Your Taxes

So you want to open a business in Israel?

By LEON HARRIS
January 22, 2014 22:59
An accountant [illustrative photo]

An accountant calculator taxes 370. (photo credit: Ivan Alvarado / Reuters)

 
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It’s perfectly possible to make money in Israel and keep most it. According to the OECD, Israeli tax revenues amounted to 31.6 percent of GDP in 2012, which was better than the OECD average of 34.6%.

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Israeli business law follows Western principles, thanks to British rule in 1917-1948, the hi-tech revolution of the last 20 years and OECD membership since 2010.

Here are 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 a 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. 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. But almost every company needs an annual audit, which has a cost.

In 2014, companies pay 26.5% company tax on profits and withhold 30%-32% tax on dividends paid to shareholders with 10% or more (subject to any applicable tax treaty).

This means distributed corporate profits are taxed at up to 50.34%.

Tax breaks exist for manufacturers and tech firms, usually if exports amount to 25% of sales.

Salaries and business profits are subject to personal income tax and National Insurance Institute payments at rates ranging up to 50%.

On the tax front A business must register for Israeli tax purposes as soon as 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 canceled check and a copy of your premises’ lease or purchase agreement.

The VAT Authority also 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 79,482 (in 2014), you will probably be an “exempt dealer” (below the VAT threshold). You are still liable to income tax and National Insurance Institute payments (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 and 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 to the VAT and incometax authorities.

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 or 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 register for income-tax and National Insurance Institute purposes.

There are strict bookkeeping and customer- billing rules. Approved Israeli software or printed books must be used; i.e., not Excel, Word, QuickBooks or Sage. Otherwise, the Israel Tax Authority levies fines and is allowed to estimate taxable income, which is never good for the taxpayer.

Reports and payments of income tax, National Insurance Institute payments and VAT 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 at a local post office or bank branch. Lateness results in penalties.

Persistent lateness (three or four times) can result in a prohibition on doing business with the government and public companies.

In practice, smaller businesses 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 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.

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. If you have intellectual property (unique technology, know-how, brand, etc.), consult a patent attorney about protecting it.

In particular, estimate your finance needs and available sources, including own money, 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.

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.

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.

Once employees have worked three to six months at a firm, they are entitled to mandatory pension funding. In 2014 the stipulated minimum pension fund contributions is 17.5% of gross salary, with the employer paying two-thirds and the employee one-third.

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. 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 six 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.

It is recommended to consult an Israeli lawyer about labor law and employment contracts among other things.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

leon@hcat.co Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax ltd.

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