High-income earners in Israel prepare to pay an additional surtax

The latest amendment to Israel’s Economic Efficiency Law was enacted at the end of 2024 with the aim of increasing State revenues and reducing the tax deficit. The law inter alia, amends section 121B of the Income Tax Ordinance, which specifies the tax rates imposed on high-income earners.

Currently, section 121B of the Income Tax Ordinance prescribes that individuals with annual taxable income exceeding the maximum of ILS 721,560 are subject to a 3% surtax on that portion exceeding the maximum in the 2025 tax year. In other words, such individuals will pay a total of 50% tax in respect of taxable income exceeding the maximum.

“Taxable income” includes all sources of income specified in the Ordinance, including income generated from personal exertion and from a business, and capital income (capital gains, interest, dividends, etcetera).

Additional 2% surcharge on high capital income

The latest amendment to the Arrangements Law adds section 121B(a1) to the Income Tax Ordinance. This section stipulates that, as of 2025, an additional 2% surtax will be imposed specifically on taxable capital income (income from dividends, interest, capital gains from real estate sales and other capital sources) exceeding the maximum of ILS 721,560. This means that taxable capital income exceeding the maximum will now be subject to an inclusive surtax of 5%.

In other words, anyone whose taxable annual income exceeds the maximum of ILS 721,560 will be subject to a 3% surtax on the sum exceeding the maximum. If part of the annual taxable income is from capital sources, and that portion alone exceeds the maximum, then that portion exceeding the maximum will be charged an additional 2% surtax (i.e. a total of 5%).

A few emphases in this regard:

• Income from capital sources is income generated, for example, from interest, dividends, capital gains and real estate appreciation. The Income Tax Ordinance defines capital income as any income not generated from a business or employment or any other income deriving from personal exertion.

• Capital gains from the sale of any residential apartment (including residential apartments that are not exempt from betterment tax) will not be included in the calculation of taxable income, provided that the apartment’s sale value does not exceed ILS 5,382,285 (the maximum amount correct as of 2025). If the apartment’s sale value exceeds this sum, the real capital gain (in respect of the full sale value) will be added to the taxable income for the purpose of calculating the surtax.

• The Israel Tax Authority published directives in February 2025 that provide several examples demonstrating how the new amendment will be implemented under various circumstances. Following is an illustrative example:

Let’s assume that an individual’s annual taxable income totals ILS 2,000,000: ILS 1,000,000 from capital sources and ILS 1,000,000 from personal exertion.

All taxable income exceeding the maximum of ILS 721,560 will be subject to a 3% surtax. In addition, capital income exceeding the maximum, will also be subject to an additional 2% surtax (i.e. the total capital income exceeding the maximum will be subject to a 5% surtax).

***

If you have any doubts concerning how the new surtax applies to you, do not hesitate to contact Barnea Jaffa Lande’s tax department. We will be happy to advise you and answer any questions about the surtax and about any other tax issues.