The fixed shield, the expenses shield and the assets shield

Excess profits under section 81 are accumulated profits less a "shield" — an amount the law allows the company to keep without the additional tax. Section 81C sets three alternatives for computing the shield, and the company is entitled to the highest of them.

Fixed shield — ILS 750,000

A fixed amount under section 81C(1). Where several closely held companies are controlled by the same controlling shareholder, the shield is shared between them — equally by default, and a different allocation can be set by notice to the assessing officer.

Expenses shield

The higher of the deductible expenses in the tax year under review and the average expenses in the year under review and the two preceding tax years. Expenses include cost of sales, selling and marketing, general and administrative, research and development and financing expenses. Section 4.3 of Circular 7/2025 lists expenses that are not included in the shield.

Assets shield

The cost of all the company's assets at the end of the tax year under review, less the following components:

• Special assets — cash and deposits, securities and financial assets, loans granted (including to shareholders), rights in real estate not used by the company, and an intangible asset whose main income is royalties.
• Funding sources that are not profits — share capital, premium and capital reserves, and loans received from a related party.

This leaves only the part of the business assets that was financed from the company's profits — and that is the shield.

Example

A company has accumulated profits of ILS 2,600,000. Its deductible expenses: ILS 900,000 in the year under review, ILS 1,000,000 in the previous year and ILS 1,100,000 the year before. Its assets cost ILS 5,000,000, of which ILS 2,500,000 are cash and securities. Share capital is ILS 100,000 and a loan from the controlling shareholder is ILS 400,000.

• Fixed shield: ILS 750,000.
• Expenses shield: average (900,000 + 1,000,000 + 1,100,000) ÷ 3 = ILS 1,000,000, higher than this year's expenses (ILS 900,000) — so ILS 1,000,000.
• Assets shield: 5,000,000 − 2,500,000 − 100,000 − 400,000 = ILS 2,000,000.
• The highest shield is the assets shield — ILS 2,000,000 — so the excess profits are 2,600,000 − 2,000,000 = ILS 600,000.

Common mistakes

• Classifying cash used in the business as a business asset — as a rule, cash is a special asset (there are exceptions, such as cash pledged under the Sale (Apartments) Law).
• Omitting a loan from the controlling shareholder from the funding sources in the assets shield.
• Computing the expenses shield on a single tax year when the three-year average is higher.

Another example — the expenses shield decides

A service company has accumulated profits of ILS 1,800,000. Its deductible expenses in the year under review were ILS 1,500,000 (and ILS 1,200,000 and ILS 1,050,000 in the two preceding years), and it has few business assets.

• Average expenses: (1,500,000 + 1,200,000 + 1,050,000) ÷ 3 = ILS 1,250,000.
• Expenses shield: the higher of ILS 1,500,000 and ILS 1,250,000 — ILS 1,500,000.
• Excess profits: 1,800,000 − 1,500,000 = ILS 300,000.

Note that where the expenses shield decides, an additional deductible expense before year end increases the shield and reduces the excess profits.

When is the assets shield needed?

The assets shield requires a detailed classification of assets and funding sources. Where the fixed shield or the expenses shield covers all the taxable accumulated profits, there are no excess profits and there is no practical need to classify the assets for this purpose.

Frequently asked questions

How is the fixed shield shared between companies under identical control? Equally by default. If a company does not need the shield, a different allocation can be notified to the assessing officer so that its share passes to the other companies.

At what date are the assets measured? The assets shield is based on the cost of the assets at the end of the tax year under review.