Category: Business in Israel

A young mother told us that she was considering full-time freelancing as a way to make her own schedule and have enough time to spend with her children, but she wasn’t sure she understood the paperwork involved. A new oleh reported that he chose freelancing in order to work with clients abroad using expertise that doesn’t translate well in the Israeli job market and wanted to know his obligations to the Israeli government. A translator chose freelancing because full-time translation jobs are a rarity, but was confused about her rights as a small business owner. 

What all these professionals have in common is that they were all concerned about the legalities of full-time freelancing. They were worried that freelancing in Israel might be complicated and expensive. They had heard that they would pay high taxes and be bogged down in paperwork. 

So we set out to put together a list of legal issues which must be taken into consideration before deciding to go freelance.

Freelancers don’t enjoy the same rights as employees

Employees have rights under Israeli law, such as vacation days, sick days, compensation for getting fired and Bituach Leumi partially paid for by the employer. Freelancers do not enjoy these rights – they are paid only according to the agreement made with the client, the agreement can end at any time and they must pay their own Bituach Leumi.

In exchange for their lack of rights, freelancers retain control over their work schedules and the clients they choose to work with. The labor courts have been known to consider a freelancer a de facto employee, if the client behaves more like an employer than a client. One example would be a freelancer who works exclusively for one client for a long period of time and is integral to the function of the department in which he works. The possibility that this worker will be considered an employee retroactively is meant to prevent companies from taking advantage of workers by forcing them to accept freelance conditions while not allowing them the freedom that comes with the status.

Freelancers are responsible for reporting income and paying tax

Employees have their income tax automatically withheld from their paychecks, but freelancers are responsible for reporting their income and paying income tax. Reporting for an Osek Murshe is done bi-monthly and can often be a complicated process. Many freelancers choose to hire an accountant or tax advisor to file their reports in order to avoid fines and other sanctions from the government.

Freelancers may have to collect and pay VAT

A freelancer who is categorized as Osek Murshe (either because his annual salary is over 120,000 NIS as of 2024, or because his business must always be categorized as Murshe) must collect VAT from clients and pay it forward to the Israeli government. 

According to the Israel Tax Authority website, Value Added Tax (VAT) is “imposed on any transaction executed in Israel, on import of goods by every person and on provision of services, in a single rate from the sum of the transaction or the price of the goods.” In 2024, VAT is 17% of the total sale.

This tax is collected by the business and then transferred to the government. Physical products are priced with the VAT included, but when services are provided, the freelancer may quote a price including VAT or let clients know that the price quote does not include VAT. 

VAT which is collected from customers is paid to the government every two months. Certain business expenses can be deducted from the total VAT owed.

Transactions must be recorded with receipts

Any transaction associated with the business must be recorded. The customer must receive a receipt for payments made. Receipts can be on paper or online and must be compliant with Israeli law. An Osek Murshe providing services will also issue a tax invoice, although this can often be combined with the receipt in a document called Cheshbonit Mas Kabbalah (tax invoice receipt).

Some examples of approved invoicing and receipt software are:

• EasyCount
• morning (by Green Invoice)
• iCount
• Invoice4U
• SmartBee

Freelancers are required to contribute to a pension fund

Until 2017, freelancers could choose whether to deposit funds independently into a pension fund, but this led to a situation in which too many freelancers were in a financial bind when they reached retirement age. According to current law, freelancers must contribute to a pension fund according to how much they earn.

For the first 75,216 NIS earned, a minimum of 4.45% must be deposited. For the next 150,432 NIS earned, 12.55% must be deposited. Any income above that amount is exempt from the pension fund, but freelancers who want to increase their retirement fund can choose to deposit more. There are tax incentives for pension funds but they are not limitless.

Legally, pension funds can be deposited all at once, as long as they are deposited by the end of the tax year in December. Of course, for many freelancers it is financially easier to deposit a smaller sum each month. This can be set up automatically through the bank.

Freelancers must fill out a Hatzharat Hon

The Israeli government requires freelancers to declare their assets to the government periodically (when the file is first opened and about every five years thereafter). The purpose of this report, called a Hatzharat Hon (declaration of assets), is to ensure that freelancers aren’t under-reporting their income. 

The first Hatzharat Hon serves as a basis for future reports, so that assets reported are constantly checked against the first one. This makes it doubly important that the first one is done properly. It is highly recommended to hire a professional accountant or tax advisor to assist in the preparation of this report. Because the declaration requires a lot of personal information, it is not a job which can be handed over entirely to an expert, and the freelancer will have to be involved with the paperwork. But the accountant will know what needs to be included and ensure that the freelancer is in compliance.

Is it worth it?

We are often asked whether it’s worth it to freelance with all the extra obligations and paperwork that come along with it. There’s no right answer, of course. So much depends on industry, income, lifestyle and personality. Some people find that the inconveniences are far outweighed by the flexibility that freelancing affords them. Others are able to establish more lucrative careers by working for themselves or just can’t fit full-time work into their schedules and prefer to make their own hours. 

Freelancing can be made much simpler by outsourcing the reporting and paperwork. The extent to which this is done must, of course, be balanced with the cost of hiring others to do this work. Many freelancers start out doing a lot of the admin work for their business themselves and hire others as their income grows. If they can earn more by doing the work of the core business, it pays to outsource the admin work. 

