Doing Business in Israel – 2018
It’s perfectly possible to make money in Israel and keep most of it. According to the OECD, Israeli tax revenues amounted to 31.2% of GDP in 2016, which was better than the OECD average of 34.3% And Israeli business law follows Western principles thanks to British rule in 1917-1948, the high tech revolution and OECD membership since 2010. Below we review some of the things to address when doing business in Israel.
At the Macro Level:
You are probably doing taxable business in Israel if you conduct business activities physically in Israel or operate in Israel via an agent who can commit you. Israel’s tax treaties and the OECD Multilateral Instrument refine these criteria for foreign companies – check out any applicable treaty. Don’t forget to check out VAT too – Israeli rules differ from other countries’ rules.
Decide if you want to operate as a company or as a self-employed individual (=independent contractor). Companies offer limited liability protection from most lawsuits and are useful for deferring part of the tax on undistributed profits of up to NIS 5 million. But almost every company needs an annual audit which has a cost. New rules tax the income of personal service companies as salary or trading income at rates ranging up to 50% in certain cases.
Business Tax Rates:
For 2018, regular company tax rate is 23%. The regular dividend tax rate is 30%-33% for 10%-or-more shareholders, 25%-28% for other shareholders, resulting in a combined tax burden on distributed corporate profits of 42.25%-48.41%, subject to any tax treaty (see below) in the case of foreign investors.
Preferred income derived by preferred industrial and tech enterprises is liable to company tax of 6% – 7.5% in development area A, 6% – 16% elsewhere in Israel, without time limit. Dividends are taxed at 4 %-20%. The resulting combined tax burden on distributed profits is 9.76% – 32.8% subject to any tax treaty.
There are also tax breaks for: capital gains of foreign resident investors, trust owned vehicles (TOV‘s), agriculture, approved rental buildings, oil and gas exploration and production, movie productions. R&D grants typically range up to 50% or 60% in a development area, and up to 100% financing in designated incubators. For details, see: http://www.matimop.org.il/growth.html. Loans of up to NIS 125,000 are available from the Ministry of Aliya & Immigration Integration – see: http://www.moia.gov.il/English/Subjects/BusinessAndTax/Pages/AssistanceToEntrepreneurs.aspx
Salaries and business profits of freelancers are subject to income tax at rates ranging up to 50%.
The VAT standard rate is 17%. Exempt dealers must have annual revenues below NIS 99,003.
Israel has income tax treaties with 55 countries – see:
Israel is a party to a FATCA Intergovernmental Agreement with the USA, the OECD Multilateral Instrument for BEPS Tax Treaty Related Measures and the OECD Common Reporting Standard. Remittances to and from Israel are subject to tax compliance checks by the Israeli banks.
Israel has free trade agreements with: Canada, Columbia (draft), Egypt, the EU, EFTA, Jordan, Mercosur, Mexico, Turkey and the USA.
Israel offers R&D grants – typically up to 50% – and has international collaboration agreements with:
• Europe: Numerous EU subject programs via Israel-Europe R&I Directorate (ISERD)
• Asia: China (including Changzhou, MOST, Shenzen), Australia, India, Japan, Taiwan, Hong Kong.
• Latin America: Brazil, Argentina, Uruguay
• USA: Bird Foundation, New York, South Carolina, Florida, Medical Technology, Nevada, Colorado, Canada: CIIRDF, Quebec, Ontario, Baycrest-Israel Brain Health & Senior Care Products,
• Africa: Israeli Product Adaptation Pogram
• Global Enterprise Collaboration: 3M, Abbott, Arkema, Audi, Braun, BD, Bombardier, Boston Scientific, Commonwealth Bank, Cisco, Coca Cola, Deutsche Telekom, DNP, Du Pont, Enel, Fujitsu, GE, Hewlett Packard Enterprise, HP, IBM, Infosys, Intel, Jabil, Leonardo, Merck, Microsoft, Monsanto, Motorola, MSD, NEC, Nestle, Nielsen, Novozymes, NTT, Oracle, Panasonic, Philips, Posco, P&G, Punj Lloyd, Qualcomm, Renault, Ricoh, Roche, RWE, SAP, Syngenta, Technicolor, Telecom Italia, Telefonica, Terumo, Tyco, Unilever, Yanmar
For details, see: http://www.matimop.org.il/ic.html
Israel is a member of the IMF, the OECD, the UN, World Bank Group, GATT, GATS, TRIPS and many more.
