Israel is a country with a strong domestic economy, developed international ties, a high level of technology development, simple and transparent business rules, and a well-balanced tax policy of the state. In addition, faced with a constant flow of repatriates, the state has tried to create optimal conditions for a rapid and successful injection of new citizens into the social and economic life of the country. To open and conduct business in Israel is quite simple, both for a citizen and a foreigner:
Can I start a business without legal arrangements?
In Israel, financial discipline and reporting of private enterprises are strictly observed. Do not start a business activity before completing legal arrangements: the first refusal to issue a tax receipt (heshbonit mas) or a receiving slip for the receipt of money (kabala) may result in the customer’s appeal to the appropriate authorities with the most unpleasant consequences. But turning to the Rohe Heshbon (accountant-auditor), you can start your business without violating the rules, and, if the situation permits, take advantage of special benefits for start-ups. Open your business in Israel correctly.
Choosing the organizational and legal form of the company
The choice of the form of ownership of a new business depends on many factors: the type of activity (including: licensed or not), the number of owners and obligations of the founders, the geography of the business (not only it matters whether international activities are planned, but also in which regions of Israel your firm will operate) , it is necessary to forecast the volumes of the annual monetary turnover, the prospects for taxation and much more. Before registering a business in Israel, it is essential to clearly know the answers to all of the above questions. And in this matter, you can get help from a competent auditor. By the way, it is also important for foreign companies to analyze whether it will be more profitable for them to enter the Israeli market as a subsidiary or to open a representation office. In summary, the laws of Israel define such forms of business: individual entrepreneur, company (open or closed joint-stock company, limited liability company), branch (or representation office), partnership, cooperative, etc. But, despite the variety of options, business in Israel is mainly registered in the form of an individual entrepreneur (esek patur, esek murshe) or as a limited liability company (hevra baam).
The simplest form of an individual entrepreneur is an esek patur. This type of business is exempt from VAT and is suitable for professionals who independently sell their services or products to individuals. But there are activities that cannot be formalized as esek patur because by law they cannot be exempt from VAT. For example: auditors, lawyers, doctors, veterinarians, translators and other representatives of the so-called “liberal professions “. If your type of business falls into this category, it is better to check with your accountant in advance. An Esek Patur does not issue tax receipts, therefore in conducting business it is accountable to Maam once a year in the form of a “tax statement for the released entrepreneurs." But this type of company is limited in the amount of annual turnover. In 2019, the allowable amount was 100 187 shekels.
If your company has a bigger turnover, or plans to work with other legal entities, which requires the issuance of tax receipts, it is better to open the esek murshe. An esek murshe has no restrictions on its turnover. Here you already have to report on VAT bi-monthly or every month in the case of especially large incomes. The summary report of the Esek Murshe is submitted once a year.
A business that involves large investments, several owners and a significant turnover is registered as a hevra baam, i.e. a company with limited liability. Such organizational and legal form presupposes rather complicated reporting. In addition, it is impossible to open and to operate the hevra baam without an experienced accountant.
Registration of a business in Israel for non-residents
A non-resident may register a business in Israel only in a special partnership with an Israeli citizen or through a trust company. Making it very simple to understand, a foreigner needs a local representative to start a business in Israel who will act as a guarantor before the tax authorities for filing tax reports and paying taxes on a foreigner’s business. There are also restrictions on the form of business registration for foreign citizens.
Osek Patur and Osek Murshe can be established only by a foreigner who is in the process of obtaining Israeli citizenship. For example, through the stepwise procedure for the legalization of spouses. In this situation, the guarantor may be the Israeli spouse or someone from relatives or friends – here the law does not make any demands.
In Israel, the registration number of an individual entrepreneur is the same as the number of the Teudat Zehut (ID card). Therefore, the business of the future citizen of the country, through a special registration procedure, is finalized as joint ownership with the current citizen. And after obtaining citizenship, a businessman will be able to change the registration of the individual entrepreneur to his teudat zehut and independently answer before the tax authorities.
Hevra Baam or a company in the form of LLC (Ltd) is available for registration to foreigners who do not have an Israeli passport. To open a limited liability company (Ltd), a foreigner also needs a resident guarantor. It can be either a physical or a legal person.
All forms of doing business are registered by starting a folder in three instances:
In the Office of Value Added Tax (Ma’am), a legal entity receives a certificate and a registration number, and also gets an opportunity to procure and issue receipts.
In the Income Tax Administration (Mas Akhnasa), the amount of the tax rate, the frequency and scope of reporting, the method of accounting are established. If, in order to open a company, an entrepreneur enlists the support of an experienced auditor, he can achieve preferential terms, up to a full exemption from taxes for the first year. Later onwards, the tax is accrued based on the results of the reporting, depending on the profitability.
In the National Insurance Service (Bituach Leumi) the amount of insurance contributions is determined, that in future will allow the entrepreneur and his employees to apply for pensions, various benefits and other social guarantees. Each Israeli, on the basis of contributions to this organization, after reaching a certain age begins to receive an old-age benefit with a bonus for length of service. Insurance is also important in case of disability or prolonged temporary incapacity for work. The amount of payments depends on the profit and employment level in business, it is adjusted annually.