Employer of Record services like Route 38 are another solution for outsourcing paperwork. In this scenario, the person is considered an employee of the EOR service. Income tax, Bituach Leumi and pension will be automatically withheld. Invoices and receipts will be issued by the EOR per the employee’s instructions and there is no need for a Hatzharat Hon. Some EOR services are geared towards freelancers with multiple clients, while others (like Route 38) are more focused on those who have one client abroad.

Not sure whether freelancing is for you? Read more about the differences between employees and freelancers in our free e-book, Your Route to Career Success in Israel.

Starting a business in Israel? In addition to figuring out product, marketing and revenue streams, you have to decide how you will pay yourself a salary.

There are a number of ways that you can structure your business and get paid. 

Chevra B’Am

One option is to create a Chevra B’Am (registered company). This option allows you to hire as many people as you like, including you. You will be an employee of the company and draw a salary with a pay stub just like any other employee. This structure allows your business to scale easily, but it does raise the price of your accounting fees, so it’s generally recommended only if you plan to expand and bring in a large revenue. 

When you open a Chevra B’Am you enjoy full autonomy and some flexibility with expenses. The main advantage, though, is the potential for long term gains if you don’t pay yourself all of the company’s earnings as a salary. Funds that remain in the company account are taxed at a lower corporate rate and can be used for investment purposes.

However, these advantages may be offset by the difficulty of dealing with Israeli agencies. You may be familiar with the process of opening a company in the US, which can be done inexpensively online. But Israeli companies are more complex to open and maintain. You need to understand all the rules and take responsibility for the company, in order to ensure you are getting the full value. It’s crucial that you have a trustworthy accountant who is proactive and ensures that all your forms and reports are filed in a timely manner.

Opening a Chevra B’Am is sometimes mentioned as a way to avoid paying US Social Security (if you’re an American citizen), but again, it only makes sense if the company is successful enough to offset the higher accounting fees.

Please note that although we have covered some basic information here, you need to consult with an accountant before making a decision about opening a Chevra B’Am.

Osek Patur or Murshe

You can register as a freelance business, which is called Patur (VAT-exempt) for up to 120,000 (as of 2024) NIS annual revenue and Murshe (not exempt from VAT) for a higher profit. In this scenario, you’re not paying yourself a salary in the classic sense. You collect money from each client and whatever is left over after you pay income tax, Bituach Leumi, VAT, health tax etc. is your income.

This method generally incurs accounting fees (unless you’re really really savvy), but they are much lower than that of a Chevra B’Am. You are responsible for invoicing, collecting and reporting your income to the government. If you are a US citizen, the American government requires you to pay 15% of your income to Social Security.

EOR employee

A method that has become popular in recent years is signing up as an employee of an Employer of Record service. You are a regular Israeli employee with a Tlush Maskoret (pay stub) and all necessary payments withheld before you receive your salary. This method is the best solution if you have one client abroad and need to pay yourself a salary in Israel. If you have multiple clients/customers, it might be expensive to work through an EOR, so you need to check whether this is worthwhile for you.

An EOR service takes care of invoicing and collecting payment and there is no need to report your income to the Israeli government, since your Tlush Maskoret takes care of that. There’s also no need to pay US Social Security.

Choosing the right method

It will probably not surprise you to hear that there’s no right answer for everyone and that you should get professional expert advice before deciding how to structure your business. Your current income, projected income and personality can all play a part in determining which of these methods you should choose for maximum profit and minimum headache.
At Route 38, we offer one-time consultations in which we help you weigh your options and advise you on the best way to proceed. Although we are an EOR service, we promise not to push you into choosing that method or into working with us if that’s not what’s best for you. Our mission is to assist you in making a living in Israel, so you and your family can enjoy a successful aliyah. Email us at info@route38.co.il to book a consultation and take the next step in setting up your business.

Making more money in your business this year and need to transition from Osek Patur to Osek Murshe? Mazel tov! 

Here’s what you need to know about making the switch.

What’s the difference between Osek Patur and Osek Murshe?

The maximum annual revenue for an Osek Patur is 120,000 NIS (as of 2024). If you’re making less than that, you are defined as an exempt business – meaning that you are exempt from charging VAT (Ma’am) and transferring it to the government. Once you become an Osek Murshe, you will need to collect VAT from each customer/client and pay it to the VAT office. 

Another difference between Osek Patur and Osek Murshe is that an Osek Patur reports revenue to the VAT office once at the end of the year, while an Osek Murshe reports every two months. Reporting and paying income tax and Bituach Leumi are the same for both types of businesses.

Note that certain professions are always defined as Osek Murshe, no matter the revenue. Architects, engineers, private detectives, lawyers, chartered accountants, doctors, management consultants, interpreters, insurance agents, psychologists, dentists and medical clinics cannot be registered as an Osek Patur. 

I’m almost at the Osek Patur limit; should I stay under it?

While it’s tempting to stay under the Osek Patur limit to make life simpler, this may not be the best financial choice. It’s true that as you transition you may find that you are briefly in a situation where you aren’t actually taking home more money or maybe even losing a bit, since accounting expenses and the need to charge VAT negatively impact your take-home pay. But you just need to get over that hump and increase your income enough that being an Osek Murshe starts to pay off. At the end of the day, limiting your income artificially doesn’t give you the freedom to expand and succeed.