National Insurance (Social Security):
The National Insurance (Bituach Leumi) rates are as follows:
• Resident employees: 3.5%-12%
• Employers of resident employees: 3.45%-7.5%.
• Nonresident employees: 0.04%- 0.87%
• Employers of nonresident employees: 0.49%-2.55%
• Freelancers: 5.97%- 17.83% (52% of the NI amount paid is tax deductible)
• Not working: 9.61%-12% (52% of the NI amount paid is tax deductible)
• Payment if no income: NIS 172 per month.
No National Insurance liability applies to monthly income exceeding NIS 43,370. There is generally no National Insurance liability on dividends and capital gains.
The above is subject to any applicable social security (“totalization”) treaty. Israel has such treaties with Austria, Belgium, Bulgaria, Canada, Czech Republic, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Romania, Russia, Slovakia, Sweden, Switzerland, Uruguay and the United Kingdom.
New and Returning Residents (“Olim”):
New residents and senior returning residents (lived abroad 10 years) who took up Israeli fiscal residence since January 1, 2007 are generally exempt from Israeli tax on non-Israeli source income for 10 years. The exemption does NOT apply to income for work done in Israel for a foreign firm. Citizenship is not relevant for these purposes. Keep a diary of where you worked day by day. Olim do not need to report overseas income or assets in their 10 year Israeli tax holiday.
Olim also enjoy an exemption for 5 – 20 years regarding interest on Patach foreign-currency time deposits of three months or more at an Israeli bank.
On Israeli source income, new immigrants receive extra personal credits which reduce taxes by NIS 216 – 648 per month for three and a half years.
Foreign Expatriates in Israel:
Israel’s tax treaties sometimes grant an income tax exemption for employees resident in those countries but working in Israel.
Otherwise, non-residents working in Israel lawfully in their field of expertise for an employer who are paid at least NIS 13,200 per month, may enjoy a deduction for accommodation expenses and a daily living expenses deduction of up to NIS 320 for up to 12 months as “foreign experts,” provided they are invited by an Israeli employer that is not an employment agency. But employers may be subject to a foreign workers’ payroll levy of 0% to 20%.
Two year innovation visas are available foreign entrepreneurs – see: http://innovation-visa.org.il/en/
A business must register for Israeli tax purposes immediately the business activity starts, even before revenues are expected. If you wait until after the year-end, you will probably be fined.
You start with the VAT registration. In Israel, you cannot legally bill your customers until you are registered for VAT purposes. And you can’t do that without first opening a business bank account, and providing a cancelled check and a copy of your premises’ lease or purchase agreement. The VAT Authority insists on at least one Israeli resident director or fiscal representative in the case of a company.
If you are self-employed and your annual revenue is less NIS 98,003 in 2018 you will probably be an “Exempt Dealer” (below the threshold). You are still liable to income tax and national insurance (social security) but probably not much. But an Exempt Dealer is exempt from the need to collect VAT from customers and cannot get back VAT on expenses. An exempt dealer must issue receipts (not tax invoices) to customers and keep a Receipts & Payments Book in a prescribed format.
Above that revenue level, businesses must register as an Authorized Dealer. That means issuing tax invoices, offsetting VAT on expenses against VAT on revenues, keeping approved accounting records, and reporting monthly or bimonthly to the VAT and income Tax Authority. People in some professions are not allowed to be Exempt Dealers and can only be Authorized Dealers. These include: Agronomist, architect, technician, private investigator, Rabbinical attorney, dental technician, organizational consultant, management consultant, scientific consultant, economist, engineer, surveyor, bookkeeper, translator, insurance agent, lawyer, accountant, appraiser, chemical or medical laboratory owner, artistes, various others in show business, doctor, psychologist, physiotherapist, veterinary surgeon, dentist, driving school owner, school owner, real estate agent or dealer.
Once the VAT registration is sorted out, a business can go on to register for income tax and national insurance (social security) purposes.
Pay Tax As You Go:
Every year, the business taxpayer will receive demands to pay VAT, payroll taxes, income tax, and tax installments on profits (Mikdamot). These installments are usually set at a percentage of monthly revenue and must be paid unless reduced by agreement with the local tax office. The installments are merely a payment on account of the annual tax on profits and a reckoning up is done after the year-end by filing annual tax returns. These are usually filed both online and as signed paper returns with supporting documentation (pension payment confirmations, foreign tax confirmations, etc).
