Proposals have been presented to reduce the tax rate on dividends distributed out of profits generated before 2003. In general, regular companies in Israel pay 26 percent company tax on their profits in 2009. This is down from 36% a few years ago. By contrast, regular corporations in the United States pay 35% federal tax plus state tax. If the remaining 74% of after-tax profits are distributed as a dividend to controlling shareholders with 10% or more of any means of control in the company, dividend withholding tax is payable to the Israel Tax Authority at a rate of 25% by the 15th day of the following month. The resulting combined tax burden is 44.5% (26% plus (25% of 100% minus 26%)). For minority shareholders controlling less than 10% of all means of control of the company, the dividend withholding tax rate is 20%, resulting in a combined tax burden of 40.8% (26% plus (20% of 100% minus 26%)). There is no National Insurance Institute (NII) liability unless the company has elected to be a family company (see below) or a house property company (outside the scope of this article). In practice, successful privately run companies often pay salaries to their controlling shareholders that are taxed at graduated rates ranging from 10% to 46%. Theses salaries are also subject to NII contributions at rates ranging up to 5.43% for employers and 12% for employees (the controlling shareholders) on the first NIS 38,415 of monthly salary. The salary and employers' NII contributions are deductible expenses. If the company is doing well, surplus income after paying salaries, NII contributions, other expenses and company tax is often retained indefinitely by Israeli companies. This retained income may be used as working capital or it may be invested in other things such as securities or real estate. Now it seems the government is despairing of ever collecting tax on retained income; so much so, that the government recently proposed reducing the dividend withholding tax rate from 20%-25% to 12%, provided the following conditions are met: â€¢ The dividend is distributed out of profits derived in the period January 1, 1996, to December 31, 2002; â€¢ For these purposes, distributable profits are the lower of accounting profits per the financial statements and taxable income in that period; â€¢ The dividend is received by an individual or a family company (see below); â€¢ The dividend is received in 2010; â€¢ The payor company is not listed on a stock exchange; â€¢ In the year the dividend is distributed, and in the following two years, total payments (salary, management fees, loan interest, indexation and other payments) from the company to the shareholder, directly and indirectly, are no less than the average of such payments made in the years 2007 and 2008. Note that the above proposal still requires Knesset approval. Readers who are controlling shareholders of regular private Israeli companies may want to wait and see before receiving dividends from them in case the 12% rate is enacted. Other possibilities also exist. Freelancers pay income tax at rates of 10% to 46% plus NII contributions at rates ranging up to 16.23% on the first NIS 38,415 per month. BUT, 52% of their NII payments are deductible expenses for income tax purposes. This results in a potential combined tax and NII burden of about 60% until the NIS 38,415 income level is reached. "Family companies" are companies that are owned by members of one family who elect to attribute their income to the largest or joint-largest shareholder for tax purposes. The tax arithmetic is similar for them. Many Israeli industrial and hi-tech companies enjoy tax breaks on their income (0% to 25% company tax) if they are "approved enterprises" or "privileged enterprises" under the Law for the Encouragement of Capital Investments, 1959. Their dividends are usually taxed at a rate of 15%. As for the NIS 38,415 income limit for NII contribution purposes, proposals exist to raise it to about NIS 60,000 per month. This would make dividends even more attractive. As always, consult experienced tax advisers in each country at an early stage in specific cases. firstname.lastname@example.org Leon Harris is an international tax specialist.