Fictitious salary in Israel

It's a question that often comes up: as a shareholder in a company in Israel, or as a self-employed person carrying on a commercial activity (Ossek Mourché / Ossek Patour), can you give a salary to a family member or close friend? Will the tax authorities suspect a fictitious salary? The position of the tax authorities in Israel is clear: it is possible to pay a relative a salary, provided that the salary received is the same salary that would have been paid to a "foreign" person. In other words, as long as the salary paid to a relative remains reasonable, and at market conditions, it remains possible to employ a family member.

The war against "fictitious" jobs

Fictitious employment is a term that has come up a lot in recent years. Just look at what happened during the last elections in France. Without getting into politics, financial manipulation often causes damage to governments. Consequently, the authorities are keen to avoid fictitious employment.

Why is fictitious employment "advantageous" for a company?

For those wondering why the government might be bothered by the fictitious salary, here's a little explanation of why and how:

1 - We reduce the company's accounting profit, and therefore its corporate income tax.

By paying a salary to a family member or close friend, the company will create a tax-recognized expense (the salary, but also the inherent employer charges) and will therefore reduce its accounting profit. The company will therefore save 23% of the amount of the salary paid. This amount corresponds to the corporate tax in Israel (IS) that it would have had to pay.

2 - We reduce the shareholder's income tax.

In theory, the person receiving the salary will have to pay the income tax on the salary. Generally, when companies resort to this kind of financial manipulation, it's because the person receiving the salary pays less tax than the shareholder who should have received it. In some cases, the relative pays no tax at all! Subsequently, the relative "returns" the salary to the shareholder, who has thus considerably reduced his or her tax liability. See also Lax in Israel: how does it work?

Here's an example to help you understand:

Mr A. is a shareholder in an Israeli company. He owns 100% of the company's shares. The company had sales of 1,000,000 shekels in 2017, and expenses of 400,000 shekels (excluding the shareholder's salary). The company therefore has an accounting profit of 600,000 shekels before tax. Assuming that Mr. A. decides to withdraw all the profit via a salary, he will have to pay Mas Ahnassa (income tax) and Bitouah Léoumi (social charges). For an annual salary of 600,000 shekels, the shareholder will have to pay almost 235,000 shekels in tax and social security charges.

Employing your spouse, the most common example

He may also decide to employ one of his close relations. Let's say Mrs. A. Let's say he decides to pay Mrs. A a salary equivalent to 200,000 shekels. In this case, Mrs. A would receive 200,000 and Mr. A. 400,000.

• Mrs A will have to pay 44,684 shekels in tax and social security contributions.
• Mr A. will have to pay 138,424 shekels.

In total, couple A will have to pay 183,108 shekels instead of 235,000 shekels. That's a difference of nearly 52,000 shekels a year!

Employing your spouse, the most controlled case

As the difference in tax charges can reach considerable sums, the tax authorities in Israel regularly carry out checks on companies. The purpose of these checks is not only to monitor the company, but also to verify the actual presence of employees. The most frequently audited companies are those in which both spouses receive a salary in Israel.

In conclusion: Israel is no joke when it comes to fictitious salaries.

As we mentioned at the start of this article, the Israeli tax authorities allow you to employ a family member as long as the salary paid is "acceptable". We also recommend that you always keep proof of the actual presence of your employees (e-mail exchanges, fixed workstations, etc.). In the event of an audit, you'll need to be able to prove that this is not fictitious employment.

Your questions - our advice :

• What documents do you need to prepare for a possible tax audit?
• How many years back can the Israeli tax authorities check a company's employees?
• How can the tax authorities find out if one of my relatives is an employee of my company?
• Is it possible to employ someone who works from home?

As you can see, you need to be careful when it comes to salary in Israel. If you have a company, or if you are self-employed, it is advisable to call on the services of professionals. Working with an accounting firm will ensure that you are familiar with and comply with Israeli tax regulations. Contact us to take care of your company's accounting and payroll in Israel.