For an individual entrepreneur (Esek Patur, Esek Murshe), business registration is completed at that. Later on, periodic reports are submitted to these same bodies and taxes are paid through them to the treasury. By the way, reporting is mandatory even in periods when your business was idle and did not bring income, otherwise a sizeable fine is inevitable. Unlike with an individual entrepreneur (esek patur, esek murshe), registration of a company (hevra baam) has two stages. First, a special package of documents (information about the owners and top management, the company’s charter and other data) is submitted to the state body under the Ministry of Justice of Israel with the name “Registrar of Companies" (Rasham Hevrot), and a fee for opening the company in the amount of 2600 shekels in the year 2017), plus the services of a lawyer about 1000 shekels. Further, by analogy with an individual entrepreneur, the company folders are opened in three tax authorities, with subsequent reporting and payment of taxes. Plus, your firm will annually allocate a fixed amount of tax (agra) into the “Registrar of Companies".
At this stage it is important to take into consideration that the name should be unique and not consonant with the already known names of other companies on the market, especially in your segment. Otherwise, it will be possible to register the company only after an acceptable variant is selected. And of course, business registration will be denied if there is something insulting or violating the foundations of the Israeli society in the name of the company. Depending on the form of ownership, there may be special requirements. For example, a limited liability company should contain the abbreviation “LTD" in its name. Usually, the name of a company is hard to find to a beginning entrepreneur. Let us give you a couple of tips from our experience. It comes out very well, if the name of the company speaks about the essence of your business, then it is the first to begin selling your product or services. Another approach is possible if your business is focused on individuals or is based on exclusive knowledge and skills. Use your own name and develop what is called a “personal brand". Remember: the name of the company will be successful if it is understandable to everybody, easy to pronounce and memorable.
Taxes in Israel
Below, in the most general terms, the main types of taxes and the range of rates as of 2017 are listed. What deductions will occur and in what amounts is a question for a series of separate articles for each type of the legal form of a legal entity. To understand which set of payments is expecting you personally, and how you can optimize taxes in your case, consult a rohe heshbon before registering the firm. The list of main taxes for legal entities:
Corporate tax – 23%
Tax on dividends – from 25 to 32%
VAT – 17%
Income tax – progressive rate from 10 to 50%
Social Insurance Funds – from 3,5 to 17,5%
Submission of reports and payment of deductions
Dealing with the tax authorities may be a real headache even for the smallest businessman with a small turnover, let alone a large business which has a lot of items of expenditure and income. Opening a business and simultaneously delving into Israeli taxation system is not an easy task. At the same time, dealings with taxation people seriously affect the effectiveness of your business: from choosing the optimal tax rate when registering the company and ending with rendering the accounts. Any errors or inaccuracies can lead to substantial sanctions and fines. Reporting on esek patur is simple enough. Remember that this type of business is exempt from VAT, if within a year the turnover established for the esek patur has not been exceeded. Once a year, an entrepreneur submits to the Income Tax Office (Mas Akhnasa) a report stating that the established limit has not been exceeded. The Administration sends the form for submission of reports to Mas Akhnasa to the entrepreneur by mail. You can also report by sending the completed form by mail (do not forget to set the seal when sending), or through the Internet on the website of the Income Tax Administration. If wit hin a year the limit that is not subject to VAT has been exceeded by your business, then it is necessary either to pay VAT (only for the excess amount) or to re-register into the esek murshe in advance, but it is better to consult your accountant first. The scopes of reporting on the esek murshe are determined at the company registration and may differ depending on the type of business activity, annual turnover, the number of employees and other parameters. Therefore it is very important at the registration stage of the firm to engage a competent auditor who will help to predict the optimal volumes of reporting for your business or completely shift relations with tax authorities to a specialist. The auditor will, with due periodicity, request documentation and make the necessary payments, taking into account the company’s income and expenses for the reporting period, and at that time you cannot be distracted by “paper work", but do exactly what brings profit. It should be noted that in Israel, 98% of companies use the services of an accountant by outsourcing. You can open the hevra baam on your own, but according to the law, its annual reporting must be certified by the rohe heshbon. We recommend choosing one specialist for both accounting tasks and for certifying accounts. A personal auditor who knows your company’s work well since its opening will be able to offer effective models of accounting, will help to optimize taxation correctly, in short, save time and money for the company.
Virtually any type of business is accompanied by the costs of doing business. Learn from the start to clearly record all the expenditures of the business or assign this task to your accountant. A competent write-off of expenses allows legally to optimize taxable income and reduce payments of VAT. At the same time, Israeli tax authorities very severely punish any suspicious, in their opinion, attempts to conceal income. Serious fines threaten not only for the “gray" optimization of taxes, but for elementary errors and inaccuracies. A competent rohe heshbon will help to avoid problems with tax and competently build a reduction in fiscal deductions for your business.
Three reasons why you should contact «Shmuel Brodetsky Rohe Heshbon»
Good start. There is no need to step on the same rake like all beginners do, if an experienced accountant can correctly set up your business right away. This is a real saving of time, effort and money, which can better be invested in development. It’s easy to open a business in Israel, but developing a new business with the support of an experienced mentor has a better chance of success.
Integrated approach. Our long-term experience in supporting business in a wide range of areas, markets and volumes, is always at the service of our customers. We do not just fill in and submit documents for you, the team of Shmuel Brodetsky Rohe Heshbon is ready to provide a full range of additional services, if necessary, to advise on excellent specialists in other areas, as well as to point in advance towards the bottlenecks that are often met not only by beginners, but also by experienced entrepreneurs.
Transparency and openness. Accounting is a difficult area of knowledge, especially for a beginner, but we are always ready to explain to the client in detail and in layman’s terms what exactly kind of work we are doing for him and how it helps his business.
The offices of the company “Shmuel Brodetsky Rohe Heshbon" are located in Tel Aviv and Haifa – we are always where you need us.