Israel Payroll Services 

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Israel Payroll  

Successful international expansion hinges on making the right moves from day one. This is vital for companies establishing their company’s profile in Israel, a comparatively young nation that has quickly made its mark as a target for foreign investment.

Companies establishing a presence in Israel face challenges complying with employment, tax, and company registration laws. The complications are increased by requirements to use Hebrew as well as English in some circumstances. Plus, importing staff from abroad poses more complications – and risks.

Bradford Jacobs’ Professional Employer Organization (PEO) and Employer of Record (EOR) platforms provide complete answers to every question you will face before your move into the Israeli economy. Our teams step in from the start, sourcing local talent then guiding you through complying with the Income Tax Ordinance and National Insurance Institute.

The potential pitfalls of Israel’s multi-layered taxation laws can be daunting – but not for the taxation and payroll specialists at Bradford Jacobs. We remove all the worry and safeguard your expansion plans. Read through our trusty guide to find out more about payroll and taxation in Israel.

What Israel Payroll Options are available for Companies?

  • Remote payroll - This option allows businesses to operate under a single payroll system, by adding employees in Israel to your parent company’s payroll. However, these employees must operate under different regulations, which is likely to cause problems.
  • Internal payroll - You may operate payroll for your subsidiary, especially if you are committed to growing your company’s presence in Israel. However, this does require hiring dedicated HR staff who understand Israeli employment and compliance laws.
  • Israel payroll processing company - If you are considering outsourcing, then working with an Israeli payroll company will help in processing your payroll – but not when it comes to compliance.
  • Israel payroll outsourcing - However, there is another option available that solves both concerns – by working with Bradford Jacobs. We can handle payroll and compliance for all your employees in Israel. We take the administrative stress off your shoulders so you can focus on what you do best.

Israel Payroll Services

International companies extending their operations into Israel open up a vista of opportunities throughout the eastern Mediterranean and North Africa.

However, challenges come alongside the potential benefits and payroll management is among them. Whether your company is considering moving employees abroad or hiring new staff in-country, employment laws, payroll and income tax regulations are areas where you cannot afford mistakes.

Bradford Jacobs’ Employer of Record (EOR) payroll solutions will navigate around these potential problems effectively and efficiently by putting into action our comprehensive knowledge of all these potentially troublesome areas.

Running Israeli payroll requires keeping up to date with changes in rules and regulations. As part of our service, we file returns and remit associated deductions for wages tax and social security contributions directly from our payroll system to the relevant authorities.

Outsourcing your payroll in Israel will streamline your operations by dealing with the following:

  • Complying with the provisions of the Income Tax Ordinance, for both nationals and non-residents covering wages, dividends, assets.
  • Registering with the National Insurance Institute for remitting social security contributions.
  • Filing annual tax returns on a calendar year basis.
  • Remitting withheld taxes by the 15th of the following month’s deadline.
  • Creating employment contracts.
  • Creating pay slips, which under Israeli accountancy rules must be divided into various sections.
  • Salaries must be paid by the ninth of the following month.
  • Calculating monthly salary and tax contributions and completing the monthly Form 102, verifying calculations before then submitting the year-end Form 126 to the authorities.

The above checklist highlights why the vast percentage of foreign companies expanding into Israel’s business environment hand their payroll to Employer of Record (EOR) providers such as Bradford Jacobs. 

By outsourcing payroll your company complies with tax and employment regulations without risking sanctions or financial penalties for late or incomplete filing. You focus on your goals and expansion, free of any concerns over payroll. 

Questions? We have the answers. Contact Bradford Jacobs now.

What is required to set up Payroll in Israel?

Usually, it is not necessary for a foreign company to set up a subsidiary, or branch, before hiring staff in Israel, however it must register with the Israeli Income Tax Ordinance and National Insurance Institute as an employer in order to run payroll.

