Your taxes: Doing business in Israel – 2016

money (photo credit: REUTERS)
(photo credit: REUTERS)
It’s perfectly possible to make money in Israel and keep most of it. According to the OECD, Israeli tax revenues amounted to 31.1 percent of GDP in 2014, which was better than the OECD average of 34.4%.
And Israeli business law follows Western principles thanks to British rule in 1917- 1948, the hi-tech revolution of the last 25 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 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 value-added tax (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. But almost every company needs an annual audit, which has a cost.
On the tax front
The standard rate of company tax in Israel is expected to be 25% in 2016, down from 26.5% in 2015. Dividends are taxed at rates ranging from 25% to 32%, resulting in a combined tax burden on distributed corporate profits of 45%-50%.
This is subject to any tax treaty in the case of foreign companies and investors.
Preferred enterprises in industry and technology pay company tax of 9% in development area A and 16% elsewhere if they are in biotech or nanotech or their exports amount to 25% of sales. The withholding tax on their dividends is 20%.
The resulting combined tax burden on distributed tax-break profits is therefore 27.2%-32.8% subject to any tax treaty in the case of foreign investors.
Salaries and business profits of independent contractors (self-employed) are subject to personal income tax and National Insurance Institute (Social Security) payments at rates ranging up to 50%.
The standard rate of VAT is 17%.
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; this does NOT include income for work done in Israel for a foreign firm. Detailed time records should be kept of where you worked day by day.
Tax registrations
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 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 99,006 in 2016 (NIS 100,000 in 2015) you will probably be an “exempt dealer” (below the threshold).
You are still liable to income tax and NII payments, 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 Income Tax Authority. People in some professions are not allowed to be exempt dealers and can only be authorized dealers. These include management consultant, engineer, surveyor, bookkeeper, translator, insurance agent, lawyer, accountant, appraiser and doctor.
Once the VAT registration is sorted out, a business can go on to register for income tax and NII purposes.
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 yearend 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). Persistent lateness (three or four times) can result in a prohibition on doing business with the government and public companies.
Essential records
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 Israel Tax Authority not only levies fines, it can also estimate taxable income, which is never good for the taxpayer.
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. 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 has outstripped reported income. There is currently no wealth tax nor estate/inheritance tax in Israel. Olim do not need to report overseas assets in their 10-year Israeli tax holiday.
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.
Consult your accountant regularly. A good accountant should help you plan ahead and not only report the past.
Once employees have worked three to six months at a firm, they are entitled to mandatory pension and severance funding. The stipulated minimum pension- fund contributions is 17.5% of gross salary. The employer generally pays 6% toward pension funding and 6% toward severance funding. The employee pays 5.5% toward 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 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.
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 tax advisers and lawyers in each country at an early stage in specific cases. Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.