76. (a) The provisions of this Chapter apply to every company which is under
the control of at most five persons and which is not a subsidiary or a
company in which the public has a real interest (hereafter: small 117
(b) For purposes of this Chapter: "company under the control of at most
five persons" a company in which five or fewer persons, directly or
indirectly, jointly control, are able to control, or are entitled to acquire
aforesaid control of the company's affairs, and particularly, but without
derogating from the generality of the aforesaid, jointly hold or are entitled
to acquire most of the share capital or of the voting power in the
company, or most of the company's issued share capital or that part of it
which would, if the company's entire income were distributed to the
members, entitle them to receive most of the amount distributed.
(c) For the purposes of this section: "subsidiary" a company, in which
shares representing not less than 80% of its share capital are held or
controlled by a company or companies to which the provisions of this
Chapter do not apply.
(d) When determining whether a company is or is not under the control of
five persons, the following shall be deemed a single person:
(1) a person and his relative; for this purpose: "relative" spouse,
brother, sister, parent, parent's parent, descendant, the spouse's
descendant and the spouse of any of these;
(2) a person and his representative;
(3) partners in a partnership.
(e) Nothing said in this Chapter shall prevent from appealing according to
sections 153 to 158 against a decision by the Director in the exercise of
powers conferred on him by sections 77 and 78.

Undistributed profits that are deemed to have been distributed
77. (a) If the Director finds that a small company did not, by the end of twelve
months after any tax year (hereafter: the said period) distribute its
taxable profits for that year or some part of them to its shareholders in
the form of dividends, and that it is able to distribute its profits or part
thereof without detriment to the existence and development of its
business, and that the effect of non-distribution is an avoidance or
reduction of tax, then he may within three years after the end of the
said period, after he consulted with the committee for which provision is
made below and after he gave the company a reasonable opportunity to
be heard direct the Assessing Officer to treat those undistributed
profits as if they had been distributed as dividends.
(b) When an aforesaid direction has been issued, the shareholders
concerned shall be assessed or have their assessments amended, as if
the sums treated as distributed had been received by them as dividends
on the date or dates which the Director may find it just to determine,
having regard to the date or dates on which the company distributed
dividends, if any (hereafter: hypothetical dividend).
(c) The Director shall not issue aforesaid directions if before the end of
twelve months after any tax year the company distributed as dividends
an amount that is not less than 75% of its taxable income in that tax

Hypothetical dividends of small companies
78. A hypothetical dividend from a certain small company (hereafter: the first
company) to a shareholder that is also a small company (hereafter: the second
company) shall not be liable to tax as income of the second company, but shall
be treated as a dividend distributed by the second company on the date
prescribed by the Director under section 77, and the shareholders of the 118
second company shall be assessed or have their assessments amended
accordingly; if a shareholder of the second company also is a small company,
then the provisions of this section shall apply, mutatis mutandis as the case
may be, to the hypothetical dividend as though any reference here to the first
company were a reference to the second company, and any reference to the
second company were a reference to that shareholder, and so on until,
applying the same principle, no part of the profits to which the Director's
directions relate and which must be treated as distributed to a small company
remains undistributed.

Unpaid tax to be debt of company
79. If a person was assessed to tax or had his assessment amended in
accordance with the provisions of sections 77 or 78, and if he did not pay all or
part of the tax attributable to his share in a hypothetical dividend on time, then
the unpaid amount shall become a debt due to the Government from the
company, because of whose failure to distribute the profits the directions of the
Director directions under section 77 were made, and it may be recovered thw
way a debt is recovered.

Undistributed profit that was subsequently distributed
80. When undistributed profits liable to tax under sections 77 and 78 are
subsequently distributed, then they shall not be treated as taxable income of
their recipients.

Advisory Committee
81. A committee of five, at least three of them not State employees, shall advise
the Director on the use of the power conferred upon him by this Chapter; that
committee shall be chosen when the need arises by the Director from a list
drawn up by the Minister of Finance in a notice published in Reshumot.