Many businesses in Israel and elsewhere are run by husbands and wives working
In most countries, income splitting is
This means that each spouse pays their own tax on their own
share of income from the family business, without regard to income allocated to
the other spouse. But not in Israel at present. Israel still has a chauvinistic
system of tax.
Let’s take an example. Avraham and Sarah Cohen are married
and they run a family travel business in a 50/50 partnership together. In 2013,
they make a profit of NIS 1 million.
But the Israeli tax law does NOT
allow married couples to split their income 50/50 and each pay tax separately on
their share. Nor can the second spouse draw a decent salary from the family
If a couple work together, the maximum that can be allocated to the
second spouse is currently NIS 48,960 per year, according to Section 66(e) of
the Income Tax Ordinance. And even that paltry amount is subject to
Each spouse must work at least 36 hours per week for at least
10 months per year in a fixed place of business that is not the family home. If
separate taxation is claimed for the spouses for only part of the year, a pro
rata calculation applies. The claim for separate taxation must be filed at least
a month before the beginning if the first tax year concerned (unless the
assessing officer allows a different filing date) and must be renewed every
three tax years.
So if Avraham reports income of NIS 951,040 and Sarah
reports income of NIS 48,960 (total NIS 1m.), Avraham will pay taxes of around
NIS 407,169 and Sarah would pay taxes of around NIS 4,808, resulting in a total
income tax and national insurance liability of around NIS 411,977 for the two of
By contrast, If they were allowed to each report and pay income tax
and national insurance on NIS 0.5m., Avraham would pay taxes of around NIS
193,460 and Sarah would pay taxes of around NIS 192,152, resulting in a total
income tax and national insurance liability of around NIS 385,612 for the two of
The Israel Tax Authority has over the years zealously imposed joint
(aggregated) taxation on spouses who work together. Separate tax calculations
are only allowed if the spouses work independently in different activities and
A joint tax return containing these calculations is usually still
filed unless the couple are at loggerheads.
This situation has been the
subject of many court cases in recent years. But the Supreme Court ruled in the
Shikori case that even if the spouses genuinely work together, the law does not
allow any more than NIS 48,960 per year to be allocated to the second
Fortunately, the new Finance Minister, Yair Lapid, has seen the
light. On August 7, 2013, he announced that he will work towards repealing the
joint taxation of married couples who work together in the same business. The
intention is to amend the law by the beginning of 2014.
reportedly said: “The decision is a direct continuation of the policy of placing
the worker at the center of industry and to provide an incentive for
participating in the labor force, resulting in increased productivity in the
I am glad we have managed to stop the longstanding economic
distortion which prevented the growth of family businesses, mainly small and
medium sized, which form the central backbone of the Israeli business
The Israel Tax Authority has just published updated guidance to
its tax offices dated July 22, 2013, regarding separate tax calculations where
issues have arisen. As a draft bill is on the way, the Tax Authority will
suspend tax assessment and collection procedures.
But couples don’t
celebrate yet. The tax law still has to be amended.As always, consult
experienced tax advisors in each country at an early stage in specific
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