Executive Directive 9/2026, published by the Israel Tax Authority on 15.9.2026, sets out how it is reported in the annual return. A closely held company completes the Section 62A system and Appendix 1281 to Form 1214, and the shareholder completes Appendix 1362 based on a certificate received from the company. The 2% additional tax on profits not distributed in 2025 must be paid no later than 31.12.2026.

• Source: Income Tax Executive Directive 9/2026, dated 15.9.2026. This is an operational directive that supplements Income Tax Circulars 3/2025, 7/2025, 1/2026 and 2/2026.

• The law: Amendment 277 to the Ordinance, in force from 1.1.2025.

• Who it applies to: a closely held company under Section 76(a) of the Ordinance and its shareholders.

• Threshold for Appendix 1281: accumulated profits of NIS 750,000 or more as of the end of the previous year.

• Rate: 2% on excess profits, after deducting dividends distributed in the same year (Section 81B).

• Payment date for the additional tax: the filing date of the return or the end of the year following the tax year, whichever is earlier.

• Forms: Form 1214 (fields 169, 167 and 073), Appendix 1281, Appendix 1362 and Form 1214B.

The amendment already applies from 2025. The directive adds the practical side: which field to complete and in which appendix. It was published after the official filing deadline for companies' 2025 returns, while representatives are still filing under the extension arrangement.

Section 62A: A Company Whose Income Derives from Personal Exertion

Part A of the company's return asks whether it is a closely held company to which Section 62A applies. A positive answer opens the "Section 62A system", in which the income attributed to the shareholders is calculated. Section 62A(a1) applies when three conditions are met together: turnover from personal-exertion-intensive activity is below NIS 30 million multiplied by the number of controlling shareholders, the profit margin exceeds 25%, and accumulated profits at the end of the previous year exceed NIS 750,000. Profit above 25% is attributed to the active shareholder.

The company has two ways to report. In the first, it records an expense equal to the attributed income and issues the shareholder a certificate. In the second, the "dividend alternative", it pays corporate tax and distributes a dividend, and the shareholder reports the income as personal-exertion income and offsets the corporate tax and the tax withheld. In the example in the directive, out of taxable income of NIS 1,000,000, NIS 750,000 is attributed, the corporate tax on it is NIS 172,500, and the dividend distributed is NIS 577,500.

Sections 81A to 81F: 2% Additional Tax on Undistributed Profits

Appendix 1281 calculates the accumulated profits, the excess profits and the track the company has chosen. Excess profits are accumulated profits less exempt profits and less the highest of three shields: a cash shield of NIS 750,000, an expense shield and an asset shield. A company that distributed 6% of its accumulated profits, or that chose the loss alternative, enters only its accumulated profits in the appendix.

Timeline

1. 1.1.2025: Amendment 277 enters into force.

2. 19.10.2025: Income Tax Circular 7/2025 on Sections 81A to 81F (updated on 8.2.2026).

3. 30.7.2026: Official filing deadline for the 2025 return for companies and controlling shareholders. Representatives have a separate extension arrangement.

4. 15.9.2026: Publication of Executive Directive 9/2026.

5. 13.10.2026: Israel Tax Authority information page with reporting tutorial videos (updated on 26.10.2026).

6. 31.12.2026: Final date for paying the additional tax for 2025, if the return has not been filed earlier.

The directive applies to a closely held company, meaning a company controlled by no more than five persons, which is not a subsidiary and in which the public has no substantial interest. It also applies to the individual who holds it: anyone who indicates in their personal return that they are a shareholder in a company to which Section 62A applies must complete Appendix 1362.

In several situations, part of the reporting is not required. A company whose accumulated profits are below NIS 750,000 is not required to complete Appendix 1281. A company whose income derives from a Beneficiary Enterprise, Preferred Enterprise, Preferred Technological Enterprise or Special Preferred Technological Enterprise is not required to complete the Section 62A appendix. The 2% additional tax is not imposed where the company distributed 6% of its accumulated profits (5% in 2025) or more than 50% of its excess profits, or where its current-year loss exceeds 10% of its accumulated profits.

A dividend distributed under the Section 62A dividend alternative is not counted toward the 6% or 50% threshold. Anyone relying on it to avoid the additional tax should check whether an additional dividend is required.

Before submitting the 2025 return, or if it has already been submitted, it is advisable to go through these steps:

1. Calculate accumulated profits as of the end of the previous year (for the 2025 return, as of the end of 2024) based on the lower of the tax method and the accounting method.

2. Run the Israel Tax Authority's simulator for attributing income under Section 62A. It is anonymous, and the data is not saved.

3. Decide between recording an expense in the company and the dividend alternative, and issue the certificates to the shareholders.

4. Ensure that Appendix 1362 in the personal return matches the certificate. Under the dividend alternative, the corporate tax credit in field 100 is limited to 23% of the amount in fields 084 and 092.

5. If 2025 advance payments were made on all the income in the company's file, you can ask the Collection Department to freeze the debt in the shareholder's file for three months, for the portion covered by those advance payments.

6. If the return was submitted without this reporting: a request to amend it may be treated as a "material amendment" under Executive Directive 3/2018. In that case, it is advisable to consult an income tax lawyer before filing.

The decision between distributing a dividend and paying the additional tax is part of corporate tax advice and planning. At the firm, this area is handled by Adv. & CPA Shlomi Vaknin, who worked for 18 years as a senior partner at a tax firm before founding the firm in 2024.