Key points
- Section 3(t): imputed interest on a loan to a shareholder — 6.53% in 2026.
- Section 3(t1): withdrawals by a substantial shareholder not repaid by the end of the following tax year may be treated as income.
- Section 3(j): loans between related parties — 4.9% in 2026.
When a company transfers money to a shareholder — as a loan or a withdrawal — the tax rules examine whether this is a taxable benefit. Three main sections of the Ordinance deal with it.
Section 3(t) — imputed interest
A loan to an employee or individual shareholder that does not bear interest at the rate set in the regulations — the difference between the set rate and the interest actually paid is income in the borrower's hands. In 2026 the section 3(t) rate is 6.53%. The computation is by actual days, based on the balance in each period.
For example: an interest-free loan of ILS 500,000 outstanding throughout 2026 — the shareholder's income: 500,000 × 6.53% = ILS 32,650.
Section 3(j) — loans between related parties
In a loan between related parties (for example, between group companies), interest is set at the rate in the regulations — 4.9% in 2026.
Section 3(t1) — withdrawals by a substantial shareholder
Withdrawals by a substantial shareholder from the company that were not repaid by the end of the following tax year may be treated as income in his hands (dividend, salary or business income — depending on the circumstances). The section also applies where the company makes an asset available for the use of the shareholder or a relative, such as an apartment or a car.
- A withdrawal balance not exceeding ILS 100,000 is not examined (section 3(ja)).
- An amount attributed under section 3(t1) is also deducted from accumulated profits for the section 81 computation.
Practical recommendation
It is recommended to follow the shareholder's account balance during the tax year, and to plan its repayment or reclassification (for example, as a dividend that also helps meet the section 81 tests) before the end of the following tax year.
Another example — a loan for part of the year
An interest-free loan of ILS 300,000 was outstanding in the shareholder's favour for 182 days in 2026.
- Annual interest under section 3(t): 300,000 × 6.53% = ILS 19,590.
- Interest for the period: 19,590 × 182 ÷ 365 = ILS 9,768 (rounded).
- This amount is taxable in the shareholder's hands as income.
Recommended work order
- Produce the shareholder's ledger card for the tax year and the year before.
- Compute the balances by period and the interest under section 3(t).
- Review balances not repaid by the end of the following tax year, for section 3(t1).
- Review assets made available to the shareholder or a relative.
- Decide on repayment, reclassification or recognizing income.
Frequently asked questions
Does section 3(t1) apply to every withdrawal? It applies to withdrawals by a substantial shareholder not repaid by the end of the following tax year; a balance not exceeding ILS 100,000 is not examined.
What is the link to section 81? An amount attributed to the shareholder under section 3(t1) is deducted from accumulated profits when computing excess profits.
Notes
- The interest rates are updated every year in the regulations; the rates stated are correct for 2026.
- Each case must be reviewed on its own merits, according to the nature of the withdrawal and the loan terms.
Sources
- Income Tax Ordinance, sections 3(t), 3(t1), 3(j) and 3(ja)
- Income Tax Regulations on the interest rate
Rates and amounts are correct as of the update date. This is a translation of the Hebrew article; in case of a discrepancy, the Hebrew version prevails.
This article is for general information only. It does not constitute tax advice or a professional opinion, and does not replace a specific review of each case.