On 30 September 2026, Supreme Court President Yitzhak Amit rejected a request for a further hearing on the petition against Israel's tax on retained earnings. The request came from the Rubinstein Group. The court had already dismissed the petition itself in May 2026 and ruled the law constitutional. With this decision the legal route is closed, and the law stays in force as written.
Who the law covers
The law is Amendment 277 to the Income Tax Ordinance, in force since 1 January 2025. It applies to a "company of few": a company controlled by up to five people. Public companies, subsidiaries of larger companies and companies on special incentive tracks are excluded.
A freelancer working as an osek patur or osek murshe is not affected, because there is no company involved. Someone who opened a limited company to pay corporate tax on the profit and draw only what they need is exactly who the law targets. Its stated purpose is to deal with "wallet companies", used to push their owners' personal tax to a date of the owners' choosing.
Two parts to the amendment
The first part widens the cases in which a small company's income is attributed to its owners as if they had earned it personally. It is then taxed at their personal income-tax rates, even if the money never left the company.
The second part is an annual 2% tax on profits the company has accumulated and not paid out as dividends. It does not apply to the whole accumulated profit. Taxes paid, dividends distributed, losses and income already attributed to the owners are subtracted first. The company then gets an exempt cushion, the highest of a fixed amount, its running expenses, or its net asset value. Only what remains above the cushion is taxed at 2%.
Avoiding the 2% charge
A company that pays out, in a given year, a dividend of at least 6% of the profits it had accumulated by the end of the previous year is exempt from the 2% for that year. In 2025 the bar was 5%, as relief for the first year.
The dividend itself is taxed in the shareholder's hands. So the choice is between two payments: 2% on the surplus that stays in the company, or dividend tax on 6% of accumulated profit paid out to you. Which costs less depends on the size of the accumulated profit, the exempt cushion, and what you plan to do with the money.
Before the end of 2026
Anyone who was waiting to see whether the court would strike the law down before deciding no longer needs to wait. The year closes on 31 December, and the 2026 calculation runs on profits accumulated by the end of 2025.
Sit down with your accountant now, at the start of the last quarter, and get three numbers: how much accumulated profit the company holds, how much of it falls inside the exempt cushion, and what a 6% dividend would cost against the 2% tax. If your company mostly sells your own work, also ask whether part of its income is attributed to you personally under the first part of the amendment.
The petitioners said they will keep working to change the law. With the court finished, any change can only come from the Knesset, so planning for this year should assume the law applies.