Section 62A(a) — the wallet company

Section 62A(a) of the Income Tax Ordinance is designed to prevent an individual, who would otherwise earn as an employee or provide management services, from setting up a company and earning that income through it — in order to enjoy the corporate tax rate and defer the tax.

Income covered by the section

• Income from management services provided through the company by a substantial shareholder.
• Income that is in substance employment income — where the service is provided to someone who was the shareholder's employer, or in an employer–employee format.

How the income is attributed

The taxable income from that activity is attributed in full to the shareholder who provided the service — not by shareholding percentage and with no profitability test. If only some of the shareholders provided the service, the attribution is made to them alone, according to each one's share in providing it.

Example

A shareholder provides management services through a company he owns. The company's income from the service in the tax year is ILS 600,000 and the deductible expenses for it are ILS 100,000. The taxable income from the service — 600,000 − 100,000 = ILS 500,000 — is attributed to the shareholder who provided the service and taxed in his hands at the rates that apply to individuals.

A company with several activities

A company may at the same time have a "wallet" activity, a personal-exertion activity and other income (interest, rent). Income and expenses must be split between the activities, since different rules apply to each. In the calculator, the split follows the account classification in the client's accounts table.

The distinction from excess profitability

Section 62A(a1), added from tax year 2025, applies to a personal-exertion activity with a high profitability rate — even when it is not management services or employment income. See the article on excess profitability.

Recommended work order

• Identify the company's activities — management services, employment income, personal-exertion activity and other income.
• Allocate income and expenses to each activity according to the account classification.
• Identify the shareholders who provided the service and their share in it.
• Compute the taxable income from the activity and attribute it to the relevant shareholders.
• Take the attribution into account for section 81 as well — an amount attributed to shareholders is deducted from accumulated profits.

Shared expenses

Where the company has several activities, expenses that cannot be attributed to a specific activity (such as office rent or administrative expenses) are allocated between the activities on a reasonable basis — for example, by the ratio of income. In the calculator, an expense can be marked as shared and the allocation is made automatically.

Frequently asked questions

Does the attribution depend on the profitability rate? No. Unlike section 62A(a1), the attribution under section 62A(a) is not subject to a profitability test.

Can income be attributed to a shareholder who did not provide the service? No. It is attributed only to the shareholder who provided the service, according to his share in it.

Notes

• The example is for illustration only and does not exhaust the conditions of the section.
• Each case must be reviewed on its own merits, according to how the service is provided and the nature of the engagement.