Committee Seeks to Close Tax Loophole Exploited by Israel's Top Earners

The measure could increase state revenue by NIS 600m-800m by preventing high earners from receiving their salary as payments to a company.

A government committee called for closing a tax loophole exploited by high-income earners, a move that could bring the state another NIS 600 million to NIS 800 million in revenues on Monday.

The committee lead by Tax Authority Chairman Moshe Asher called for taxing all undistributed profits at so-called "wallet companies." People receiving high salaries create these companies, which have only one employee, and have their employers pay their salary into the company as revenue. Thus, they can avoid paying income tax, which has a marginal rate of 50% at the top tax bracket, and instead pay corporate tax of 26.5% on their salaries.

When they need to spend money, they withdraw it from the company's coffers and pay corporate tax. Otherwise, though, the money sits in the company's account and is not taxed.

The proposal would subject owners of "wallet companies" to pay income tax rates on money generated by these companies.

The committee's recommendations are currently only in draft form and have been sent to associations representing accountants, lawyers and portfolio managers for feedback, and have also been published on the Tax Authority's website. After receiving feedback, the committee will submit the final recommendations to Finance Minister Yair Lapid to begin the legislative process in the Knesset.

Israel has an estimated 13,000 "wallet companies." One factor that pushed many top wage-earners to exploit this tax loophole was the decision to increase the ceiling on National Insurance and health taxes during the past decade.

Emil Salman