Israel Payroll and Tax Overview.

On the southeastern shores of the Mediterranean, Israel represents a gateway to the Middle East and is one of the region’s most significant economic and political powers. Israel is a developed parliamentary republic with high standards of living and social care and a strong infrastructure promoting international trade and commerce. In 2020, Israel reached an estimated GDP of $387.7 billion with a growth rate of 3.5% buoyed by strong consumer spending, exports, and investment. Israel’s economy is supported by high performing technology and pharmaceutical sectors which developed rapidly in the 21st century, but the country’s agricultural, financial services, manufacturing, and tourism sectors also contribute significantly to its financial profile. With a corporate tax rate of 23%, Israel continues to push to attract a range of international investment interests and hosts multinational businesses from a range of countries including the United States, China, India, Germany, and the UK. Israel is a member of the United Nations, the WTO, and the OECD, and was ranked 35 on the World Bank’s Ease of Doing Business Survey 2019.

Why Invest in Israel?

Israel is actively encouraging international organisations to invest in the country, and in 2017, ranked 3rd in the region on the World Bank’s ‘Ease of Doing Business’ survey. With a range of incentives to consider, why should businesses invest in Israel?

• Economic development: In 2010, Israel joined the Organisation for Economic Cooperation and Development. Its economic development has been swift and, outside North America, it hosts the largest number of start-ups and NASDAQ companies in the world.
• Tech sector: The technology sector is one of Israel’s most successful investment targets. Tech products make up the majority of industrial exports (and a substantial amount of total exports) and tech companies populate the Israeli stock market. In the U.S markets, Israel has more listed tech companies, in innovation fields such as cyber-security, big data, fintech, and health and life sciences, than any other country in the world.
• Financial resilience: The Israeli economy has shown remarkable resilience. In the wake of a market collapse in 2000, the government introduced reforms to open up financial services, privatise state-owned companies, and increase entry to a variety of industries. At 5%, Israel’s unemployment rate is now one of the lowest in the world.
• Foreign investment: Israel’s Foreign Investment and Industrial Cooperation Division leads initiatives to attract foreign investment with support available for every stage of the investment process. A range of tax breaks and other financial incentives are available for foreign businesses hoping to set up in Israel.
• Geographic advantage: Israel acts as a continental gateway, with access to markets in the Middle East, Asia, North Africa, and Europe, and tens of millions of consumers. Israel hosts several modern international sea ports and busy international airports which connect to destinations in every corner of the globe.

Foreign Direct Investment in Israel

Israel is widely considered to be one of the most advanced countries in Western Asia, in both economic and industrial development. With a robust and growing economy, the country is a leading exporter of technology and pharmaceuticals, with the largest number of start-ups and NASDAQ-listed companies in the world outside of North America.

Beyond lucrative exports of pharmaceuticals, fruit, military technology and diamonds, Israel’s technology and science sector includes world-leading companies working to develop water conservation, solar energy and geothermal energy. Major enterprise organisations have opened research and development facilities in Israel, including Microsoft, Intel, Apple and Google. The cultivation of innovative start-ups within Israel has drawn comparisons with the Silicon Valley tech-boom.

Registering a Company & Establishing an Entity in Israel

The Israeli Companies Law (ICL) defines a company as a corporation formed and registered in Israel, in accordance with Israeli law.

It is necessary to register the company with the Registrar of Companies. While Hebrew and Arabic are the official languages of Israel, in practice, the Registrar will generally accept corporate documents in English. However, the Company Registrar does require that the Articles of Association be translated into Hebrew.

In order to register a business with the Registrar of Companies, the following documents must be submitted:

• Form No.1 of the Company Registrar – An application form to register a company.
• Signed affidavits by the first shareholders and directors of the company.
• Articles of Association, which set forth rules of conduct for the company. Should a company not submit its own articles of association, then the standard articles which are listed in the Companies Law will be in force for this company.

The fee for registering a company is currently 2,653 NIS.

After the registration is complete, the registrar will issue a Certificate of Incorporation and a company number.

An Israeli lawyer is required in order to verify the company's documents. A lawyer will usually handle the process for most requests and will represent the company at the Companies Registrar Office as well.

Once the company has been registered with the Registrar, it must be registered with the appropriate tax authorities.

Registration of the new company with the appropriate tax authorities should be made upon commencement of operations. The filing number is usually the same one as the one issued by the Registrar of Companies. Registration is made using form 4436, which includes basic details of the company. Most companies limit the personal liability of their members, usually in the form of shares. In this case, the term "Limited" (or the abbreviation "Ltd.") must appear as part of the official full name of the company.

A company may be registered as a "Private Company" or a "Public Company", with securities registered on a Stock Exchange. Both types of companies must present annual reports, including audited financial statements to their shareholders. However, there is no requirement to publish financial statements of a private company.

