The taxman today badly disappointed high-salaried Israelis who have been setting up companies in order to evade higher tax bills.

Income Tax Commissioner Tali Yaron Eldar announced this morning that the tax authority will view companies set up by high-income salaried workers as a "false transaction" meaning, an illegal dodge.

The tax reform now under Knesset review abolishes the ceiling on payments to national and health insurance. The higher the salary, the more the worker pays, period. However, the reform did not touch the ceiling on such insurance payments by corporations, inducing highly compensated salaried people to consider setting up companies.

Speaking at a conference of accountants, Yaron Eldar said her ruling will not affect independently-employed people setting up companies. Moreover, she added, the ruling seems reasonable.

But cases of people earning more than NIS 35,000 a month, who set up a company and withdraw "management fees" in order to evade the higher national insurance bills, will be deemed to have engaged in a false transaction.

The ceiling on insurance payments will be restored at the end of 2003.