Tax for an Israeli Investor in a Foreign Project Company: Dividends, Capital Gains, Controlled Foreign Company and Tax Treaties

Projects of Israeli developers abroad are often held through a local company: an SRL in Romania, a Greek company or a Cypriot company. The Israeli investors hold shares in this company, directly or through an Israeli company. The tax in the project's country is paid at the company level, but the question of what happens in Israel when the money comes back remains open for many until the moment of distribution.

This guide explains the principles of taxing an Israeli investor in a foreign project company, under the Income Tax Ordinance and according to the professional tax summaries. It does not replace advice from an accountant or tax adviser, because the outcome depends on the structure, the country and the treaty. On the Israeli side of holding a property abroad directly, see the guide to the Israeli side of a property abroad.

1When does an Israeli investor pay tax in Israel on a foreign company?

As a rule, on two events: when the company distributes a dividend, and when the investor sells their shares. As long as the profit remains in the foreign company, and subject to the exceptions below, there is no tax in Israel at the investor level. The exceptions are two situations in which Israeli law “pulls” the company or its profits into Israel: a company managed from Israel, and a controlled foreign company.

2How much tax is paid in Israel on a dividend from a foreign company?

Under Section 125B of the Income Tax Ordinance, as of November 2026, a dividend received by an individual is taxed at 25%. If the individual was a substantial shareholder in the paying company, on the date the dividend was received or at any time in the 12 months preceding it, the rate is 30%. According to the PwC tax summary, a substantial shareholder is anyone who holds 10% or more of any means of control in the company. In projects with a small number of investors, many of them will be substantial shareholders.

The project's country usually withholds tax at source from the dividend. The tax treaty between Israel and that country, if there is one, may limit the withholding rate. The tax withheld abroad is credited against the Israeli tax on the dividend. If the Israeli investor is an Israeli company and not an individual, according to PwC a dividend from a foreign company is generally taxed in its hands at 23%, and in certain circumstances it may elect regular corporate tax and receive a credit also for the corporate tax the foreign company paid.

3How much tax is paid in Israel on selling shares in a foreign company?

According to the PwC tax summary, as of November 2026, a real capital gain from the sale of shares acquired from 1.1.2003 is taxed at 25% for an individual, and at 30% for a substantial shareholder. A real gain is the gain after deducting the rise in the index. In a project that ends with the sale of the property by the company and the distribution of the money, the event is a dividend. In a project that ends with the sale of the shares of the project company, the event is a capital gain. The choice between the two also has tax implications in the project's country; see the guide to exiting a project: asset sale or share sale.

It is also important to check the tax treaty: in some treaties the rule on real estate applies only to a direct sale of the real estate and not to a sale of shares, and in others there is a special rule for shares of a company most of whose value is in real estate. For example, according to the guide to Israel's tax treaties, in the treaty with Greece the rule giving Greece alone the right to tax the sale of real estate does not apply to the sale of shares of a Greek company that holds the property.

4How does the credit for tax paid abroad work?

Foreign tax paid on foreign income that is taxable in Israel is credited against the Israeli tax, under Sections 199 to 210 of the Ordinance. The main principles:

• Cap. The credit does not exceed the Israeli tax on the same income. According to PwC, foreign income is classified by source (for example, dividend or business income), and each source has a separate cap.
• Excess credit. Under Section 205A, foreign tax exceeding the credit may be set off against the tax on foreign income from the same source in the following five years, linked to the index.
• Exempt income. Under Section 201, foreign tax paid on income that is exempt from tax in Israel is not credited.
• Residence. Under Section 200, the credit is given only to someone who was an Israeli resident in that tax year.
• Supporting documents. Without confirmation of the withholding or payment abroad, it is difficult to obtain the credit in practice.

5When is the foreign project company considered an Israeli company?

