What is a "holding company" in Israel?
When a person is employed, he or she receives remuneration in the form of a salary. The employer deducts the corresponding income tax, national insurance contributions (bitouah léoumi) and other statutory deductions, paying the net salary to the employee.
An Israeli personal services company (otherwise known as a holding company, or "hevrat Arnak") is a company created to receive remuneration for work performed. in the form of invoicinginstead of receiving a salary.
In other words: an employee is paid by invoice, not by payslip.
As a general rule, a person opening a holding company will be someone with an income well above the average in Israel, or who has several deductible expenses that he or she wishes to deduct from his or her income.
Holding companies are created primarily for the tax optimization of their shareholders.ALSO READ: Tax in Israel: Online simulation.
What is the tax definition of a holding company in Israel?
The law defines holding companies as companies owned by a maximum of five people.
What's more, a of the following conditions must be met:
- The company's income derives from actions as an official director of other companies (e.g. managing director).
- The company's income is derived from the individual's activity and corresponds to work generally carried out by an employee.
- The definition of salaried activity for an employer will apply if more than 70% of the company's sales come from the same customer.
- In addition, the service is provided for at least 30 months over a 4-year period.
As long as the company meets the definition of a holding company, its income will be taxed as individual income, rather than corporate income.
Disadvantages of holding companies
A major disadvantage of using holding companies is that the tax authorities will tax the company on profits earned, even if they are not distributed to its owners.
What's more, if up until now a service provided by the company's owners has been allocated as a service between an employee and an employer, then using the portfolio company means that the employee-employer relationship no longer applies. It's now a company-customer relationship.
As a result, labor law no longer protects the employee, and protection depends solely on the contract between the holding company and the customer.ALSO READ: Understanding the tax system for a company in Israel
The Israeli tax authorities are very scrupulous about this type of company.
A special declaration must be made in your personal tax return if applicable.
In a nutshell:
Holding companies" in Israel are companies that allow their shareholders to receive payment for a service rendered. via billing.
The payment is recorded in the company's books and not directly to them in the form of salary.
Until 2017, holding companies could be used to make substantial tax savings.
Since then, however, tax policy regarding holding companies has changed. Today, holding company income is taxed as personal income, rather than corporate income tax.
Your questions - our advice
- How to avoid being considered a holding company?
- Is opening a Hevra in Israel and invoicing the company in France considered a holding company?
- What about social security contributions in this case?
The above should not be construed as a recommendation and/or opinion and, in any case, it is recommended to obtain personalized professional advice. We will be happy to be at your disposal for any questions and/or clarifications on this subject and in general.