A company incorporated overseas may establish a branch or a local office in Israel, as long as it is registered as a foreign company with the Registrar of Companies within a month of its establishment. In order to register, a foreign company must submit all the necessary documents to the Registrar of Companies.

If the company uses the term "limited" as part of its name, then it must display its name (and the name of the country it was incorporated in) on every invoice, letter, announcement, advertisement and any other official publication.

More information regarding tax and registration can be found at the following links:

• Israel Tax Authority: https://www.gov.il/he/departments/israel_tax_authority/govil-landing-page
• Employment Law: https://www.gov.il/he/departments/ministry_of_economy/govil-landing-page
• National Security: https://www.btl.gov.il/

Banking for Business in Israel

It is not mandatory to have an in-country bank account to process the payroll. Salary and third-party payments can be made on behalf of the company. Monthly payments to the authorities are made by cheques and in shekels. Payments to employees are made using bank transfers or cheques. Bank transfers are usually made within the same day in Israel.

Israeli banks have set special branches for foreign residents who wish to open a bank account in Israel, this also applies to local companies that have foreign shareholders.

The standard bank opening hours are 08:30 to 12:30 on Sundays to Fridays and 16:00 to 18:00 on Mondays and Thursday afternoons. Some branches are closed on Fridays or Sundays.

Working Days and Working Hours in Israel

Working hours in Israel are generally 08:00 to 17:00 on Sundays to Thursdays. Companies that work on Fridays are generally open from 08:00 to 13:00.

The working week for employees 18 years of age or over who are employed full time consists of 42 hours. It is illegal to make an employee work more than 12 hours a day or 16 overtime hours a week.

Different rules apply for employees classified as part time, handicapped, absent and apprentices. All employees are entitled to a weekly rest period of at least 36 hours - on Friday, Saturday and/or Sunday, depending on their religion.

Employees are entitled to overtime pay after 8:36 hours on four of the five working days and after 7:36 on the fifth (or any other chosen by the employer) working day (in a 5-day workweek) or after 8 hours (in a 6-day workweek). For the first two hours of overtime each day, payment is 125% of the regular hourly wage; for each additional hour, the rate is 150% of the regular hourly wage.

Basic Facts about Israel

Israel lies on the south-eastern edge of the Mediterranean sea, bordered by Lebanon and Syria to the north, Jordan to the east, and Egypt to the south-west. Founded in 1948 as a democratic Jewish state by the United Nations General Assembly, today Israel is a developed country with one of the highest standards of living in the region. Israel’s climate is varied, with hot Mediterranean summers and mild, wet winters, while its territory includes fertile areas of grassland, sun-soaked stretches of coast, and even arid desert regions. Israel is home to an abundance of plant and animal species, and has a variety of nature reserves. Thanks to its scenic beaches and natural beauty, rich historic heritage, and religious significance, Israel is an extremely popular destination for holidaymakers and tourists from all over the world.

Full Name: Israel

Population: 8.88 million (World Bank, 2018)

Capital: Jerusalem

Major Language: Hebrew and Arabic

Currency: Israeli New Shekel

Main Industries: High-Technology Products, Pharmaceuticals

Internet Domain: .il

International Dialling Code: +972

The financial year in Israel runs from 1st January to the 31st December.

Income Tax in Israel

Income tax is deducted from the salary by the employer and transferred to the relevant tax authorities.

Note: The employer is required to pay the authorities various fees in order to attain the necessary permits to employ migrant workers. The employer should not deduct any such fees from the salary of these workers.

Self-employed individuals are required to pay income tax on taxable income at rates ranging from 10% to 50%, plus national insurance and health tax of up to 5.97% on the first NIS 6,331, and 17.83% on any additional income exceeding the sum of NIS 6,331 up to a limit of NIS 45,075.

Taxes of up to 50% are levied on most domestic Israeli expenses, unless the recipient holds confirmation from the Israeli tax authority allowing a lower rate.

Israeli banks must withhold tax (generally at rates of 25-31%) on remittances from Israel, unless the remittance is related to imported goods.

An exemption or reduction in tax withholding may be obtained in certain cases, for example: when a treaty applies or when the payments are for services that are rendered entirely abroad.

Failure to withhold tax properly will result in a denial of the relevant expense and possible penalties.

For the purpose of withholding tax, an employer is required to open a withholding tax file with the Israeli IRS prior to making remuneration to employees or payments to other recipients. The employer is then required to withhold income tax from employment remuneration paid to employees (and any benefits given to the employee), for work performed in Israel.

Income tax is paid to the authorities every month. Therefore, the employer must transfer the deducted tax via bank or the Post Office so it arrives to the authorities by the 16th day after the month's end. Late payments generate a penalty. Employers are also required to provide all employees with annual earnings and deductions statements.