Another reason to become an Osek Murshe is that your business will now be seen as more established. This will garner you more respect and ultimately generate more sales.

I’ve reached the Osek Patur limit and the year isn’t over – now what?

If you started off as Osek Patur but find that you have reached the 120,000 NIS limit before the end of the year, you will need to update your status at the VAT office and show them proof that your bank account belongs to you (either with a form from the bank or a canceled check). 

You will need to start collecting VAT from your customers and transfering that money over to the VAT office on a bi-monthly basis. It’s a good idea to put VAT payments aside when you receive them from clients so that you don’t accidentally spend that money and find yourself scrambling to pay VAT at the end of the two month period. Reported business expenses are deducted from the amount of VAT you owe, so you can save by keeping meticulous records of your expenses and reporting them accurately.

You may find that the transition from Osek Patur to Osek Murshe makes the accounting complex enough that it is worth hiring an accountant or tax advisor to help you with the bi-monthly reporting.

Should I raise my prices?

This is a question which seems to cause a lot of angst to small business owners. You may be afraid that if you raise your prices, your customers will go elsewhere. On the other hand, if you don’t raise your rates, you will be paying the VAT out of pocket, which is unlikely to be sustainable for very long.

If you can swing an across the board price hike without losing customers, let them know that you are now an Osek Murshe and are therefore adding VAT to all prices. If you don’t think this will fly, consider sending a notice that prices will be rising on a certain date, so that clients can enjoy your old rates if they book your services or buy from you sooner. You can get a boost of business from those wanting to save and you’re giving enough notice to everyone so they can adjust to the new prices.

Another method is to raise prices for all new clients while keeping the old prices for existing clients. If you’re selling products, you can do this by setting higher prices and then offering return customers discount coupons. This method works best if the repeat business isn’t too frequent. If you have customers paying you every month for the foreseeable future, at some point you are likely going to want to raise their rates as well.

How else can I make up the difference?

Maybe you can’t raise your prices right now. Or maybe your new prices cover the VAT payment but not your extra accounting costs. If that’s the case, you want to look for other ways to increase your income and your take-home pay. 

Selling more is the most obvious way to increase revenue. Marketing, networking and offering your services to new audiences are all effective ways of boosting sales and making more money. You can also consider cutting costs, so that a larger percentage of the sale is actually revenue. Look into decreasing your payments on internet, phone, workspace, production costs, shipping etc.

Review the value of the product or service you are providing. Cut out any elements that don’t add much value to the customer but cost you time or resources. Instead, add elements that aren’t a big effort and don’t cost a lot of money but significantly increase value for your customers.

Consider whether outsourcing is financially beneficial to you. If it increases productivity and sales, it is worth outsourcing some of the work. But if you are paying someone to do work you could just as easily do yourself without detracting from your business, it may be time to rethink that arrangement.

I’m still not sure what to do…

The transition to Osek Murshe can be overwhelming. If you find yourself unsure about what steps to take and how to run your business with this new status, a business consultant can help you get a handle on things and make decisions about how to move forward. Many consultants offer a one or two session package, in which you can get individualized advice that can be implemented easily. Think about investing a small amount to help you smooth the transition and set yourself up for continued success.

We wish you plentiful and joyful parnassah!

The age-old saying, “You have to spend money to make money” is absolutely true. You can’t run a business without incurring some expenses, whether you are freelancing or selling a physical product. The good news is that it’s possible to deduct many business expenses from your taxable income and reduce the amount you pay to the Israel Tax Authority. 

What is considered a business expense

Business expenses are defined as expenses that are necessary to running your business, for which you get no additional benefit and that you can provide a receipt for. (No, the Tax Authority won’t take your word for it…)

• Products – If you sell a product, the cost of purchasing the product as well as additional expenses such as shipping, storage and packaging can be deducted. Rent, price of buying and maintaining a storefront or office are also considered business expenses.

• Office – If you work from home, you can deduct your internet, and part of the water, electricity, cell phone and property taxes (arnona). Office equipment, such as computers, software, office furniture and ink for your printer can also be deducted. These apply whether your office is a rented/purchased space or a room in your house. 

• Personnelle – Salaries and other employee expenses like training are deductible. So are payments made to consultants, including your accountant and lawyer. Your own contributions to a pension plan, Keren Hishtalmut or Kupat Gemel grant significant tax reductions. 
   
• Food and accommodations – Coffee, drinks and snacks can be deducted at a rate of 80%. Business trips outside of Israel only are recognized as long as they are really business trips and not a trip for pleasure onto which you tacked a conference or meeting. 
   
• Education – Tuition for academic degrees are not deductible, but professional courses related to your business are. 

• Cars – If you are an Osek Patur or Murshe and use your car to generate business, you can claim 45% of your expenses, including gas, insurance, maintenance, parking, tolls, registration fees and depreciation. If the business is registered as a corporation, a car attached to a specific person is considered an employee benefit. 

• Restaurants – You cannot generally deduct the expense of taking a client or employee out to a restaurant or otherwise entertaining them. The exception is if you take a foreign client out for a meal. 
  
