What the statute says

Section 81B(b) lists three alternatives which, if met, mean the surcharge is not paid: company losses for the tax year under sections 28, 29 or 92 exceeding 10 per cent of the accumulated profits at the end of the preceding tax year; dividends on which tax was paid on distribution in an amount exceeding 50 per cent of the excess profits at the end of the preceding tax year; or dividends on which tax was paid on distribution at a rate of 6 per cent or more of the accumulated profits at that date.

The two are worded differently. The 6 per cent alternative reads “6% or more”, while the 50 per cent alternative reads “exceeds 50%”, so a distribution of exactly 50 per cent does not satisfy it. Income Tax Circular 2/2026 of 25 January 2026 words both as “at least”. The gap is real, and until it is clarified the statutory wording governs. The loss condition likewise reads “exceeds 10%” rather than exactly 10 per cent.

Two ways a dividend qualifies

The first is a dividend taxable in the hands of its recipient, other than one not included in the recipient company income under section 126(b). Circular 2/2026 adds that offsetting a loss or deducting an expense against the dividend income, in whole or in part, is treated as taxation of that part. The second is an inter-company dividend for which the distributing company elects to pay the highest rate applicable to a dividend under sections 125B and 121B, under the regulations made by the Minister of Finance pursuant to section 81B(b)(3)(c). This is the distribution alternative.

The main route, regulation 2

Under the regulations the company withholds and pays the tax to the assessing officer, gives the recipient a certificate by 20 March following the tax year in which the dividend was distributed, and files an online report by 30 April following that year. Circular 2/2026 states that the rate is the highest rate applicable to a dividend and gives 35 per cent for tax year 2025. As to the timing of the election and its reporting, the update to Circular 7/2025 of 8 February 2026 sets a mechanism of the earlier of the filing date of the return for the year under examination and the end of the following tax year. Those are circular provisions rather than the wording of the regulations.

The alternative route, regulation 4

Regulation 4 allows an inter-company dividend to be treated as one on which tax was paid under regulation 2, even where the distributing company withheld nothing at the time. Its conditions: the company that received the dividend distributed the whole of it to its own shareholders in the same year; tax was withheld on that onward distribution under the appropriate route; certificates were given before and after the distribution; the certificates were delivered to the assessing officer with the annual return; and an online report of the payment was filed. The regulations also accommodate a chain of companies where the recipient is not the final shareholder, subject to the same conditions. When this route is worth choosing, for instance where the rate applicable to the final shareholder is lower than the rate that would have been withheld, is a planning consideration and not a statutory condition.

Intermediate companies and notional dividends

Under the regulations an intermediate company is one that received an inter-company dividend from which tax was withheld, or to which a notional dividend was attributed. Regulation 3 sets a mechanism under which such a dividend is attributed notionally to the shareholders of the recipient, and where they are not final shareholders the attribution continues through the holding companies up to the final shareholders. The regulations also provide that part of a dividend actually distributed to a final shareholder is treated as not distributed, up to the ceiling and deductions in regulation 3(e). Regulation 5 provides that in computing the amount of dividends on which tax was paid, a distribution under regulation 4(a)(1), or a dividend treated as not distributed under regulation 3(e), is not taken into account. Circular 2/2026 explains the result as leaving the excess and accumulated profits of an intermediate company unaffected by the dividend it received, and states that an intermediate company seeking the exclusion for itself must make a distribution of its own.

Combining the routes

Circular 2/2026 illustrates a structure in which a closely held company applies the regulations to the part of the dividend attributed to a company, while section 125B governs the part attributed to an individual shareholder, and shows that the routes can be combined within a holding chain. The possibility follows from that illustration and from the structure of the regulations, rather than from a separate provision.

Application and the transitional rule

The regulations were published in Reshumot on 15 September 2025 and apply to a distribution made on or after their commencement. The transitional rule allows a company that distributed a dividend between 1 January 2025 and commencement to notify the assessing officer that the regulations shall apply to that distribution, and by that notice and payment of the tax to classify it as a dividend on which tax was paid.

Whom the regulations address

The regulations address the case where the dividend distributed, in whole or in part, is not included in the recipient company income by virtue of section 126(b). Where the dividend is taxable in the hands of its recipient it falls within the first alternative in section 81B(b)(3)(a) in any event, and the regulations are not needed. The examination follows the identity of the actual shareholders and the law applying to each of them.

Sources

Income Tax Ordinance, sections 81A to 81F, 121B, 125B, 126(b), 28, 29 and 92 · Economic Efficiency Law (Legislative Amendments for Achieving the Budget Targets for 2025) (Taxation of Undistributed Profits), 2024 · Income Tax Regulations (Dividends on which Tax was Paid on Distribution), 2025, published in Reshumot on 15.9.2025 · Income Tax Circular 2/2026, 25.1.2026 · Update to Income Tax Circular 7/2025, Circular 7/25(1), 8.2.2026 · CA 8511/18 Assessing Officer Netanya v. Delek Hungary · CA 2515/18 and others, MCL Kenyon Drorim v. Assessing Officer Petah Tikva