Background

Recent changes in the national social insurance thresholds and the increase in the tax burden, have created an incentive for high-income individuals to operate through companies which reduce the tax burden named “wallet companies”.

The essential benefits of operating as a company and not as an employee who receives a monthly salary, in terms of tax law, is the control over the timing of the tax liability in respect of the “second income stage”, which is the stage that income is distributed to the shareholders as dividends or as wages/management fees. This control, in certain cases, allows shareholders to delay or bring forward the income on the date of payment of the tax which is preferred and allows them to reduce or even avoid the taxable payments.

In the context of Amendment 235, section 62A of the Tax ordinance, it determines the manner of taxation of a material shareholder in a close-held corporation (organization which contains up to 5 individuals and isn’t a subsidiary company of a public company) which is a senior officer who   provides services to a 3rd party/company.

According to section 62A an earned income of certain determined cases which are associated with the substantial holding owner of a such company will be considered in tax terms as an individual income and the individual shall be liable to tax on account of such income.

All other incomes which are not associated with the substantial owner income will not be subjected to section 62A.

**Comment- earned income which is associated with section 62A will not be calculated (excluded) for offsetting.

Herewith are the cases in which provisions of section 62A apply:

1. Income as an executive officer who provides management services etc. Section 62A (a)(1):
2. Income which is associated and driven from employer and employee as detailed in Section 62A (a)(2)&(3).
3. Section 62A (a)(3) determine a presumption of validity in case of:
   1. Income of 70% or more (excluded special income according to section 89 of Tax Ordinance- Value of sale under the Real Estate Taxation Law or the amount of a dividend)  in a close-held corporation which is associated with a service which has been given by an individual or his relative (according to section 76) including company’s employee (direct/indirect) and excluding services which have been given by a partnership.
   2. Service has been given for 30 months or more.

Clarifications – regarding the exclusion of a substantial shareholder as defined in Section 88 of the Ordinance and Partner In partnership:

• Company’s director will be excluded from section 62 in case he isn’t a substantial shareholder.
• Every case should be examined in which it is argued that the shareholder holding the rights in the “other” company, at a rate lower than 10%, but in actual fact this individual is considered as a substantial shareholder due to a holding of 10% or more along with another.
• IAT will inforce section 62A on a partnership which is found to have been established for the purpose of avoiding section 62A.

The  information mentioned  above is a general summary which might change or be updated from time to time and isn’t a suitable alternative for an in-depth professional tax consultation.