Social Security in Israel

Every Israeli resident aged 18 and over is obliged under law to be insured by National Insurance and to pay the National Insurance contributions, except for a housewife (a married woman who is not employed outside the household) and for a person who first became an Israeli resident over the age determined by law (the age increased gradually from 60 to 62).

Every resident of Israel aged 18 and over is also obliged to be covered by Health Insurance and to pay the health insurance contributions to the National Insurance Institute together with the national insurance contributions. A housewife is exempt from payment of health insurance, with the exception of a housewife who is an old-age pension recipient or whose spouse receives a supplement to his old-age pension.

Every insured person must be registered in one of the four healthcare funds and is entitled to the health services defined by law.

Payment rates of national insurance and health insurance are calculated according to the insured’s earned and unearned income, and according to their work status (employee, self-employed, unemployed, student, etc.).

Payments will not be less than the minimum specified by law and will not be more than the maximum income ceiling for insurance contributions.

A resident who does not work and has no income will pay the minimum insurance contribution of NIS 177 (as of 01.01.2020) per month.

An insured person is obligated to pay insurance contributions for any period he/she is temporarily absent from Israel.

National Insurance in Israel (In Hebrew: Bituach Leumi)

Fees are deducted from a foreign employee's salary and cover the following:

• Work-related injuries
• Maternity allowance
• Unpaid wages or severance pay in case your employer goes bankrupt

The rate of national insurance deduction for a foreign employee is 0.04% for the first NIS 6,331 (as of 2020) of his salary, and 0.87% of every additional shekel above NIS 6,331.

You can find detailed information on National Insurance benefits and deductions on the National Insurance Institute website.

Housing and Health Insurance: additional deductions that can be made from a foreign employee's salary include housing expenses and health insurance costs. The employer may also deduct sums that the employee owes them (such as loans and recruitment fees), but only if the employee agrees in writing to such a deduction.

Reporting Tax in Israel

The Israeli Tax Year is generally the calendar year. Subsidiaries of foreign public companies may sometimes use a different fiscal year.

Yearly:

By the end of March of each year, the employer must provide every employee with a 106 Form, which is an annual statement of wage and tax. The employer also has to submit to the IRS a 126 Form by end of April, and a 126 form to the NII by the end of July, January and April.

Withholdings to be included in the submitted forms above are:

• Company Tax Installments - a percentage of the company's monthly sales revenue
• Supplementary company tax installments with respect to certain non-deductible expenses
• Tax withheld from salaries and remittances to suppliers when applicable
• Value Added Tax (VAT)
• National Insurance

All companies doing business in Israel are required to file audited annual tax returns and financial statements within 5 months after their fiscal year. Extensions may be obtained. Filings may sometimes be spread over a period of up to 13 months after the tax year-end.

Monthly:

Companies must also file monthly returns on accounts accompanied by tax payments. Bimonthly returns are sometimes acceptable for small businesses.

These filings and payments must be made by the 15th day after the month's end and can be paid at a bank or post office.

Late payments generate a penalty.

New Employees in Israel

It generally takes 3-4 days to set up a new employee on payroll.

The information required to register a new start are:

• Personal Demographic Data: Name, Address; Proof of Address and Identification;
• Tax Information;
• Salary Data;
• HR/Payroll Data,
• Family Members,
• Employee’s Health Insurance,
• HR/Salary Data: Employee Salary, Premiums, Bonuses And/or Allowances, Dispense Voucher, Job Title, Cost Center, Location, Department, Work Hours, Type of Employment Contract
• New Employee Forms Completed and Registration with Authorities:
• Form 101 - Workers Declaration to be filled out by employee at the beginning of employment and of each tax year, and after any change in form details
• Employment contract stating conditions between the employer and the employee, including salary components, insurance and funds, etc.
• Bank account

Leavers in Israel

Upon termination, the employer must compensate the employee for accrued and unused vacation days. The redemption must be calculated in accordance with the level of salary being paid to the terminated employee at the time of termination.

Payroll in Israel

Wages and salaries are paid on a monthly basis. Payments can be made in cash, cheque or electronic bank transfer.

The most common payment systems in Israel are:

• Zahav system, which is designated for immediate and final settlement of large and urgent payments;
• Paper-Based Clearing House for paper transmissions (checks and various credits and debits);
• Masav (banks' automated clearing house, which settles electronic debit and credit instructions;
• TASE Clearing Houses (the securities of clearing houses) and the credit card companies.

The main users of these various payment systems are mostly commercial banks and large financial institutions. Private users and the public use these means of payment directly, and need to use the inter-bank payment systems for the transfer of money from bank to bank.

Payroll reports are kept for 7 years.