  
• Clothes – Clothing is also not deductible, unless you need special clothing for safety or a uniform that you need to wear. 

Deduct expenses carefully

When you deduct expenses, you need to be extremely careful that you are claiming only what the Tax Authority allows you to claim and that you are being honest about what you spent on your business as opposed to your personal life. Since deductions are often partial, it can be complicated to keep track of everything yourself. It is recommended to keep all receipts and hand them over to an accountant or tax advisor who will file your taxes and claim only what should be deducted.

As an immigrant to Israel, you have the advantages of speaking another language and connections in the country you came from. These advantages can be translated into a lucrative freelance career working with clients abroad who require your expertise. Here’s what you need to know about freelancing in Israel for clients abroad.

How do I price my services?

Price your services by investigating how much these services cost in the country where your clients are located. You may want to charge slightly less than that price, as an incentive for clients to use your services instead of someone more local. If the salaries in that country tend to be higher than they are here in Israel, you won’t feel slighted by taking less and you will get more business, ultimately leading to you making more money. 

Alternatively, charge the market price your clients are used to and give them other reasons to hire you – such as your unique expertise or your quick turnaround.

How do I create invoices and receipts for clients abroad?

You need to provide the tax offices with receipts for payments for all clients, regardless of where they are located. These receipts must be in Hebrew but you can send the client a version in another language. Many of the invoicing programs which are approved by the Israeli government will provide you with an English version of your invoices and receipts to send to the client, while simultaneously creating a Hebrew version for your reporting and accounting.

Do I need to charge VAT?

If you’re an Osek Murshe, you generally charge your clients VAT. However, the general rule is that clients abroad, with no presence in Israel at all, do not pay VAT. Sometimes individuals living in Israel have a corporation or nonprofit registered abroad and mistakenly think that they can pay you through that entity without having to pay VAT. If you are in any doubt about whether to charge a specific client VAT, consult with a knowledgeable accountant. You don’t want to get in trouble with the VAT office retroactively, so it’s best to get the correct information upfront.

How can clients abroad pay me?

There are a few ways that you can collect payment from clients abroad.

1. Ask them to send funds via international bank transfer. There is a fee on both ends, so the client will pay to send the transfer and you pay to receive it. The funds can be transferred into shekels at the rate that the bank provides, which is not always the highest rate. The transfer can take up to 7 business days, although it often arrives sooner. Due to money laundering laws, you may be required to show the bank where this money came from before they allow you to access it. Alternatively, you can have funds transferred through Wise, which is the easiest, fastest and least expensive way to move money from abroad to Israel.
   
2. If you have a bank account in the country your clients are located in, they can pay into that account. This is easy for your clients, but then you have to get the money here in order to pay your bills and buy groceries. If you have a credit card for that account with no fees or low fees, using it to pay for things in Israel can be a good solution. But be aware that not every company will accept every foreign credit card, so you need a shekel alternative as well. Also note that even if the money is in a foreign account, it needs to be accounted for and reported in Israel.
   
3. Payment can be transferred through Paypal. There are fees here too (although they tend to be lower than the bank) and the conversion rate isn’t always in your favor. If you transfer small amounts into your bank account, you will be charged a fee, but if your client pays you a larger amount or you let a few payments build up, you can then deposit the funds in your bank account in shekels for free.
   
4. Your client can mail you a check here in Israel, which you can take to a change place and exchange for cash or a check in shekels. Not all change places are willing to accept checks and those that do will give you a lower rate than they give for cash. This method is time consuming and dependent on an unreliable postal system, so we don’t recommend it as a first choice.
   
5. You can register with an Employer of Record (EOR) service. You officially become an employee of the EOR company and they take care of fees and exchanging currency. There is a fee involved here too (a flat fee or a percentage of your income), but you also save on accounting fees and time spent on admin work for your business, so it may very well be worthwhile.

Is it better to freelance for Israeli clients?

The answer to this question is dependent on a number of factors. These include market prices in Israel vs. abroad, your level of Hebrew, where clients in your industry tend to be located and whether you need to work during the hours that your clients are in their office. 

Of course, you don’t necessarily have to choose one or the other – if your expertise is required internationally, there’s no reason why you can’t work both for clients in Israel and abroad. The important thing is to find a mix that works for you and to stay compliant with government regulations and proper reporting.

Are you dreaming of being your own boss, making your own schedule and choosing your own clients? Are you thinking of switching from employee to freelancer but are scared of making the leap? We’re here to help with a list of pros and cons so you can make an informed decision.

Advantages of freelancing in Israel

Being your own boss is a very attractive proposition. You don’t have to answer to an employer and can decide when you want to work and who you want to work for. It’s easy to take time off for a doctor’s appointment or for an errand you can’t do in the evening. You can work the hours that you’re most productive, whether you do your best work in the morning or are a total night owl. And you can create a schedule that works around your family life with maximum flexibility.

You get to choose your clients and if you’re not happy with a business arrangement, you are free to end it, whether the client is difficult or the project is not to your liking. This will lead to greater job satisfaction and more pleasant business interactions. 

Some professions lend themselves particularly well to freelancing, since companies or individuals tend to need these services sporadically or as a minor part of their budget and don’t need to hire someone in-house. Translation, marketing, website development, financial services and law are just some examples of service-based businesses that succeed in Israel. 

