What is an Israeli personal service company?
When a person is employed, they usually receive a salary. Their employer deducts income tax, national insurance contributions and other statutory deductions. Then, after everything been paid, they transfer the net salary to the employee. So, a wallet company (personal service company) is a company established to collect income via a corporation instead of being paid as a salary.
Usually, a person who opens a wallet company will be a person with a higher income than average, and whose job is usually paid as an employee. And a wallet company is mainly just for the tax planning of it’s shareholder.
What is the tax definition of a wallet company?
As a rule, the law defines wallet companies as companies held by five people or less. In addition, one of the following conditions must be met:
– The Company’s income is a result of acting as an official officer to other companies, and the said individual serves as an officer in those companies.
– Income earned by company is from the work of the individual. But its also for a role usually carried out by an employee for an employer. The test is if more than 70% of the income is from this client and the service is provided for at least 30 months in a 4-year period.
If the company meets the definition above it would be considered a wallet company. Its income will then be taxed as individual, rather than as a company. This means that the individual will not be allowed to pay corporation tax alone and delay the remaining tax for the future.
Disadvantages of wallet companies
A major disadvantage of using a wallet company stems from the fact that the tax authorities will tax the company on the profits accrued even if it’s not distributed to its owners.
Furthermore, the utilization of the wallet company signifies a significant shift in the dynamic between the company’s owners and those providing services. Previously characterized as an employee-employer relationship, this transition redefines the connection as one between a company and its customer. Consequently, the protections afforded by labour laws cease to apply, leaving the individual reliant solely on the terms stipulated in the contract between the wallet company and the customer.
In conclusion
Wallet companies are companies that allow their owners to receive payment for a service performed. The payment goes to the coffers of the company they own, and not directly to them as a salary. Until 2017, wallet companies could be used for tax savings. However since then, the tax policy regarding wallet companies has changed. Today, wallet company revenues are taxed as sole income for all intents and purposes.
