Dr. Avi Nov, Adv.
The Israel Tax Authority presented two alternatives drawn up by the committee dealing with the issue of private holding companies and the so-called wallet companies or in Hebrew hevrot arnak.
For an update, See: Israel Proposes to Tax Wallet Companies
The committee was set up following the Trajtenberg proposals, which required the Israel Tax Authority to review the issue of wallet companies and private holding companies founded by individuals.
The committee 's members are National Economics Council chairman Eugene Kandel, Deputy Attorney General Avi Licht, State Revenues Supervisor Frieda Israeli, and Deputy Budget Director Eyal Epstein, all headed by the Israel Tax Authority director general Doron Arbeli.
The two alternatives were presented by the Israel Tax Authority director general Doron Arbeli, to professional bodies (the Israel Bar Association, the Institute of Certified Public Accountants in Israel, the Israeli Tax Advisers Association, and Lahav Israel Association of the Self Employed)
According to the Israel Tax Authority, wallet companies are fictitious companies, which have no activity, set up by high-paid salaried employees to avoid income tax and national insurance taxes.
The Israel Tax Authority believes that it is necessary to tax the undistributed profits accumulated by wallet companies and holding companies from the year in which they were founded.
According to the first option, shareholders who are individuals will be taxed for half of the profits of wallet companies which were not distributed during the tax year. This will prevent the shareholders from postponing the tax payment to a more convenient time from their point of view.
According to the second option, all companies with high profits will be taxed on an annual linear tax of 4-8%, as the tax component derived from their undistributed surpluses.
The legal obstacle
The main problem with the committee's proposal is that citizens have the legal right to incorporate. Many Israeli court cases emphasized the citizen's right to incorporate and to have his business conducted by a corporation as a way of reducing his tax liabilities.