(a)Taxable income of a closely held company, other than taxable income attributed to the closely held company from the income of a partnership of which it is a partner, that is not a foreign professional company as defined in section 75b1, arising from the activity of an individual who is a controlling shareholder therein, shall be deemed the income of the individual as set out below:
(1)income from personal exertion under section 2(1), (2), or (10), as the case may be — if the income of the closely held company arises from the activity of the individual in another body of persons, including in a related party to that body of persons, as an office holder or the provision of management services and the like, and the individual or the closely held company were office holders in that body of persons; the provisions of this paragraph shall not apply to an individual who holds, directly or indirectly, 25% or more of any one of the means of control in the other body of persons on any day in the tax year;
(2)income from personal exertion under section 2(2) — if the income of the closely held company arises from the activity of that individual for another person, including for a related party to that person, and it is of the type of actions performed by an employee for their employer;
(3)for the purposes of paragraph (2), the actions of the individual shall be deemed actions performed by an employee for their employer, notwithstanding any law or agreement, if 70% or more of the total income or taxable income of the closely held company in the tax year, excluding special income or special profits, derives from a service provided by the individual or their relative as defined in section 76, including employees of the company, directly or indirectly, including through a related closely held company, to one person or their relative as defined in section 88, for at least 22 months out of a period of three years, provided that at the end of 22 months the actions of the individual shall be deemed actions performed by an employee for their employer from the day the provision of service commenced, and this for the purposes of tax law only; for this purpose —
"special income" — income as its meaning in section 89, consideration of sale as its meaning in the Land Taxation Law, or a dividend;
"special profits" — capital gain, appreciation as its meaning in the Land Taxation Law, or profit from a dividend;
(4)(Repealed)
(5)the provisions of paragraph (3) shall not apply to a closely held company that employs four or more employees; for this purpose —
(a)if a person was employed for no more than four hours a day — they shall be counted as half an employee, and if a person was employed for part of the tax year — they shall be counted as a fraction of an employee in proportion to the ratio of their period of employment to a full year;
(b)a person and their relative as defined in paragraphs (1) and (2) of section 88 shall be counted as one employee.
(a1)(1)Taxable income from personal-exertion-intensive activity of a closely held company, reduced by an amount equal to the product of 25% multiplied by the amount resulting from the difference between the income from personal-exertion-intensive activity of the closely held company and payments to a related company, shall be deemed the taxable income from personal exertion of an individual who is an active shareholder therein, under section 2(1), in accordance with the proportionate share of that shareholder in the rights to profits of the closely held company, provided all of the following conditions are met:
(a)the income from personal-exertion-intensive activity of the closely held company in the tax year is lower than the product of NIS 30 million multiplied by the number of controlling shareholders in the closely held company in that year; for this purpose, a controlling shareholder and their relative, as defined in section 76(d)(1), shall be counted as one;
(b)in the tax year, the profitability rate of the closely held company exceeded 25%;
(2)Notwithstanding the provisions of paragraph (1) —
(a)if part of the taxable income from personal-exertion-intensive activity of the closely held company was deemed the taxable income of a controlling shareholder under subsection (a), that part shall be deducted from the taxable income attributed to that shareholder under this subsection from that same taxable income of the closely held company;
(b)if the closely held company had taxable income attributed to it from the income of a partnership —
(1)if the share attributed to the closely held company in the tax year from the income of the partnership, directly or indirectly (in this section — the closely held company's share in the partnership's income), was 10% or more — for the purposes of paragraph (1), the income and expenses of the partnership shall be taken into account, multiplied by the closely held company's share in the partnership's income;
(2)if the closely held company's share in the partnership's income was less than 10% — the provisions of paragraph (1) shall not apply, and the provisions of subsection (a2) shall apply;
(c)the provisions of paragraph (1) shall not apply in respect of a closely held company in which there is a substantial holder, if it is proved to the assessing officer that none of the substantial holders therein is a profit-holding holder, or if both of the following are met:
(1)among the controlling shareholders therein there is no individual who is a controlling shareholder in another company; for this purpose, an inactive company as its meaning in section 342ao of the Companies Law shall not be deemed another company, provided it has no accumulated profits;
(2)the amount of accumulated profits, as defined in section 77(a), of the closely held company at the end of the preceding tax year did not exceed NIS 750,000;
for the purposes of this sub-paragraph —
"profit-holding holder" — a holder in respect of whom, across all companies in which that holder is a substantial holder, taken together, the amount of accumulated profits, as defined in section 77(a), at the end of the preceding tax year did not exceed NIS 750,000;
"substantial holder" — an individual resident of Israel who holds, directly or indirectly, alone or together with another, 30% or more of any type of means of control in a closely held company; for this purpose, "together with another" — as defined in section 88.
(a2)55% of the taxable income of a partnership attributed to a closely held company that is a partner therein, less the income of the controlling shareholder in the closely held company under section 2(1) or (2), as the case may be, paid to that shareholder by the closely held company, shall be deemed the taxable income from personal exertion of the controlling shareholder therein under section 2(1), in accordance with their proportionate share in the rights to profits of the closely held company, if the income of the partnership, in whole or in part, derives from the personal exertion of that controlling shareholder, provided that the closely held company's share in the partnership's income was less than 10%.