Disadvantages of freelancing in Israel

Lack of stability is a big disadvantage of freelancing. Your salary will probably be different every month and wars, economic downturns and pandemics can greatly affect a freelance business. If you want to get the same exact salary every single month, freelancing is probably not for you.

Billing is another challenge of freelancing. You need to send invoices to clients, check that they have paid, run after them if they haven’t and issue receipts once payment is received. You also have to figure out how to price your services, negotiate with clients and justify your pricing.

Being your own boss often means that you lose the division between work and home and end up working many more hours than you did as an employee. Demanding clients and work that builds up may have you working into the wee hours of the night, when you’d much rather be spending time with your family or just chilling.

Freelancing also means that you have no intermediary between you and the client, who would have your back and smooth things over. Yes, you can stop working with a difficult client, but you might have to finish the current project and end things on a positive note to preserve your reputation in the industry. That’s not always an easy thing to do!

As an employee in Israel, taxes and additional payments are deducted automatically from your salary and there is no need to report your income to the government independently. As a freelancer, you are obligated to report your income and pay taxes, Bituach Leumi and VAT (if applicable) directly to the government. This means that you need to keep meticulous records of your bills and your expenses. It is recommended to use the services of an accountant or tax advisor for reporting, so this is an extra expense that you need to take into consideration. If you are an Osek Murshe this will be more expensive than if you are an Osek Patur.

If you are an American citizen, you will also be charged 15% of your income to US Social Security as a self-employed person.

So, is it worth it?

There’s really no right answer. You have to consider whether the freelance lifestyle is right for you and whether you can handle the financial risks of running your own business. Some people prefer to start small, by freelancing on the side while still employed. This can be challenging, especially if you’re working full-time, but it’s a good way to test the waters and see if the clients are out there and whether you enjoy working for yourself. You can also take advantage of an unplanned period of unemployment to experiment with self-employment. 

It can take from three months up to a year or even longer to build up a steady stream of clientele, acquire a reputation and bring in substantial income, so don’t give up before you’ve really given it a try.

Want to know how to set yourself up as a freelancer in Israel? Osek Patur – Guidance for Your New Business has all the details.

Question: I’ve been working for a few years as an employee here in Israel but I want to switch to freelancing for the added flexibility and the ability to choose my own clients. But I’m concerned because I’m an American citizen and I understand that it’s very expensive to be an Osek Murshe and I will end up owing taxes in both Israel and the US. Is there another solution I haven’t thought of?

Answer: Thank you for your question! Owning your own freelance business as an Osek Patur or Osek Murshe does in fact open you up to owing money to the US government. This is because when you file your US taxes, the government will charge you 15% Social Security as a self-employed person.

As a US citizen, you are required to file a US tax report if you have an income, regardless of whether you are employed or self-employed. As an Israeli, you generally will not owe taxes on earned income to the US government, due to the tax treaty between the two countries, according to which you are taxed first in your country of residence. However, Social Security is not included in this treaty. If you’re self-employed, you will be charged 15% Social Security, just like any other self-employed person in the US.

Paying into Social Security

This is not necessarily a bad thing. If you earn 40  Social Security credits you will be eligible to receive a monthly payout from the US government after you retire. Under current laws, you can receive this money even if you are living in Israel. Many retirees find this amount a welcome addition to their retirement funds.

On the other hand, you need to make a living right now. If the payments to Social Security, Israeli income tax and Bituach Leumi are too high to leave you much in your bank account at the end of the month, freelancing might not be the best idea.

Employer of Record service

But that doesn’t mean you should give up your dream of a flexible lifestyle and career. If freelancing is what you want, you can sign up with an Israeli Employer of Record service. Some of these companies specialize in employing freelancers who maintain creative control over their business, while getting an Israeli pay stub from the EOR service. You can still choose your clients and decide how much and when you want to work, but at the end of each month, the company will invoice your clients and pay you a salary according to the amount received from them. 

Legality of EOR services

EOR services which comply with Israeli government requirements are perfectly legal and a good solution for many people. If you go this route, check that the company is compliant and that it has good customer service, so that you receive your salary in a timely fashion and get a quick response when you have a question or issue. 

Are you a temporary resident of Israel looking to freelance? It can be done! Here’s what you need to do to set yourself up legally:

Obtain an A-1 visa

In order to obtain an A-1 visa, which gives you permission to work in Israel, you need to go in person to Misrad Hapnim (Interior Ministry). You will need your passport, marriage certificate, birth certificate, proof of your parents’ birthdates, a letter from your school if you are a student, proof of Jewishness (if relevant), criminal background check from your country of origin and an application for visa extension. Be sure to ask specifically for a visa that allows you to work, since it is not offered to you automatically.

Open a file at the VAT office

Before you open your business, you must open a file at the VAT office. You need to do this even if your projected income is that of an Osek Patur (sole trader who is exempt from collecting VAT for the government). As a temporary resident, you can only open a file at the VAT office if you have an Israeli representative who takes responsibility for your business dealings. This representative can be an Israeli spouse, a friend or a relative. The Israeli representative will fill out VAT Form 22, which may need to be notarized by an Israeli notary. 

