Israel

Legal Entity Formation

The Israeli Companies Law (ICL) defines a company as a corporation formed and registered in Israel in accordance with Israeli law. Registration is required with the Registrar of Companies.

The process requires:

• Form No.1 (application to register a company)
• Signed affidavits by the first shareholders and directors
• Articles of Association (in Hebrew)
• A company registration fee of 2,653 NIS
• A certificate of incorporation and company number are issued upon completion
• A local lawyer must verify company documents
  
  

Hebrew and Arabic are official languages, but English documents are generally accepted. However, Articles of Association must be translated into Hebrew.

Permanent Establishment (PE) vs. Non-PE:

There are three types of registrations:

1. Subsidiary (PE)
2. Foreign branch
3. Employer File only (non-PE)
   
   

Criteria for PE status are based on tax treaties and include employee count, office presence, and market focus.

Before operations start, companies must open a local bank account to proceed with VAT and tax registration. Activities without PE status can use a CPA’s trust account.

Fast-Track Option

An Israeli resident can incorporate the entity as sole director/shareholder and later transfer shares. This route allows for expedited registration. However, this resident must remain a co-director until replaced using standard procedures.

To add directors:

• Submit passport copies apostilled
• Israeli lawyer or consul must verify identities
  
  

Required Documents

For standard or fast incorporation:

• Application form
• Articles of Association (Hebrew and English)
• Directors' statements
• Parent company’s Certificate of Incorporation (apostilled)
• Notarized shareholder statements
• Power of attorney for Israeli representative
• Payment receipt for registrar fee

Working Week and Hours

• Sunday to Thursday: 08:00–17:00
• Friday (optional): 08:00–13:00
• Standard full-time: 42 hours/week
• Overtime: max 12 hours/day and 16/week
  
  

Overtime Pay:

• First 2 hours: 125%
• Additional hours: 150%

Employment Law

• Contracts must specify terms, benefits, pay, and conditions
• Youth employment restricted by Youth Employment Law 1953
• Weekly rest: 36 consecutive hours
  
  

Holiday Entitlement:

• 16–28 paid leave days/year based on seniority
• 9 paid religious holidays (Jewish or employee’s religion)
  
  

Maternity Leave:

• 8 or 15 weeks paid + 11 weeks unpaid, based on NII contributions
• Application via employer or directly to NII

Paternity Leave:

• Up to 7 days during maternity leave, transferable from mother
  
  

Sick Leave:

• Accrues at 1.5 days/month, up to 90
• No pay on day 1, 50% on days 2–3, 100% from day 4

Income Tax

Personal income tax rates range from 10% to 50%, with a 3% surtax applied to annual income exceeding ILS 721,560.
Corporate tax remains at 23%.
VAT is 17%, and the VAT invoice threshold is ILS 25,000 in 2024, reducing to ILS 5,000 by 2028.
Freelancers (Osek Patur): Revenue below ILS 120,000 qualifies for flat 30% expense deductions.
Rental income: Taxed at 10% flat, with expense deductions up to ILS 90,000.
Employers must open withholding tax files and remit payments by the 16th of each month.
Social Security (National Insurance)
Mandatory for all residents aged 18+, except housewives and certain new residents.
Covers work injury, maternity, insolvency/severance, and health coverage via one of four funds.
Foreign workers contribute at lower rates (0.04% to 0.87%), and employers must ensure housing meets legal standards.
Minimum contribution for unemployed individuals is ILS 177/month. 

Freelancers:

• Osek Patur: revenue < NIS 120,000; flat 30% expense deduction
  
  

Rental income:

• 10% flat tax; expense deduction up to NIS 90,000 possible
  
  

Employers must open withholding tax files and remit monthly by the 16th.

Social Security (National Insurance)

Mandatory for all residents aged 18+, except housewives and certain new residents. Includes:

• Work injury
• Maternity
• Insolvency/severance
• Health coverage via 1 of 4 funds
  
  

Foreign workers:

• Deducted at lower rates (0.04% to 0.87%)
• Housing must be arranged and meet legal standards
• Minimum contribution (unemployed): NIS 177/month

National Insurance and health insurance rates:

• Up to NIS 6,331: Employee 3.5%, Employer 3.55%
• Over NIS 6,331: Employee 12%, Employer 7.6%

Monthly payroll is standard. Payments:

• Bank transfer (preferred), cheque, or cash (≤ ILS 11,000)
• Masav system used for bank transfers
  
  

Payroll processing:

• 3–4 days to onboard a new hire
• Data required: demographics, tax and employment info, Form 101
  
  

Reports:

• Retain payroll records for 7 years
• Payslips must be issued
• Annual Form 106 (to employees)
• Annual/quarterly Form 126 (to tax and NII)
  
  

New Hires:

• Must register with tax and NII
• Require full demographic, bank, employment data
• Form 101 required yearly or upon change
• Pension enrolment starts at 3 or 6 months depending on previous coverage
  
  

Terminations:

• Accrued vacation must be paid
• Final wage based on last salary level
• Legal advice is advised due to strict labor laws
  
  

Minimum wage (April 2024):

• Monthly: NIS 5,880
• Hourly: NIS 32.3

• Pension: Mandatory (6% employee, 6.5% + 6% employer)
• Travel Allowance: Up to NIS 22.60/day or monthly bus fare
• Recuperation Pay: NIS 378 × 5–10 days/year (paid June–Sept)
• Share Schemes: Taxed on gains
• Bonuses, Benefits: Taxable (e.g., housing, insurance)
• Company Car: Car license required for tax calculations
  
  

Types:

• B1 Open Work Visa: renewable annually
• Restricted Work Permit: employer-specific
  
  

Required for B1:

• Medical exam and blood test results
• Certificate of conduct
• Fingerprinting and photo
• Application form, passport photos
• Employment offer letter
  
  

Process:

• Application fee due upon submission
• Validity and extension per Interior Ministry guidelines

• VAT registration requires Israeli citizen guarantor
• Local bank account needed before VAT or Tax registration
• Foreign-only director companies must appoint a local VAT guarantor
• CPA/law firm can manage trust bank accounts (for non-PE)
• Forms W8/W9 required for American directors
• Official publications must show full company name and origin country
• Israeli banks provide dedicated services for foreign residents
• Banking hours: Sun–Fri 08:30–12:30, Mon/Thu 16:00–18:00
  
  

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Further Information

For more information, or assistance with Israel Tax inquiries please contact: gi@activpayroll.com

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About This Payroll and Tax Overview

Please note that this document gives general guidance only and should not be regarded as an authoritative or complete statement of the law, regulations or tax position in any country. You should always seek specific advice for each specific situation. This document should not be relied upon as professional advice and activpayroll accepts no liability for reliance on its contents.