Legal Updates

Debts of a corporation established for illegal tax evasion can be attributable to those who use it for such purpose

November 12, 2023

A tax assessment was issued to a taxpayer from income generated by illegal activity, even though the proceeds from the illegal activity were transferred directly to foreign companies that are not owned by that taxpayer.

The Court rejected the taxpayer's motion and determined that he can be held personally liable for the companies’ profits. Although a company has a separate legal personality, the rules regarding the separate personality of the company are intended to promote desirable social goals. Therefore, when it comes to a company incorporated for the purpose of realizing an illegal plan, there is nothing in these important business purposes to rule out the possibility of attributing actions performed by a company to the entity that uses it and hides behind its separate personality. Here, this is a case where the taxpayer was the one who was behind the creation of the foreign companies for the purposes of conducting criminal activity, as well as being the only one with access to their bank accounts, hence any income received in these bank accounts was for the purpose of evading tax payment in Israel. Therefore, the taxpayer can be taxed on the companies income even though he was not a shareholder or officer in those companies.