Canceling the ceiling on National Insurance payments won't generate as much revenue for the state as initially calculated, says the Income Tax Authority.

Under the recently enacted income tax reform, the limit on national insurance and health insurance payments was abolished. Now, above salaries of NIS 35,000 a month, insurance levies continue to climb. But there is a loophole: anybody earning over five times the average wage about NIS 35,000 a month - can, theoretically, establish a company to which the "salary" is paid. The ceiling on such payments by companies has not been abolished.

The change came into effect on July 1, 2002, and is scheduled to continue until the end of 2003.

The treasury estimates that 2,000 to 3,000 of the 50,000 people who earn more than NIS 35,000 will use shelf companies to evade the increased tax burden. These people could cost the state up to NIS 1.5 billion in lost revenues.

The rest will not register as companies, according to Income Tax Commissioner Tali Yaron-Eldar, due to other considerations such as social benefits.

People with shelf companies are liable for 36% corporation tax, and 25% tax on dividends distributed thereafter, bringing their total tax burden to 52%. This compares to a total tax (and NII contribution and health tax) of 63% on incomes of that size.

The treasury had originally estimated that removing the insurance ceiling would contribute an extra NIS 3 billion to the state.

Keeping company

According to research by the Institute of Certified Public Accountants in Israel, an owner of an independent business would be better off incorporating his or her activities if monthly income exceeds NIS 21,220. A program, devised by the institute's professional secretary, determines the point at which the move from independent business to a fully-fledged company becomes worthwhile from a tax point of view, taking into account savings made by the changeover and associated costs such as the NIS 1,500 monthly fee for company management and accountant's fees.

This will now alter the institute's recently-launched advertising campaign, according to which those earning income of NIS 500,000 or more a year would be recommended to operate as companies to save on taxes. The move would now be recommended for those earning just half of this.

Institute president Ofer Menirav said the figures proved the worthiness of incorporation, and advised any individuals considering doing so to seek professional advice.