If the foreign company decides on the subsidiary route to run payroll in Israel, they must follow various procedures in setting up the entity. These include:

  • Select a company name and decide on the business structure, typically a limited liability company (Ltd) operating under the Companies Law (1999). 
  • Register the name in Hebrew and English (if it matches with an Israeli company, the name of the home country should be added after the company name).
  • The company must provide a local office address.
  • Appoint company director, not necessarily a local.
  • Minimum of one shareholder, which can be an individual or a company.
  • A register of shareholders must be made publicly available.
  • Company must hold an annual meeting, prepare, and submit financial reports.

Documents for registering a foreign company can be deposited at the Tel-Aviv District Office, which must include:

  • Validated Incorporation Certificate from parent company’s home country.
  • Notarized Hebrew translations of the Incorporation Certificate, Articles of Association and Status Certificate proving the parent company operates in its home country.
  • Power of Attorney authorizing an Israeli citizen to act on the company’s behalf and receive court documents.
  • List of directors including passport numbers (foreigners) and Israeli ID numbers (locals).
  • Proof of payment of all registration fees.

Now able to operate payroll, the company must register both Israelis and foreigners with the Income Tax Ordinance office and register with the National Insurance Institute to remit social security contributions.

What Entitlement and Termination Terms apply to Israel Payroll?

In Israel, statutes and regulations provide employees with minimum entitlements, which can be extended by Collective Bargaining Agreements (CBAs) by order of the Ministry of Economy, in addition to individual contracts. Where more than one level of entitlement applies to employees, the most beneficial always takes effect. The Enforcement Unit of the Ministry of Economy, federal or regional authorities oversee employment laws.

If you are thinking of expanding to Israel, it is important to keep these employment terms in mind:

  • National Minimum Wage: The minimum an employee can be paid in 2021 is ILS 5,300 (€1,497, US$1,680) per month or an hourly rate of ILS 29 (€8.20, US$9.20), with planned increments until 2025.

    In November 2021 the Finance Ministry, Bank of Israel, Israel’s national trade union, (Histadrut) and the Manufacturers’ Association announced a monthly minimum of ILS 5,400 (€1,525, US$1,713) for 2022 rising to ILS 6,000 (€1,696, US$1,903) by December 2025.

  • Sickness Benefit: Employees absent from work due to illness are entitled to sickness benefit, subject to presenting a medical certificate signed by a doctor, detailing the condition, and estimating the amount of time needed off work. Employees receive 50% of their pay for the second and third day of incapacity and 100% thereafter.

    Leave entitlement equates to a day-and-a-half for each month worked in a year up to a maximum of 18 a year up to a limit of 90 days accrued sick leave over five years’ employment. If contracts or collective agreements in their sector provide for better allowances, they apply.

  • Public Holidays in Israel: There are nine public holidays in Israel:

    - Passover: March /April (7 days)
    - Independence Day: April 15
    - Victory Day: May 9
    - Pentecost: May/June (50 days after Passover)
    - Fast of the Ninth of Av: Celebrated one day between July 17 – August 14
    - Rosh Hashanah (Jewish New Year): September / October – two days
    - Day of Atonement (Yom Kippur): September / October – one day
    - Sukkot (Feast of Tabernacles): September / October – 7 days (5 days after Yom Kippur)
    - Simchat Torah: September / October – one day

  • Working Hours and Breaks: Normal hours total 42 over a working week from Sunday till Thursday, with four days at 8.6 hours and the remaining day for 7.6 hours. Employees on a six-day week work four days at eight hours, one seven-hour day and three on a Friday.

    Approved collective agreements can allow four nine-hour days (including a 45-minute break) and one eight-hour day; but they cannot exceed 10 hours per day, including breaks, or 45 a week.

    According to the Hours of Work and Rest Law, after six hours’ work there should be an unpaid 45-minute meal break including at least 30 minutes unbroken rest. Employees may take time to pray in accordance with religious requirements.

    In a break of more than 30 minutes an employee may leave the place of work. Daily rest must be at least eight hours between workdays; weekly rest is generally not less than 36 continuous hours. If employment conditions make this unworkable then continuous rest must be at least 25 hours.