(a3)55% of the amount of the dividend distributed to a closely held company whose controlling shareholder is an active shareholder in the dividend-distributing company shall be deemed dividend income of the controlling shareholder, provided that the closely held company is not a controlling shareholder in the dividend-distributing company; for this purpose, "active shareholder" — a shareholder whose personal exertion produced the income of the dividend-distributing company, in whole or in part, including one who participates in the management of the dividend-distributing company, but excluding a person who does so solely as a member of the board of directors.
(b)For the purposes of advance payments under section 175, of an individual as referred to in this section, the income referred to in this section shall be added to the turnover of transactions that constitutes the basis for the amount by reference to which the advance payments are calculated.
(c)The tax on income under this section, including the advance payments, may be collected both from the closely held company and from the individual.
(c1)If the income of a closely held company includes income arising from the activity of an individual who is a controlling shareholder therein or income that is personal-exertion-intensive income (in this section — special income), only the expenses incurred by the closely held company for the purpose of generating the special income shall be allowed as a deduction under section 17 against that income; if those expenses cannot be determined, a proportionate part of the expenses incurred by the closely held company in producing its total income shall be deducted against the special income, in the ratio of the special income to the total income.
(c2)If part of the income of a closely held company was deemed the taxable income of a shareholder therein under this section, the following provisions shall apply:
(1)the payment paid to the closely held company shall be deemed part of the income of the closely held company in that year (in this subsection — the income);
(2)the income shall be deemed to have been paid to the individual by the closely held company in consideration for services rendered to it, and the income shall be taken into account in determining that individual's income;
(3)the payment referred to in paragraph (2) shall be deemed an expense of the closely held company;
(4)the profits of the closely held company that were taxed at the tax rates applicable to an individual under this section and were distributed shall be deemed as if they had not been distributed;
(5)notwithstanding the provisions of paragraphs (2) to (4), and without prejudice to the provisions of the Companies Law, if a closely held company elected to distribute an amount to the shareholder as a dividend in that year, the corporate tax paid on the income according to the shareholder's share and the tax withheld at source on payment of the dividend shall be offset against the tax the shareholder is liable to pay under this section.
(d)In this section —
"means of control" — means of control listed in paragraphs (1) to (4) of the definition of "means of control" in section 88;
"active shareholder" — an individual resident of Israel who holds, directly or indirectly, alone or together with another, 30% or more of any type of means of control in a closely held company, or a shareholder in a closely held company whose income, in whole or in part, derives from their personal exertion, including one who participates in the management of the company, but excluding a person who does so solely as a member of the board of directors; for this purpose, "together with another" — as defined in section 88;
"controlling shareholder" — a controlling shareholder as defined in section 75b(a)(3) who is an individual resident of Israel, and for the purposes of subsection (a3) includes a company;
"other income" — each of the following types of income, including income of the kind referred to that is deemed business income:
(1)income from interest, linkage differentials or discount fees;
(2)income from a dividend, including a dividend paid out of the capital gains of a company;
(3)income from rent;
(4)consideration from the sale of an asset, as its meaning in section 88;
(5)income from the sale of a security as defined in section 88 that constitutes business inventory;
(6)consideration from the sale of a right in real property, including a right in real property which, had it been in Israel, would have been a right in real property, or a right in a real property association, including an association that owns real property which, had it been in Israel, would have been a real property association;
"taxable income from personal-exertion-intensive activity" — the portion of taxable income arising from income from personal-exertion-intensive activity;
"income from personal-exertion-intensive activity" — income that is not other income;
"closely held company" — as its meaning in section 76, provided that in the tax year it is not one of the following: a foreign professional company as defined in section 75b1(a), a controlled foreign company as defined in section 75b(a)(1), a preferred enterprise or a benefited enterprise as defined in section 51 of the Capital Investment Encouragement Law, or an approved factory as its meaning in section 21 of that Law;
"special relationships" — as defined in section 85a(b);
"office holder" — one of the following, as the case may be:
(1)in a company — an office holder as defined in the Companies Law;
(2)in an association — an office holder as defined in section 30(a)(4) of the Associations Law;
(3)in another body of persons — a person fulfilling a role corresponding to those listed in paragraphs (1) and (2);
"related party" — as defined in section 103.
"partner" — a partner entitled to a share in the capital of the business and in its profits, and liable to participate in covering capital losses or other losses of the partnership;
"profitability rate" — the rate resulting from dividing the amount referred to in paragraph (1) by the amount referred to in paragraph (2) below:
(1)the taxable income from personal-exertion-intensive activity of the closely held company, plus payments to a related company;
(2)the income from personal-exertion-intensive activity of the closely held company;
"payments to a related company" — payments deductible in computing taxable income from personal-exertion-intensive activity, which were paid to a company with which the paying company has special relationships (in this definition — the related company), and in respect of which one of the following applies:
(1)one of the principal purposes of establishing the related company or making the payment is tax avoidance or improper tax reduction;
(2)the paying company did not declare that the payments were not intended for tax avoidance or improper tax reduction;
(3)payments prescribed by the Minister of Finance, with the approval of the Finance Committee of the Knesset.