This representative is not involved in business decisions or management, but is fully responsible for timely and correct payment of all taxes. The purpose of having an Israeli representative is to prevent a situation where a foreign national leaves the country with debts, unpaid taxes, wages owed to workers etc.

If you don’t have anyone you can ask to take on this responsibility, you can open your business through a trust company. This company will act as your Israeli representative for a fee. Some of these companies offer additional services, like registering the business for you, preparing and submitting tax reports and opening a corporate business account at the bank.

In order to open a VAT file, you need proof that your bank account belongs to you. You can use a checkbook or ask the bank for an ishur nihul cheshbon (letter stating that you manage this account). If your bank account is shared, both account holders need to be present with proof of identity (Teudat Zehut or passport).

Print receipt books or sign up for an online receipt service

There is a legal requirement in Israel to provide receipts for any business transaction. You can print receipt books with your business name and information at a printing house, or you can sign up for one of the multiple online services that provide you with electronic receipts. Not all receipt services are accepted by the Israeli government, so it is crucial to choose one that has the government’s stamp of approval.

Open an income tax file

Take your documents from the VAT office to the income tax office (Mas Hachnasa) and open a file there as well. You are now obligated to file an annual tax return, reporting your income and expenses to the government. Avoid problems by keeping meticulous records and backing up any documents that aren’t already in the cloud.

Your business is now open! Now’s the time to get the word out, invest in marketing and get your first clients. We wish you great success in your new endeavor!

For more information on opening a business in Israel, see: Osek Patur – Guidance for Your New Business.

All freelance work performed in Israel must be reported to the Israeli government and is subject to tax. If you own a business, there’s a system in place for generating receipts and reporting your income to the tax authorities. But what if you are an employee that wants to take on a short-term consulting gig? Or a student helping a professor with a research project? What if you’re currently unemployed and have been offered a few weeks of work on a timely project?

One option is to report to the government that you have made a business arrangement called “Iskat Akrai” – a temporary business agreement. This is done directly on the Tax Authority website or by filling out Form 8356 and bringing it in person to the offices of the Tax Authority. You will then receive an official tax receipt which you send to the entity which hired you as a consultant. The payment you receive is liable for Bituach Leumi (Israeli Social Security), income tax and VAT. This option is only available for a one-time payment, so if you provide a service for a few months, you can’t use multiple Iskaot Akrai to be paid each month, and will have to accept payment in one lump sum.

Another option is to ask the entity that hires you to put you on their books as an employee and pay you with a Tlush Maskoret (pay stub), in which taxes and Bituach Leumi are withheld automatically. If you have another job, you will need to notify the Tax Authority, by performing a Teum Mas (tax adjustment) online. In the absence of a Teum Mas, each employer will withhold the highest tax rate. When you report both incomes, the Tax Authority instructs each employer how much tax to withhold. 

Not all employers will agree to put you on the books for a short time, due to the extra paperwork involved, so this is not always a possibility. 

The third option is to register as an employee of an Employer of Record service. That company will then issue an invoice to the entity hiring you and send them a receipt once payment has been made. This option is easier for the hiring body, but you will still need to fill out a Teum Mas, since you will be considered a person with more than one job. 

How do you know which option is best for you? The deciding factor may very well be the employer’s preference, since it has to be worth their while to hire you. You want to make it easy for them to pay you, otherwise they might choose to hire a different consultant, who already has a registered business. If you are able to choose, consider whether you expect to receive more than one payment and whether you prefer the bureaucracy involved with an Iskat Akrai or with a Teum Mas.

Remember that a one-time consulting gig may very well turn into something more long-term or give you a taste for freelancing that you want to pursue. If that happens, you may find yourself opening a business after all.

Maternity leave and maternity pay are a basic right in Israel, whether you are an employee or a business owner. While on paid maternity leave, you are not allowed to work. 

But wait… What will happen to your business if you abandon it entirely for months? The law does allow a woman on maternity leave to maintain her business if she gets special permission from Bituach Leumi. Unfortunately, there is no uniform definition of maintenance as opposed to work and each case is judged on its own merit. 

If you’re worried that your clients and customers will start working with your competition during your maternity leave and choose to stay with them even afterwards, consider hiring a replacement or outsourcing the work so that your clients get what they need from your business without your involvement.

Are you eligible for maternity pay?

If you have paid into Bituach Leumi for 10 out of the 14 months prior to your maternity leave, or 15 out of the previous 22 months, you are entitled to maternity pay for 15 weeks. If you have paid Bituach Leumi for 6 months of the past 14, you are eligible for 8 weeks of maternity pay.

Before you give birth, check whether you owe money to Bituach Leumi. If so, you will want to pay those debts so that your right to maternity pay isn’t curtailed.

How is maternity pay calculated?

Because entrepreneurs tend not to have steady income, maternity pay is calculated in two phases. In phase one, your income is determined based on the assessment from the previous year or your estimated assessment for this year, whichever amount is higher. Remember that your total income is calculated based on what you bring in and what your expenses are. If you have a lot of expenses, maternity pay will be a lot lower than you might be expecting.

At the end of the year, when all income for the year is reported, the amount of maternity pay is adjusted, sometimes to your benefit and sometimes to your detriment. If you think that your income will decrease significantly over the course of the year, it’s recommended to keep some money on the side so you can pay back what you will end up owing the government for overpaying you during maternity leave.

