Why don’t you automatically add the two tax rates?
Company money is not automatically the private money of the shareholder.
A company and its shareholders are separate entities for many calculations. There may be tax on the company’s profits, and later tax on distribution to shareholders. Profits retained in the company are not necessarily tax-free. The term “trapped profits” is used in various contexts, and one should distinguish between historical arrangements and current rules for undistributed profits in closely held companies. Exceptions, tests and alternatives require professional review; there is no single percentage that fits all company balances.
Made-up example: a company earns 100 and pays 20 tax. It distributes 80, and on the distribution a 25% tax is assumed: the owners are left with 60. The tax burden in the example is 40%, not a simple sum of 20% and 25%.
Why don’t you automatically add the two tax rates?
A fictional company receives 10,000 money units from customers and has 7,000 in expenses that this exercise treats as fully deductible. Profit before tax is 3,000. An imaginary tax of 20% would be 600, leaving 2,400 in the company. That money belongs to the company, not automatically to its owners personally. Salaries and dividends are separate transactions with possible additional consequences. In reality, taxable profit may differ from accounting profit. Distinguish revenue, expenses and profit.
Concepts that help you compare
A Business: Sole Proprietor and a Limited Company (Ltd.)
A company is a separate legal entity; 'Ltd.' indicates limited liability of the shareholders under the law. A sole proprietor and a company are not the same. A company has its own assets, liabilities and reporting obligations. Its money is not the private wallet of the shareholder. Salary, dividend and owner withdrawals are different things with different rules. Limited liability is not immunity: personal guarantees, personal liability in appropriate cases and piercing the corporate veil according to law may change the outcome. Registering a company also involves costs and reporting. VAT classification and form of incorporation are two separate axes.
Comparison example: A fictional company has 20,000 ₪ in its account. The shareholder cannot assume that the entire amount is freely available personal money; there are liabilities and rules for transferring funds.
A wallet company is a term used in a tax context, not a separate form of incorporation in the Companies Registrar. When a person's personal activity yields income through a small company, Section 62A of the Income Tax Ordinance may, under certain conditions, attribute the income to the individual. The rules were expanded from 2025 and there are several scenarios, conditions and exceptions. Not every small company, single-owner company or a company with one client is automatically considered a wallet company. The classification should not be inferred solely from the name or an example. This is not a recommended method for tax reduction; a practical examination requires a professional and the up-to-date statutory wording.
Comparison example: A fictional person provides services through a company under his control. The mere issuance of an invoice in the company's name does not prove that the income will be taxed only at the company level; an examination of the rules and circumstances is required.
Why don’t you automatically add the two tax rates?
Because the second tax is calculated on a different balance
Because a company never pays tax
Because dividend is always exempt
Answer and explanation
Because the second tax is calculated on a different balance. Each stage has its own base. The example rates are fictional and are not the corporate tax rates in Israel.