The Israeli Tax Authority made public a discussion draft concerning the taxation of wallet companies. A wallet company refers to a situation in which a company is set up for tax purposes, has made profits and hasn’t distributed them. See also: Israel Tax Authority attacks wallet companies.
A Wallet Company Panel was established following by Trajtenberg proposals in 2011. The Wallet Company Panel headed by Tax Authority director Moshe Asher, and other members such as Prof. Eugene Kandel, chairman of the National Economic Council, Avi Licht, deputy legal adviser to the government and other Israeli tax experts.
According to the Israeli Tax Authority, the taxation of Wallet Companies could bring the state another NIS 600 million to NIS 800 million in revenues. However, one of the obstacles that prevent action by the Israeli Tax Authority is that citizens have a constitutional right to incorporate as a way of reducing their tax liabilities.
Current Israeli tax law
Under current Israeli tax law, corporate income tax applies at a rate of 25% (26.5% in 2014), and only actual distribution of profits to the shareholders are subject to dividends tax at specific rates (25%-30%). The difference between these two tax rates creates an incentive for individuals to operate through a company. Yet, according to the Israeli Tax Authority opinion, the setting up a company mainly to save tax by accumulating profits and not distributing dividends is not a desirable or just action.
Proposals by the Wallet Company Panel
The Wallet Company Panel proposes various tax rules according to the type of the company concerned, as follows:
Service Companies: Service Companies are defined as employees’ companies in which all or part of their income is from the activity of providing services to another company. The Wallet Company Panel proposes in such case, that the shareholder will be taxed personally on such income at rates of approximately 50%.
Barrier Companies: Barrier Companies are companies that at least half their income is passive income but not capital gains. The Wallet Company Panel proposes in such case, that 50% of their post-tax undistributed passive profit will be deemed to be distributed as a dividend.
Accumulation Companies: Accumulation Companies are other Israeli companies with accumulate profit, which are defined as undistributed post-tax profits at the end of the year minus 25% of their revenues. Such profits will be subject to an annual tax of 1%, which will not be deductible as an expense.