Tax Advisory and Planning for Companies and Individuals

Tax planning means choosing in advance the structure of your business or transaction so that the tax burden is lower, using tools provided by the law itself. The line is drawn by Section 86 of the Income Tax Ordinance: the Assessing Officer may disregard an artificial or fictitious transaction, or a transaction one of whose principal purposes is improper tax reduction. That is why we review the plan before the transaction is signed, making sure it has genuine commercial substance. Send us a brief description of the transaction or business structure, and we will schedule a meeting to examine the alternatives.

Usually before a decision that is hard to reverse afterward:

• You are a licensed dealer (osek mursheh), profits are growing, and you are considering transferring the activity to a limited company.

• You have a closely held company that has accumulated profits, and you need to decide whether to distribute a dividend or pay the additional 2% tax on undistributed profits.

• You provide services through a company, and your accountant has flagged that Section 62A may attribute the income directly to you.

• You are planning a company sale, investor entry, merger, or split, and want to know the tax implications of every possible structure.

• Your accountant has asked whether a particular position in the return requires special reporting to the Israel Tax Authority.

• You are considering requesting an advance tax ruling from the Israel Tax Authority before a major transaction.

The Ordinance recognizes the right to plan one's taxes, but allows the Assessing Officer to disregard an artificial transaction and requires that certain planning arrangements be reported in the annual return.

Section 86 and the Rubinstein Case

Under Section 86(a), where the Assessing Officer is of the opinion that a tax-reducing transaction is artificial or fictitious, or that one of its principal purposes is tax avoidance or improper tax reduction, the officer may disregard it and assess the taxpayer accordingly. The decision may be objected to and appealed like any other assessment (Section 86(b)).

The leading precedent is CA 3415/97 Assessing Officer for Large Enterprises v. Yoav Rubinstein & Co. (Supreme Court, 2003). A company that had accumulated losses from ornamental fish farming changed its name and line of business to construction and sought to offset the old losses against the new profits. The Court held that this was an artificial transaction and denied the offset. It adopted the commercial-substance test — namely, whether the transaction has genuine economic substance apart from the tax saving — and emphasized that this is not the sole or decisive test.

Reportable Tax Planning

• A transaction listed in the Income Tax Regulations (Tax Planning Subject to Reporting), 5767-2006, is detailed in the annual return pursuant to Section 131(g), on Form 1213.

• A position that contradicts a position published by the Israel Tax Authority, where the resulting tax advantage exceeds NIS 5 million in a single tax year or NIS 10 million over no more than four tax years, is a reportable position (Section 131E).

• A person who received a tax opinion under the conditions set out in Section 131D reports the fact of its receipt, without submitting the opinion itself to the Tax Authority.

Where a deficiency exceeding NIS 500,000 per year is determined and it exceeds 50% of the tax, the Assessing Officer may impose a penalty of 30% of the deficiency if it results from a reportable transaction that was not reported, from acting contrary to an advance tax ruling issued to the taxpayer without disclosing that fact, or from planning that was determined in a final assessment to be an artificial transaction and was not reported (Section 191(g1)).

Closely Held Companies After Amendment 277

Amendment 277 to the Ordinance was enacted on 31.12.2024 and applies from 1.1.2025. It changed the taxation of closely held companies in two respects. The first is Section 62A, commonly known as the "wallet company" provision: in the circumstances specified therein, income of a closely held company derived from the personal activity of a controlling shareholder is deemed to be that shareholder's income and is taxed at the shareholder's marginal rate as if no company existed. The amendment added Section 62A(a1): in a closely held company whose income derives from activity requiring substantial personal effort and whose profitability rate exceeds 25%, an amount equal to 25% of the income from that activity — less payments to a related company — remains in the company, and the balance is attributed to the active shareholder. The section does not apply, inter alia, where the income from the activity is NIS 30 million or more per controlling shareholder. The second change is an annual additional tax of 2% on the "excess profits" of a closely held company that did not distribute dividends at the rate prescribed by law (Sections 81A–81V).

Sole Trader vs. Company: Tax Rates

• Individual: the top marginal tax rate is 47%. With a 3% surtax on taxable income exceeding NIS 721,560 per year, the effective rate reaches 50% (Section 121B).

• Company: corporate tax of 23%. When profits are distributed as a dividend, a substantial shareholder pays an additional 30%. On every NIS 100 of profit, this means NIS 23 at the corporate level plus NIS 23.10 on the dividend — a total of NIS 46.10 before surtax.

• From 2025, income from capital sources, such as dividends, is subject to an additional 2% on the portion exceeding the same threshold, provided the capital income alone exceeds it. On that portion the total additional tax is 5%.

Advance Tax Ruling

Where there is uncertainty about the Tax Authority's treatment of a transaction, it is possible to request an advance tax ruling (Section 158B et seq.). A taxpayer who received an advance tax ruling and acted contrary to it must disclose this in the return; otherwise, the taxpayer is exposed to a penalty under Section 191(g1). We have written about opinions and tax rulings in the field of VAT on our page Legal Opinions and Pre-Rulings.

1. At the first meeting you bring the financial statements and annual tax returns for the last two years, a chart of the ownership structure, and, if available, a draft of the transaction.

2. We calculate the tax under several alternatives — for example, sole trader vs. company, or share sale vs. asset sale — including surtax and the additional tax on undistributed profits.

3. Each alternative is tested against Section 86: what is its commercial substance, how it is documented, and whether it requires reporting on Form 1213 or as a reportable position.

4. When the question remains open, we draft a legal opinion or file a request for an advance tax ruling with the Israel Tax Authority.

5. At the implementation stage we draft the agreements and corporate resolutions, and verify together with the business's accountant that the reporting in the annual return is consistent with the plan.

This area is handled by Adv. and CPA Shlomi Vaknin and his firm's team. Shlomi, the firm's founder, has been a certified public accountant since 2000 and an attorney since 2008, and served for nearly a decade as a national inspector in the VAT Professional Division of the Israel Tax Authority. In tax planning this dual qualification matters: the same person reviews what will appear in the financial statements and how the transaction will hold up if the Assessing Officer examines it under Section 86.