Pension Tips and Investment Risks with Motty Handler

Our second networking event was a huge success! We learned all about saving for retirement from Motty Handler, while enjoying sushi, fresh fruit and candy. Most importantly, we met other professionals, traded advice and dreamed up new collaborations.

Check out these pictures from the event:

Route 38’s office space in Har Chotzvim, Jerusalem is available for rent. Choose a dedicated desk or a private office. Take advantage of the conference room, internet, printing facilities and free hot drinks.

Additionally, members of the Route 38 family may come and enjoy any of our hot desks for free , up to 20 times a year.

Prices for monthly rentals are as follows:

On March 9, 2022, Route 38 celebrated the opening of its new offices in Jerusalem with its first networking event. A light dinner was served in the lobby of the new co-working space in Har Hotzvim, accompanied by lots of schmoozing. This was followed by short presentations by Baruch Swinkin and Yael Frydman and a networking session by Helena Baker, in which she taught everyone how to give an unforgettable elevator pitch. And we will certainly not forget Mike Kashnow’s pitch!

Here are a few pictures from the event:

Mazel tov on setting up your new business! If you’re just starting out, chances are that you will be an “Osek Patur,” a business which is exempt from collecting and paying VAT. The following is a brief overview of what you need to know for your new Osek Patur.

• Mas Hachnasa- Your tik (file) in Mas Hachnasa (Israeli Tax Authority) is registered on both your name and your spouse’s name.
  Every year a Doch Shnati (annual report – tax return) is submitted which should include all income earned both in Israel and abroad for both spouses. If you work with an accountant or tax consultant (and we recommend that you do), send your receipt book, expense invoices and any other documents you have to your accountant in January of the next year for preparation of the Doch Shnati.
  
• Bituach Leumi (National Insurance) – If, according to the definitions of Bituach Leumi you are required to make payments to National Insurance, you have the choice to pay via credit card or a monthly set payment (horaat keva). You should set this up as quickly as possible so you don’t end up with back payments.

• Ma’am (VAT) – Your file at the VAT office is only under your name and doesn’t include your spouse. The updated ceiling for your income in 2021 is 99,893 NIS per year. Please check your income during the year making sure you are not approaching the ceiling, and if you are please update the VAT office as soon as possible.

• Revenue recognition (receiving payment from a client) –  Israeli accounting requirements dictate that an official receipt (kabala) must be issued immediately upon receipt of payment from a client, or as soon as you become aware of a cash receipt (in the case of a bank transfer). It is important that this practice is strictly enforced. Non-issuance or late issuance of invoices may cause accounting complications and headaches, even possibly fines.

Receipts can be issued in two ways:

1. Use of online programs or applications – many of which are easy to use and are readily available, including: Easy Count, Cheshbonit Yeroka, Cheshbonit Online, iCount and more. (Some are free and some come with a low monthly fee.)
2. Manual receipt book – this book can be purchased and printed in a printshop. Ask them for a receipt book for an Osek Patur – Original + two copies per receipt.

The invoice must include the following details on the top:

Full name/Business name, Address, Phone number of the business and osek patur number (which is generally your teudat zehut number).

The receipt should provide information about the service provided and the method of payment (cash, bank transfer, check – including check number). If payment was in another currency, include the rate of exchange to shekels. 

• Important highlights when filling out a receipt:
  • Receipts should be issued at the time of the receipt of payment, even if the service will be provided at a future date.
  • The dates and numbers of each receipt must be consecutive. Do not issue receipts out of order!
  • The original should be given to the client, and copies should remain with you (the business).
  • When a receipt has to be cancelled, or a numbered receipt was skipped, the cancelled/skipped receipt should stay in the book and you should write “cancelled” or “skipped” on it.
  • Receipts in the amount of more than 5,000 NIS should include the client’s teudat zehut or business number in addition to their full name.
  • In cases of receipts over NIS 11,000, per law, cash cannot be exclusively used – payment must be remitted via check or bank transfer.

• Saving expense documents/paperwork:

It is strongly advised to keep as many expense documents as possible. Any expense that you submit will save you from higher income tax and Bituach Leumi payments.

It is also advised to keep donation receipts in order to reduce tax payments (or receive a tax payment refund), if you have any. Please note that receipts must be from Chapter 46 recognized organizations,and their status must be noted on the receipt. This applies even in years that one did not make any tax payments, as donation receipts may be used for 4 years.

The following are considered direct business expenses, and are 100% recognized and deductible:

1. Furniture and equipment for business, office equipment
2. Travel by taxi and public transportation
3. Advertising, marketing, education, advanced training
4. Accounting, professional advice/consulting
5. Subcontractors (external consultants, professional temp positions)
6. Credit card fees

Indirect/mixed expenses, partially recognized:

1. Private car expenses (including insurance, license, fuel, maintenance/repair) – 45%
2. Cell phone – 50%

Home expenses- 25%:

1. Landline, internet
2. Electricity, water
3. Municipal taxes (Arnona) and Homeowner Association Fees (Va’ad Bayit)
4. Renovations

• Inventory

One is obligated to count all inventory in one’s possession on December 31^st of every year, in the event that one has raw materials or equipment or other items for sale that require evaluation. 

