Withdrawing money from your own Israeli company might seem straightforward, but there are specific tax implications you need to be aware of. Since 2017, Section 3(ט) of the Israeli Income Tax Ordinance has changed the treatments for tax on directors loans, aiming to prevent tax avoidance. So, here’s a simplified explanation:
The Old Way: Loopholes and “Wallet Companies”
Until 2017, shareholders often withdrew money from their companies and classified it as a “shareholder loan,”. By doing this, they were essentially only ‘borrowing’ the money from their own company. And this practice, allowed many shareholders to delay paying tax on directors loans.
The New Reality: All Withdrawals are Considered Income
The introduction of Section 3(ט) fundamentally changed the game. Now, any withdrawal by a significant shareholder (someone holding a controlling interest) is considered taxable income.
Here’s what you need to know:
- Broad Scope: This law applies to private and public companies, both Israeli and foreign.
- What Counts as a Withdrawal?: This includes any loan, debt, or use of company assets for personal benefit, significantly reducing potential loopholes.
- Exceptions: Withdrawals under ₪100,000 (combined for the shareholder and their relatives) can be treated as a loan.
Tax Timing: Taxes are due the year after the withdrawal. But for assets, it’s the year the asset is used and every year thereafter until returned.
Income Classification: The withdrawal is taxed differently based on the company’s profitability and the relationship between the shareholder and the company (e.g., as a dividend, salary, or business income).
Returning the Money: If you repay before the tax on directors loans become due, you won’t be taxed. However, withdrawing again shortly after (within 2 years for cash, 3 years for assets) negates this benefit, and you’ll need to amend your tax filings.
The Bottom Line:
Withdrawing from your Israeli company is no longer a way to bypass taxes. Section 3(ט) makes it crucial to consult with a tax professional to ensure you are:
- Classifying your withdrawals correctly.
- Paying the appropriate taxes.
- Avoiding potential penalties.
Failing to comply can have serious consequences, including criminal investigations. So, protect yourself and your business by staying informed and seeking expert guidance.
