Taxation of Wallet Companies in Israel

Wallet company operations were particularly common in Israel in the past. They allowed individuals to save on taxes by paying corporate tax (and dividend tax, if relevant) instead of marginal income tax. In recent years, the prevalence of such activities has been declining due to changes in the Israel Tax Authority’s approach to these companies and the elimination of tax benefits previously available through wallet companies.

What is a Wallet Company?

A wallet company refers to a closely held company, a private corporation typically owned by a single shareholder or a small number of shareholders. The company is used to provide personal services. The company owners could provide these services as self-employed individuals or employees.

In the past, the wallet company structure allowed professionals (such as lawyers, consultants, artists, doctors, and others) to benefit from a lower corporate tax rate of 23%, instead of the higher marginal tax that applies to individuals.

Additionally, wallet companies allowed controlling shareholders to retain funds that weren’t needed for ongoing expenses. This enabled them to defer tax payments until dividend distribution.

For example, a consultant operating through a limited company, providing services to a single client and not employing workers, might be considered a wallet company.

Amendment 62a to the Income Tax Ordinance – 2017

In January 2017, an amendment to Section 62a of the Income Tax Ordinance came into effect. This amendment made substantial changes to the taxation of wallet companies, significantly altering how tax planning could be implemented:

• When the majority of a wallet company’s income derives from the personal activity of a material shareholder (someone who holds at least 10% of shares or rights), they can be personally taxed. This means the income will be taxed as personal income, at high marginal tax rates rather than corporate tax rates.
• If 70% or more of the company’s income comes from employee-like activities of a material shareholder, the income will be considered salary income. Employee-like activities refer to situations where the shareholder provides services through the company, but the nature of the engagement, work relationships, and economic dependence on the client closely resemble standard employer-employee relationships.
• The section does not apply to companies that employ at least four employees.
• Dividends distributed from income that has already been taxed will not be taxed again.

To read Circular No. 10/2017, click here.

Additional Amendments – 2025

In 2025, additional substantial amendments to legislation and enforcement policies of the Tax Authority regarding wallet company taxation came into effect. These amendments were designed to close loopholes, tighten oversight, and ensure controlling shareholders don’t exploit the private company structure to artificially defer or reduce taxes.

Key amendments that came into effect:

• Expanding the definitions of wallet companies to additional sectors, including high-tech, engineering, management services, financial consulting, and senior management. The goal is to require controlling shareholders in these sectors to examine whether their activities meet the definition of a “wallet company” and comply with reporting and taxation requirements.
• Requiring shareholders to withdraw funds as dividends from companies they own
• Increasing the responsibility of accountants and financial managers.
• Broader implications for tax planning.

For more detailed information on the topic, see: Taxation of Wallet Companies – Changes in 2025; New Mechanism for Taxing Wallet Companies – Taxation of Excess Profitability.

Tax Comparison

*Tax rates in the table above are accurate for 2025.

Case Law and Tax Enforcement for Wallet Companies

In recent years, there has been a significant tightening of enforcement against wallet companies, including criminal indictments against wallet company owners and accountants who assisted them. This occurs especially when funds were withdrawn from the company without proper tax payments.
Currently, the Tax Authority thoroughly examines the nature of the relationship between the company and the service recipient, the number of clients, and whether the activity resembles that of an employee.

Summary and Recommendations

Wallet company taxation is a dynamic field that evolves over time, with enforcement becoming increasingly stringent. Therefore, material shareholders are advised to consult tax experts to examine their operational structure and plan accordingly. Ongoing professional guidance and tailored tax planning can save significant tax amounts while preventing criminal and civil sanctions.

Nimrod Yaron & Co. – Israeli and International Taxation has extensive experience in advising companies in general, and wallet companies in particular; optimal tax planning and finding legal solutions to reduce tax burden. To contact a representative from our firm, click here.

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