When the control and management of its business are exercised in Israel. Under Section 1 of the Ordinance, a body of persons is an Israeli resident if it was incorporated in Israel, or if the control and management of its business are exercised in Israel. A Romanian or Greek company all of whose decisions are made at meetings in Tel Aviv and in emails from Israel is exposed to the claim that it is an Israeli resident, in which case it may be liable to corporate tax in Israel. When a company is considered resident in two countries, the tax treaty usually decides.

In practice, a local director with real powers, board meetings in the project's country and documentation of decision-making there are part of the planning. These decisions are also connected to the founders' agreement and its decision matrix.

6What is a controlled foreign company (CFC), and does it apply to a project company?

Section 75B of the Ordinance provides that a controlling shareholder in a controlled foreign company is deemed to have received as a dividend its proportionate share of the undistributed profits. According to the wording of the section, a foreign company is a controlled foreign company only if all of the following conditions are met:

• Its shares or rights are not listed for trading on a stock exchange, or less than 30% of them have been listed for trading.
• Most of its income in the tax year is passive income, or most of its profits derive from passive income.
• The tax rate that applied abroad to its passive income does not exceed 15%.
• More than 50% of one or more of its means of control are held, directly or indirectly, by Israeli residents, or one of the alternative tests in the section is met, for example a right of an Israeli resident to prevent material management decisions.

A “controlling shareholder” for the purposes of the section is an Israeli resident who holds, alone or together with another, at least 10% of one of the means of control. Rent is listed in the section among passive income, except income that would have been considered business income had it been generated in Israel. A company holding apartments for rent in a country with low corporate tax may therefore meet the conditions. A company that builds and sells apartments as a business activity is less exposed, but each year needs to be checked separately, because the composition changes: for example, after construction has been completed and the company is left with unsold apartments that are rented out.

Where a deemed dividend has already been taxed, the section provides mechanisms to prevent double taxation: a dividend actually paid out of the same profits is reduced by the amount of the deemed dividend, and on the sale of the shares a deemed dividend that was taxed and not yet distributed is deducted from the consideration. In addition, a person who became an Israeli resident for the first time or a long-term returning resident, and for whom ten years have not yet passed, is not considered an Israeli resident for the purposes of the section.

7What do tax treaties change?

A treaty for the avoidance of double taxation sets out which country may tax each type of income and up to what rate. For dividends, treaties usually limit the withholding rate at source in the company's country, and Israel taxes and gives a credit. For gains from the sale of shares, the rules vary from treaty to treaty. Israel has not signed a treaty with every country: according to the guide to Israel's tax treaties, for example, there is no treaty with Cyprus, and the credit there is given under Israeli law alone.

When investing in Romania, it is also worth reading the guide to the Israel-Romania tax treaty and the guide to the 2026 tax changes in Romania, which covers the changes in dividend tax.

8What needs to be reported in Israel?

An Israeli resident holding shares in a foreign company may be required to file a declaration of the holding, for example on Form 150, and an annual return reporting the dividends, the capital gains and any deemed dividend. In addition, a sale of shares requires reporting and payment of an advance according to the rules. For the reporting to be accurate, the investor needs to receive orderly annual information from the company. See the guide to investor reporting and capital calls.

9What should you check before investing in a foreign project company?

1. Check the corporate tax and the withholding tax on dividends in the project's country, and what the treaty provides, if there is one.
2. Calculate the total burden: corporate tax abroad, tax on the dividend, tax in Israel and surtax.
3. Check whether you will be substantial shareholders (10% or more).
4. Check how the company will be managed, and who makes decisions and where.
5. Check whether the company may meet the conditions of a controlled foreign company, at any stage in the project's life.
6. Decide whether to hold directly or through an Israeli company, with an accountant.
7. Make sure the company will provide you with annual information and certificates of tax withheld at source.

10How do we support this?

We build the holding structure and the shareholders' agreement together with the investors' accountant or tax adviser, and coordinate the management of the company in the project's country with lawyers licensed there. The aim is for the decisions on the structure to be made before the investment, while they can still be changed.

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