  • Overtime: Employees receive 125% of their normal hourly rate for working the first two extra hours and 150% after that. Working on a Saturday or holiday entitles employees to 150% of the usual hourly rate plus a vacation day.

  • Paid Vacations: Employees receive paid vacation as per length of service with their employer. The allowance is 16 days a year for the first five years: 18 days from the sixth year and 21 from the seventh. From the eighth year of employment an extra day is added each year to a maximum of 28 days.

    Additionally, employees are entitled to paid leave for nine paid holidays, according to the religious/ Jewish holidays of their choice.

  • Maternity Benefit: The allowance for maternity leave is made in one payment directly into the entitled mother’s bank account by the National Insurance Institute (NII). The amount is calculated on the basis of the individual’s income and the amount of related insurance contributions made to the NII.

    The maximum benefit is ILS 1,485.83 (€413, US$467) per day. Entitlement is to the higher amount based on the following calculations:

    - Previous three months’ salary divided by 90
    - Previous six months’ salary divided by 180

    Employees who have paid insurance taxes for 10 of the 14 months, or 15 of the 22 months preceding maternity leave are entitled to the maternity benefit for 15 weeks. Those who paid contributions for six months out of the 14 preceding maternity leave receive benefit for eight weeks.

    Entitlement for the self-employed depends on determining their income from advanced payments made to the NII, then benefit will be decided from the income tax assessment for the current or preceding year, whichever is highest. Women who are both salaried and self-employed can combine all their income in the assessment, up to the permitted daily allowance.

    Maternity / Paternity / Parental Leave: Employees who have worked for the same employer or in the same place of work for 12 months receive 26 weeks maternity leave, or 15 weeks if they have worked fewer than 12 months for the same employer.

    The spouse / partner of the mother is entitled to one week’s paternity leave at the same time as the maternity leave, provided the mother confirms in writing she is forfeiting one week of her maternity benefit.

    If the mother ends her maternity leave the minimum six weeks after birth, her spouse can replace her for the remainder of the leave.

  • Discrimination: Israel’s Equal Opportunities Law protects employees against discrimination on the grounds of gender, sexual orientation, sexual harassment, pregnancy, age, nationality or race, religious beliefs, country of origin or political views. Each category is protected by various laws.

  • Termination and Severance: The Notice of Discharge and Resignation Law requires both parties must give notice of dismissal or resignation. All employers and employees are subject to the laws on termination, which is permitted on reasonable grounds, excluding discrimination, if correct procedures are followed. Terminations are restricted or prohibited in some situations:

    - Pregnant women (after six months employment)
    - Women within the first 60 days after returning to work following maternity leave
    - Employees on fertility treatment, or individuals on maternity or paternity leave

    The above cannot be dismissed without prior approval from the Ministry of Economy. Employees must not be dismissed within 30 days of returning from military reserve duty. Employers who fail to follow procedures and allow the employee a hearing to give their case for reinstatement, risk paying 12 or even 24 months’ salary as compensation.

    The Advance Notice for Dismissal and Resignation Law (2001) sets statutory severance of one months’ salary for each year of service, after working for at least 12 months. A substantial portion is generally covered by employers’ monthly contribution of 8.33% of the employee’s salary towards the severance portion of the insurance or provident fund. Where an employee does not receive his full entitlement or none at all from their employer, the balance is made up by the National Insurance Institute.

  • Notice Periods: One day for each month during the first six months of employment, with additional 2.5 days for subsequent months up to completing one year’s service. Full-time employees are entitled to a minimum 30 days’ notice after completing one year, which is usually included in employment contracts. Payment in lieu of notice on equivalent salary is permitted, as is gardening leave on full salary and benefits.

  • Health and Social Insurance: Israel’s social security benefits for employees are funded by contributions from employers and workers, with further additions by the government in some categories. National Insurance contributions cover old age and survivors, long term care, disability, accident and work injury, maternity, childcare, and unemployment.

