What is a Wallet Company
In the past, it was beneficial for many individuals to provide services through a company (known as a wallet company), thereby paying corporate tax on its profits without withdrawing the profits, and thus avoiding the immediate payment of high marginal personal income tax. In January 2017, an amendment to Section 62A of the Income Tax Ordinance came into effect.
The amendment was designed to personally tax significant shareholders on the incomes of a closely held company under their ownership, when the company falls under the definition of a “wallet company.” The term wallet company is attributed to companies held by up to five individuals, which, according to the tax authority, may be established with the purpose of avoiding the payment of taxes at the high marginal tax rate.
Wallet Company in legal terms
In June 2021, the Tax Authority filed its first criminal indictment dealing with this issue (and at least one more known to our office subsequently). The indictment was filed against a lawyer operating as a law firm, and an additional indictment was filed against the accountant who assisted that lawyer in preparing and submitting reports to the Tax Authority.
In this case, the lawyer owned the company together with his ex-wife, through which he received his income as a lawyer. The accused withdrew money from the company and used its bank account as his own. After withdrawing over 1.8 million NIS, the lawyer sought to close the company without having paid the legal tax on his withdrawals. The accountant is accused of assisting the lawyer in incorrectly reporting his income. It is too early to know how this case will be decided, but it can be understood as a change in the Tax Authority’s stance regarding owner withdrawals from their controlled companies and wallet companies.
The second indictment filed was also against a lawyer, under similar circumstances, where the lawyer was arrested and charged with concealing income.
The income of a closely held company, which includes up to 5 shareholders (indirectly or directly) and is not a foreign-controlled company, is divided into two cases:
- In the case where the income of the closely held company is derived from the activities of an individual who is a significant shareholder in it, including a related party to that individual, such as holding an office or providing management services – the company’s income is considered as the individual’s personal income. This section does not apply to an individual who is a significant shareholder directly or indirectly in the other closely held company.
- In the case where 70% of the income of the closely held company is derived from the activities of the individual who is a significant shareholder in it for another person and it is of the type of activities conducted by an employee for their employer – the company’s income is considered as salary income.
This section does not apply to a closely held company that employs at least four employees.
A dividend distributed from taxable income, which was taxed, will not be subject to additional tax.
The question of whether the owners of a wallet company are also liable for National Insurance remained open and will have a significant impact on the liability of the controlling owner in a wallet company.
The essentials of Section 62A of the Income Tax Ordinance
Income Tax Circular 10/2017, deal with the taxation of shareholders in closely held companies (wallet companies). It clarifies the issue and the tax authority’s stance and determines, among other things, that identifying who the client receiving the services is depends on a variety of circumstances. For example, it could be determined that in the case of doctors, the health fund is the client, or it might be determined that the doctor’s patients are the clients, and therefore, it does not involve a wallet company.
Our office accompanies company owners and examines legal possibilities and tax planning which, as a result, would not classify the company as a wallet company, especially when it comes to companies owned by doctors, insurance agents, or artists, etc.
