Loophole could slash tax revenue by NIS 250 million a year

Establishment of companies up 40% due to tax dodgers
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High-earning employees taking advantage of a loophole could cost the state some NIS 250 million this fiscal year in tax revenue.

The dodge would be to open companies, in order to circumvent the abolished ceilings on national insurance and health tax payments.

Commissioner Tali Yaron-Eldar warned that companies used to sustain an existing employee-employer relationship, issuing just one invoice per month, will be seen as artificial. The transaction will not be recognized for tax purposes, she said.

On July 1 the government approved an austerity plan that, among other things, abolished a previously existing ceiling on national insurance and health insurance payments.

The company pays 36% tax on undistributed profits, while an individual's marginal tax after cancellation of the ceiling can reach 63%. The maximum tax rate on dividends to the company owner is 52%.

The Companies Registrar reported a 40% increase in new registrations from May to June, thought to stem from high-wage earners establishing shell companies to collect their salaries.

Accountants are divided on the validity of Yaron-Eldar's position. Yaron-Eldar emphasized that if a self-employed person prefers to operate through a limited company, this is a natural and uncontested move.

However, if an employee preserves the employee-employer relationship but converts his pay slip into an invoice, income tax considers this a fictitious transaction.