The Israeli Government has formally sanctioned a substantial increase in both corporate and individual tax rates, a fiscal measure scheduled for official announcement by December 26, 2025. This action is primarily intended to bolster the national budget to finance escalating security expenditures and to curb a widening budget deficit, which is projected to reach 1.5 trillion shekels in the coming years.
Israel
The Ministry of Finance justified the overhaul by noting that current Israeli tax rates lag the Organization for Economic Co-operation and Development (OECD) average of 28%. The proposed structure includes raising the corporate tax rate to a range between 23% and 25%. Concurrently, the individual income tax rate is set to increase, targeting a rise to between $75 and $150, though the specific bracket application requires further clarification. This policy shift is intended to anchor the budget within an economic plan that the Knesset is expected to approve by July 21, with the tax hikes scheduled to take effect in the 2026 budget cycle.
The need for revenue generation is underscored by significant national financial strain. Recent reports indicated the 12-month trailing fiscal shortfall reached 4.9% of Gross Domestic Product (GDP) in October 2025, with projections suggesting the 2025 annual deficit could approach 5.1% of GDP. The government is financing ongoing military operations, which have contributed to soaring defense costs; for instance, the Ministry of Finance and the Ministry of Defense agreed on an addition of over NIS 28 billion for 2025 to support intensive military operations through the end of the year.
The Ministry of Finance further highlighted a disparity where major corporations, particularly in the high-tech sector benefiting from existing incentives, currently operate under a tax rate approximately 40% lower than the prevailing average. This recalibration raises questions regarding the interface between these new, broader tax increases and sector-specific benefits, such as those provided by the Law for Encouragement of Knowledge-Intensive Industry, effective through December 31, 2026. The reform must be carefully implemented to maintain the competitiveness of this crucial economic engine.
Other concurrent adjustments for 2025 include an increase in Value Added Tax (VAT) from 17% to 18% and adjustments to National Insurance contributions. To address accumulated corporate profits, privately owned companies face a choice: pay a 2% tax on retained earnings or distribute at least 5% of those profits as dividends in 2025. This measure aims to curb the use of 'wallet companies' that retain earnings to avoid the second tier of dividend taxation, a practice the Israel Tax Authority estimated resulted in an annual loss of NIS 5 billion to NIS 6 billion in dividend tax revenue.
This juxtaposition of broad tax increases to cover security spending and targeted tax relief—such as lowering the income tax rate on carried interest for investment funds to approximately 27% from 50%—illustrates the complex fiscal balancing act facing the Israeli Government as it navigates the economic aftermath of sustained conflict.
