What is an Israeli personal service company?
When a person is employed, they usually receive a salary. Their employer deducts the relevant income tax, national insurance contributions and other statutory deductions, paying the net salary to the employee. An Israeli personal service company (otherwise known as a wallet company) is a company established to collect remuneration for work carried out instead of being paid a salry
As a rule, a person who opens a wallet company will be a person with a significantly higher income than the average in the economy, whose job is usually the work of an employee or self-employed person. Wallet companies are set up mainly for tax planning of their controlling shareholders, and do not engage in economic activity Independently, but giving the same service as their owners would give if they were self-employed or employees of another company.
What is the tax definition of a wallet company?
As a rule, the law defines wallet companies as companies held by five people or less, and that the income of the five derives from a single activity that holds at least 10% of the company’s shares. In addition, one of the following conditions must be met:
– The Company’s income is a result of acting as an official officer to other companies, and the said individual serves as an officer in those companies.
– The company’s income is earned by the activity of the individual and is work usually carried out by an employee for an employer. The definition of an employee’s activity for an employer will apply if more than 70% of the company’s revenue comes from this activity. In addition, the service is provided during at least 30 months in a 4-year period.
Insofar the company meets the definition of a wallet company, its income will be taxed as individual income, rather than company income. In doing so, the individual and the wallet company lose the ability to enjoy the retention of revenue by the company.
Disadvantages of wallet companies
A major disadvantage of using wallet companies stems from the fact that the tax authorities will tax the company on the profits accrued even if it’s not distributed to its owners.
Moreover, if until now, a service
provided by the company’s owners was attributed as a service between an employee and an employer, then the use of the wallet company means that the employee-employer relationship does not apply any longer. From now on, it is a company-customer relationship. As a result, labor laws no longer protect the employee, and the protection is dependent solely on the contract between the
wallet company and the customer.
In conclusion
Wallet companies are companies that allow their owners to receive payment for a service performed. The payment goes to the coffers of the company they own, and not directly to them as a salary. Until 2017, wallet companies could be used for tax savings. However since then, the tax policy regarding wallet companies has changed. Today, wallet company revenues are taxed as sole income for all intents and purposes.
