The Bottom Line: The Israel Tax Authority (ITA) published an important operational directive this week (December 23, 2025) addressing the issue of tax advances for Closely Held Companies ("Wallet Companies") for the 2025 tax year. The directive offers a solution to the cash flow problem created by the transition to the new tax regime (Amendment 277), allowing taxpayers to offset excess tax paid by the company against the personal tax liability of the controlling shareholder, or to freeze collection proceedings until tax returns are processed.
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Executive Summary

• The Problem: Companies paid Corporate Tax advances throughout 2025. However, under the new law, income is attributed to the controlling shareholder. This creates a credit balance in the company and a significant debt in the personal file.
• Solution A (Dividend): Distributing a dividend and offsetting the Corporate Tax paid (advances) against the individual's tax liability.
• Solution B (Debt Freeze): Accounting registration of expense/income, and filing a request to freeze the personal tax debt for 3 months (until the company receives its refund).
• Relief on Fines: Cancellation of arrears fines and deficiency fines (Section 190) resulting from the implementation of the law.
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The Background: The "Transition Year" Cash Flow Trap

Tax year 2025 is the first year of implementation for Amendment 277 to the Income Tax Ordinance, which altered the tax rules applicable to "Closely Held Companies" (Section 62A). Under the amendment, the income of many companies (defined as "labor-intensive") is now attributed directly to the controlling shareholder ("Tax Transparency").

During the year, many companies continued to pay current Corporate Tax advances based on past turnover. Now, at year-end, a cash flow distortion has emerged:

• In the Company File: Excess advances have accumulated (since the income is attributed to the individual and the company is not liable for tax on it), creating a credit balance.
• In the Individual File (Controlling Shareholder): A significant tax debt has been created due to the attributed income, without corresponding advances having been paid in the personal file.
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To prevent a situation where the taxpayer is required to pay personal tax "out of pocket" while their funds are "stuck" with the Tax Authority in the company's file, the ITA has published a special relief framework.
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The Proposed Solutions

The ITA presents two tracks for resolving the gap, at the taxpayer's discretion:

Option 1: Dividend Distribution ("The Dividend Alternative")

In this track, the company actually distributes the attributed profits as a dividend.

• The Mechanism: Section 62A(c2)(5) stipulates that Corporate Tax paid by the company (the advances) will be credited to the shareholder.
• The Result: The individual's tax liability will be offset against two sources:
  1. The Withholding Tax deducted at source from the dividend.
  2. The Corporate Tax paid (the advances).
• Condition: The distribution must be made by the submission date of the 2025 annual report (and no later than the end of 2026).
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Option 2: Income Attribution and Collection Freeze

In this track, no dividend is distributed. Instead, an accounting entry is made recording an expense in the company's books (payment to the shareholder) and corresponding income in the individual's file.
To bridge the cash flow gap until the tax refund is received in the company's file, the following arrangement has been established:

1. Submission of Request: A dedicated request must be submitted (using "Appendix A" of the directive) to the Collection Department.
2. Debt Freeze: The tax debt in the personal file will be frozen for 3 months (with an option to extend for an additional 3 months), until the credit/refund is transferred from the company's file.
3. Threshold Conditions: The freeze will be permitted only regarding the portion of income for which advances were paid in the company, and provided that the remaining debt in the personal file has been settled.
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Relief on Fines and Interest

The Authority recognizes that the situation arose due to a legislative change and therefore provides a "safety net" against sanctions:

• Cancellation of Arrears Fines: No arrears fines will be imposed in the personal file regarding the attributed debt.
• Cancellation of Deficiency Fine (Section 190): Companies that reduced advances during the year (or will reduce them now) due to the attribution of income to the individual will not be charged a deficiency fine, even if a discrepancy is discovered retrospectively.

Important Note: Freezing the debt does not exempt the taxpayer from Linkage Differentials and Interest as required by law. Interest will continue to accrue, but simultaneously, the tax refund in the company's file will also accrue Linkage Differentials and Interest (Section 159A), so the offset should be economically balanced.
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Preparing for 2026

In addition to solving the 2025 problem, the directive calls on companies to prepare correctly for the 2026 tax year.
It is recommended to examine projected profitability and the applicability of Section 62A now, and to perform an adjustment of advances (reducing them in the company file and increasing them in the personal file, or canceling company advances entirely), to prevent the recurrence of this issue next year. Reducing advances can be done via Query 415 using the designated codes published.
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FAQ (Questions & Answers)

Q: Is it mandatory to distribute a dividend to offset the advances?
A: No. You can choose the second option (income attribution without actual distribution) and use the debt freeze mechanism via Appendix A.

Q: Is the freeze automatic?
A: No. You must actively submit a request to the Collection Department at the Assessing Officer's office, accompanied by a representative's declaration (Appendix A). Without submitting the request, collection systems will operate as usual to collect the debt in the personal file.

Q: What happens if I didn't pay advances in the company?
A: The arrangement is relevant only to situations where excess tax was paid in the company. If no advances were paid in the company, the controlling shareholder must settle their personal tax debt immediately, and there are no grounds for a freeze.

Link to Source: Click here to view the full Directive (Hebrew)

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