The above installments are generally due regularly on the 15th or every other 15th of the month (not VAT in the case of Exempt Dealers). Payment is made online up to certain credit card limits, or at a local post office or bank branch. Lateness results in penalties. Persistent lateness (3 or 4 times) can result in a prohibition on doing business with the government and public companies.
There are strict bookkeeping and customer billing rules – approved Israeli software or printed books must be used – not Excel, Word, QuickBooks or Sage. Otherwise, the Israeli Tax Authority not only levies fines, it can also estimate taxable income, which is never good for the taxpayer.
In practice, smaller business typically outsource the accounting and tax reporting to an accountant or bookkeeper who has all the approved software and can deal with the filings by the 15th. They must let the accountant or bookkeeper have all the paperwork on a regular basis throughout each month. They should also provide read-only access to their bank accounts and credit card accounts on the internet. Larger businesses usually have in-house accounting departments.
Self-employed businesses and 10%-or-more shareholders are also usually requested to file a capital declaration (Hatsharat Hon) at the outset and every few years, listing their personal assets and liabilities. This is to help the Tax Authority see if the increase in assets have outstripped reported income. There is currently no wealth tax nor estate/inheritance tax in Israel.
On the General Business Front:
Set business goals over time and prepare a business plan – it may improve your chances of success and reduce surprises. You need to know your unique selling point(s) that will make you competitive and in demand. Consider whether franchising is for you. If you have intellectual property (unique technology, knowhow, brand, etc), consult a patent attorney about protecting it.
In particular, estimate your finance needs and available sources – family and friends, suppliers’ credit, venture capital funds, angels, etc. Choose a bank you are comfortable with – but don’t expect an Israeli bank to lend you much unless you put up solid collateral. Decide whether to operate from an office, hub, accelerator and/or from home.
Check if you need a business license. Choose an appropriate business name and logo. Go for customers by networking – some networking groups such as BNI are quite effective.
Considering hiring a marketing consultant. Build a catchy website and social media presence and design your stationery and graphics with care.
Register for municipal taxes and utilities. Install appropriate communications and computer systems. Get adequate insurance. Consult lawyers regarding legal matters.
Employees and Freelancers:
Once employees have worked 3 – 6 months at a firm, they are entitled to mandatory pension and severance funding. The stipulated minimum pension fund contributions is 18.5% of gross salary. The employer generally pays 6.5% towards pension funding and 6% towards severance funding. The employee pays 6% towards pension funding.
“Study Funds” (Hishtalmut) are also common but not mandatory – the employer usually pays 7.5% of gross salary and the employee 2.5% up to prescribed limits. The employer deducts his cost for tax purposes and the employee is exempt and can use the money for any purpose if no withdrawals are made for 6 years.
A similar Study Fund arrangement is available to the freelancers (self-employed) – they can contribute 7% and deduct 4.5% as an expense within prescribed limits. Commencing in 2017, the self-employed must contribute 4.45%-12.55% of income into a pension-unemployment fund within certain limits.
Employees are also entitled to reimbursement of their home-to-work travel costs, a recreation bonus (Havraah) every summer according to a formula, and severance pay (one month’s salary per year of service) if dismissed or in certain other cases.
Approved share option plans are popular as employees may pay only 25% tax if various conditions are met. International plans should have an Israel annex.
Records must be kept of time worked by employees, vacation taken, sick leave, etc.
Be sure to consult an Israeli lawyer about labor law and employment contracts among other things.
Home rental income of up to NIS 5,030 per month is exempt for individuals. Thereafter, several possibilities exist – regular tax on net income, flat rate tax of 10%. Companies pay tax at regular rates.
Real estate acquisition tax rates range up to 10% generally. For an Israeli resident purchaser with no other home in Israel, the first NIS 1,646,520 may be exempt from acquisition tax.
The gain from the sale of an only home in Israel by a resident individual may be exempt from tax provided its value does not exceed NIS 4,455,000 (in 2018). Otherwise home sales are generally taxed at 25%-50%.
Passive income derived by individuals from securities are generally taxed at rates of 25%-33%. Traders and companies pay tax at regular rates.
Estates, Inheritances and Gifts:
There is no tax in Israel on estate or inheritances. There is also no tax on gifts to Israeli residents. But capital-gains tax is payable at rates of 25%- 50% on:
• Gifts to foreign residents except for cash;
• Sale of assets acquired by way of a gift or inheritance.
• Please contact us for tax and business advice to help you get started.
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As always, consult experienced advisors in each country at an early stage in specific cases.
Leon Harris, email@example.com
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.