• Hatzarat Hon (Financial statement):

Sometime after the opening of your independent contractor tax file, Mas Hachnasa will request and require a Hatzarat Hon (financial statement) as of December 31^st of the year that the tax file was opened. The statement details all the assets and liabilities of the business owner as of the date of the statement. Additional Hatzarat Hon requests are generally made once every 4-5 years.
It is generally recommended to submit this statement with the help of an accountant or tax consultant, since it can be complex. The first one should certainly be submitted with professional assistance, since it serves as the basis for all future statements.

If you’ve owned a business in another country or seen firsthand how a foreign business is managed, you may be surprised at some of the business practices which are common in Israel.

Payment Terms

One of the most surprising (and challenging) aspects of doing business in Israel is the concept of shotef plus – delayed payment. Many organizations and businesses don’t pay immediately upon receipt of an invoice. In 2017, a law was passed in the Knesset requiring most institutions and businesses to pay up to 45 days from receipt of an invoice. If you expect payment sooner, this should be included in your service agreement/contract, but don’t be surprised if you are told that the institution simply can’t pay earlier. These payment terms are usually based on cash flow issues (i.e. they are also being paid late), so you may have to accept these terms if you want to work with certain clients.

Acceptable forms of payment are cash, bank transfer and checks. Checks have become less popular in recent years and they aren’t worth the hassle if you can avoid them. Your clients may want to pay with Paypal, Paybox or Bit. Check fees and ease of use to decide which of these you choose to accept. You can also sign up for a paid credit card processing app and accept payments through it. Keep in mind that the easier you make it for clients to pay you, the sooner you will receive the money.

Becoming a Supplier

If you supply services or goods to another business, they might ask you for your Nikui Mas BaMakor and Ishur Nihul Sefarim. The Ishur Nihul Sefarim states that you keep your books according to the regulations of the Israeli Tax Authority. Nikui Mas BaMakor instructs the paying entity whether they are required to withhold tax and at what percentage. These documents can be obtained from your accountant or via the Israeli Tax Authority website.

Communication

In keeping with the informality prevalent in Israeli culture, business culture can be pretty informal too. Clients often prefer to communicate via WhatsApp or Facebook Messenger and some eschew use of email entirely. If you find that this way of communicating wreaks havoc on your business processes and organization, consider signing up for a task management system. There are lots of free options out there, and you can keep everything organized in one place, regardless of the form of communication utilized by your clients.

Price Haggling

Haggling over price is a time-honored Middle Eastern tradition and Israelis are well-versed in the art. You can choose not to work with clients who bargain or you can quote a higher price and expect to lower it in negotiations. In either case, you don’t want to lower your price below what your work is worth or to an amount that doesn’t leave you enough profit after taxes and expenses. A strategy that reduces the chance that a client will haggle is to let them know what they are getting for this price so that suddenly the amount seems low. 

Meetings

Meetings at coffee shops are totally acceptable in Israeli business culture. It’s understood that you may work from home or have an office space that’s not set up for hosting and your client or colleague may be in a similar situation. Etiquette requires that if you are the one who has asked for the meeting, you pay for the drinks or meals. Location should be closer to the person who was invited to the meeting and the initiator should check about dietary restrictions, including kashrut, before choosing a cafe or restaurant.

Invoices

Most clients will ask you for an invoice before they send payment for a service. An official invoice is called cheshbonit mas, and it obligates the business owner to pay VAT once issued.  Therefore, many business owners will send a “drishat tashlum” or “cheshbon iska” which is not an official document, in order to avoid getting stuck with a VAT expense before receiving payment. However, your client may fear making a payment and then getting stuck tracking the official cheshbonit mas. They are allowed by law to request the official, numbered cheshbonit mas before issuing payment and you must provide it.   

Some clients are prompt in their payments but others may need a little nudging. Sometimes clients will even ask to pay in installments or reduce the payment that was already agreed on. Stand firm when necessary and choose clients wisely to avoid these issues as much as possible.

Receipts

Once payment is made, if you are an Osek Patur, a receipt (kabala) is issued. If you are an Osek Murshe, you will need to issue a cheshbonit mas, which is a legal document and must be numbered. The ORIGINAL is what has value, so when using officially printed books the original document must be given to the payee. A digital copy is not enough for the payee to claim the VAT back on the expense.

In many cases, especially when funds are exchanged at the time services are provided, these documents are issued together in what’s called a cheshbonit mas kabala.

If you are using an electronic invoicing system, it’s easiest to create the payment request in the system and transform it into a receipt once payment has arrived.

Receipts are legal documents and it’s important to use a government-approved electronic system or an official printed booklet. Clients generally prefer to receive receipts electronically, so if you use a printed book, take a picture or scan it to send immediately and then send the paper one in the mail afterwards.

Professionalism and Extenuating Circumstances

In some countries, the lines between work and life are sharply defined, but they are a bit blurrier in Israel. Business owners may tell you why they can’t provide a service as quickly as they usually do – for example, they are taking a vacation, their baby is sick or they are dealing with a family crisis. It is assumed that you will be understanding, and that, if your project isn’t urgent, you will wait a little longer. If you feel comfortable, you can also let clients know how life events affect your productivity. Constant excuses won’t go over well, but an occasional hiccup is understood and accepted.