    All employees over 18 years old must contribute, including foreigners, and be registered with one of four health funds. Different contribution rates apply according to income. Employers must withhold employees’ contributions and remit them to the National Insurance Institute.

13th Month Salary Israel

Many Israeli employers pay a 13th month salary on the basis that there are 52 weeks in the year but only 12 calendar months. A pay slip is issued as normal.

What Taxation Rules Exist for Israel Payroll?

Employees (including resident foreigners) whose taxes and social security contributions are deducted at source by their employer need not file a tax return, which otherwise is due by April 30 of the following year.

The Israel Income Tax Ordinance defines residency on whether an individual’s ‘center of life’ is in Israel and provides general guidelines. An individual may be considered a tax resident if they are present in Israel for a minimum 183 days in a tax year, or for a total of 425 days in the current tax years and the two previous years.

Remitted deductions and contributions must be paid by the 15th of the following month.

Accounts are regulated by the Israeli Accounting Standards Council and accounts must include a balance sheet, income statement, cash flow account and owning company’s equity account.

  • Income Tax: The Israel Tax Ordinance defines residency on whether an individual’s ‘center of life’ is in Israel. Individuals may be considered tax residents if they are present in Israel for a minimum 183 days in a tax year, or for a total of 425 days in the current tax year and two preceding years. All Israeli residents pay tax on their worldwide income.

    Individual tax residents must file a tax return if their salary exceeds ILS 647,640 (€180,043, US$203,422) when they must pay 3% surtax, regardless of deductions taken at source bringing a 50% maximum income tax rate. Individual tax returns must be filed if rental, foreign income, or foreign pension income exceeds ILS 337,000 (€93,627 US$105,850).

    Non-residents are taxed at the same rates as Israel residents on their Israel-sourced income and capital gains from assets. Married couples can file separate or joint tax returns.

  • Social Insurance Tax: Deductions apply to both employers and employees. Resident employees contribute 0.4% of their income up to ILS 6,331 (€1,756, US$1,988) per month and 7% above that up to a maximum of ILS 44,020 (€12,215, US$13,826). Employers contribute 3.55% and 7.6% of the resident employee’s salary within the same monthly income limits.

    Non-resident employees contribute 0.04% and 0.87% in the same income parameters and employers of non-resident employees contribute 0.59% and 2.65%.

Rules on other taxes:

  • Health Insurance Tax: Resident employees contribute 3.10% on the first ILS 6,331 (€1,756, US$1,988) of their monthly income and 5% above that to a maximum income of ILS 44,020 (€12,215, US$13,826). Non-residents do not pay Health Insurance Tax.

  • Corporate Income Tax (CIT): The rate of 23% applies to companies incorporated in Israel and foreign companies with a presence in the country. Resident entities are liable for taxation on their worldwide income, with non-resident companies liable only on their Israel-sourced income. There are no local taxes on corporate income.

  • Capital Gains Tax (CGT): Generally applied at 25% although can be levied at 30% in certain circumstances.

  • Value Added Tax (VAT): The standard rate is 17% applied to most goods and services. Exported goods and certain services are exempt.

  • Customs and Excise: Rates on certain imports depend on classification under the Harmonized Customs Tariff and country of origin. Excise taxes are assessed individually on such as tobacco, alcohol, petrol, and diesel.

  • Other Rules: Municipal taxes apply to property and capital gains on real estate are liable under the Land Appreciation Tax Law. Israel does not have Wealth, Inheritance, Estate or Gift taxes.

Stress Free Global Expansion

Bradford Jacobs’ Employer of Record (EOR) solutions smooth your route into Israel and every new territory targeted for worldwide expansion. Registration procedures, tax laws and dealing with relevant authorities are potentially hazardous barriers to your expansion, risking severe fines for non-compliance or late returns. 

Bradford Jacobs is on call every step of the way to ensure your company clears all the hurdles to establishing a successful presence in Israel. Contact us today for more information!