Sources inform ''Globes'' that Israel Tax Authority director general Doron Arbeli today presented the final alternatives drawn up by the team dealing with the issue of private holding companies. Dubbed "wallet companies", these are fictitious companies, which have no activity, set up by high-paid salaried employees to avoid high tax rates (income tax and National Insurance) and pay reduced rates instead.
The alternatives presented by Arbeli to professional bodies (the Israel Bar Association, the Institute of Certified Public Accountants in Israel, the Israeli Tax Advisers Association, and Lahav Israel Association of the Self Employed) indicate that the team believes that there is room to tax the undistributed profits accumulated by wallet companies and holding companies from the year in which they were founded.
The Tax Authority confirmed that the meeting was held, but declined to disclose details.
Two alternatives
The first alternative discusses taxing shareholders who are individuals for half of the profits of wallet companies which were not distributed during the tax year. This will prevent the shareholders from postponing the tax payment to a more convenient time from their point of view (which may never come).
The second alternative proposes dealing with all companies with high profits by levying an annual linear tax of 4-8%, as the tax component derived from their undistributed surpluses.
After the Tax Authority receives the comments from the professional bodies, the final recommendations will be presented to Minister of Finance Yuval Steinitz.
Following Trajtenberg
Steinitz appointed Arbeli to head the team, following the Trajtenberg report, which noted the need to review the issue of wallet companies. Private holding companies founded by individuals invest in subsidiaries and exploit the current tax exemption on dividends between companies, so that the individuals who own the shares in the private holding companies control the timing of income from dividends and tax payments, if any.
The team was also instructed to review the issue of taxing employee options.
The team's members are National Economics Council chairman Eugene Kandel, Deputy Attorney General Avi Licht, State Revenues Supervisor Frieda Israeli, and Deputy Budget Director Eyal Epstein.
Published by Globes [online], Israel business news - www.globes-online.com - on October 10, 2012
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