Doing Business in Israel – 2017
It’s perfectly possible to make money in Israel and keep most of it. According to the OECD, Israeli tax revenues amounted to 31.4% of GDP in 2015, 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.
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 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). Each has pros and cons.
On the tax front:
The standard rate of company tax in Israel is 24% in 2017 and 23% in 2018. Dividends are taxed at rates ranging from 25% to 33%, resulting in a combined tax burden on distributed corporate profits of 43%-49.08% in 2017. This is subject to any tax treaty in the case of foreign companies and investors.
For 2016 the standard company tax rate is 25%; the dividend withholding tax rate for pre-2017 profits will be capped at 25% if the dividend is paid by September 30, 2017 subject to conditions, resulting in a combined tax burden of 43.75%.
Commencing in 2017, technology enterprises of companies with annual revenues up to NIS 10 billion generally pay company tax on profits derived from intellectual property at a rate of 12% if they are in Central Israel and 7.5% if they are in peripheral areas. The withholding tax on their dividends is 4% if the recipient is a foreign resident company, otherwise 20%. The resulting combined tax burden on distributed profits for 2017 is 11.2-29.6% subject to any tax treaty.
For companies with annual revenues above NIS 10 billion, the company tax rate may be 6%, and the dividend withholding tax rate 4%, resulting in a combined Israeli tax burden of 9.76%. These low rates for high tech fit in with OECD rules against BEPS, base erosion and profit shifting. Modified tax breaks are available for industrial exporters and agriculture.
Salaries and business profits of independent contractors (self-employed) are subject to personal income tax and national insurance at rates ranging up to 50%. The standard rate of VAT is 17%.
New residents and senior returning residents (lived abroad 10 years)(“Olim”) who took up Israeli fiscal residence since January 1, 2007 are generally exempt from Israeli tax on non-Israeli source income for 10 years – this does NOT include income for work done in Israel for a foreign firm. Keep a diary of where you worked day by day.
A business must register for Israeli tax purposes immediately the business activity starts. If you wait until after the year-end, you will probably be fined.
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’ rental 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 than NIS 98,707, 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 recover VAT on expenses.
People in some professions are not allowed to be Exempt Dealers and can only be Authorized Dealers. These include: management consultants, engineers, surveyors, bookkeepers, translators, insurance agents, lawyers, accountant, appraisers and doctors.
Pay tax as you go:
Every year, the business taxpayer will receive booklets for paying 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 and reports are generally due regularly on the 15th or every other 15th of the month. Four extra days are allowed for online reporting with card payments, within certain limits. 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. Otherwise, the Israeli Tax Authority not only levies fines, it can also estimate taxable income, which is never good for the taxpayer.
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.
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 self-employed – they can contribute 7% and deduct 4.5% as an expense within prescribed 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.
As always, consult experienced advisors in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.