7-minute read (1,400 words)
Known as the “Startup Nation,” Israel is home to more than 6,400 startups, according to Start-Up Nation Central, which tracks the industry. It’s a country with a robust domestic economy, a high level of technology development, a well-balanced tax policy, developed international ties, and simple and transparent business rules. In fact, according to The World Bank’s 2020 Ease of Doing Business Survey, Israel ranked 35th out of 190 economies, performing especially well in the categories of starting a business (28th), paying taxes (13th) and protecting minority investors (18th).
One of the most noteworthy benefits of starting a new business in Israel is the absence of a language barrier. While Hebrew is the official national language, English is typically used for conducting international business. Also, many guides including official signs, business services and restaurant menus are translated into the English language.
In Israel, financial discipline is strictly observed. So before starting a business, it’s important to complete all legal arrangements — for example, non-issuance of a heshbonit mas (tax receipt) or a receiving slip for the kabala (receipt of money) may result in an appeal to the authorities (by the customer), which can have unpleasant consequences. But with the help of an accountant/auditor, you can avoid violating any rules, and also reap the special benefits and grants for startups, if applicable.
Here are some facts about starting a business in Israel:
Types of Business Formations in Israel
An individual in Israel can open and run a business under two classifications, depending on the annual business income: Osek Patur and Osek Murshe.
Osek Patur is the simplest form of business classification in Israel. This type of business entity is suitable when the financial turnover of the business is small (no more than 100,491 NIS a year, as of 2020 (around $30,000). The annual turnover of the business is limited and recalculated each year.
Also, this type of business is not required to pay Value Added Tax (VAT) for trading transactions. However, such specialists as doctors, architects, lawyers, real-estate agents and auditors must register as Osek Murshe even if their annual turnover is below the upper limit.
Osek Murshe is a type of legal entity that is not limited to an upper turnover limit, which enables the company to expand quickly. This type of company must pay VAT from all its trading operations. However, it can reimburse VAT on such expenses as purchase of raw materials, rent of accommodation and more. Moreover, the registration of a business as Osek Murshe allows the employment of workers in the business.
Setting Up a Business as a Foreign Citizen
A foreign citizen must appoint a guarantor for tax purposes in order to establish a legal entity in Israel. This guarantor must be an Israeli citizen, and is legally bound to accept the liabilities of the foreign citizen.
The most common and easiest type of business organization that the foreigner can establish is Limited Liability Company.
The foreign citizen can also register as a private entrepreneur if they are married to an Israeli citizen and plan to go through the process of obtaining Teudat Zehut (the Israeli ID card).
Registering a Company in Israel
All companies in Israel must register with The Registrar of Companies (Ministry of Justice) and the Tax Authorities (Ministry of Finance). While Hebrew and Arabic are the official languages of Israel, corporate documents in English are generally accepted by the Registrar. However, the Registrar of Companies does require that the Articles of Association be translated into Hebrew as well.
The following documents are required to be submitted with the Companies Registrar for registering a business as a company:
- Form No. 1 of the Companies Registrar, which is an application form to register a company.
- Memorandum of Association, which establishes the corporate identity and principal objectives of the company, shareholders' responsibility and shares issued.
- Articles of Association, which set forth rules of conduct for the company. Should a company not submit its own Articles of Association, then the standard articles that are listed in the Companies Ordinance will be in force for this company.
- The fee for registering a company is currently NIS 2,244.
Once the registration is complete, the Registrar will issue the business a Certificate of Incorporation and a nine-digit company number. An Israeli lawyer is required to verify the company documents — usually, the lawyer handles the process for most requests and also represents the company at the Companies Registrar’s office.
After the company has been registered with the Registrar, it must be registered with the appropriate Tax Authorities. Registration should be made at the Tax Authority upon commencement of operations. The filing number is usually the same one as the one issued by the Companies Registrar. Registration is done using Form 4436, which includes the basic details of the company.
Registering a Company by a Foreign National
As mentioned earlier, the easiest type of company that the foreigner can form is Limited Liability Company. Here are basic steps that a foreign citizen should follow to start a business in Israel:
- Appoint a guarantor
- Register the company with the Registrar of Companies
- Open a separate business bank account
- Register with the Israel Tax Authority
Filing Taxes in Israel
All businesses in Israel are required to file audited annual tax returns and financial statements within five months after their fiscal year. The Israeli tax year is generally the same as the calendar year. However, subsidiaries of foreign public companies may sometimes use a different fiscal year.
Companies must also file monthly returns accompanied by tax payments. Bi-monthly returns are sometimes acceptable for small businesses.
Taxes to be filed include:
- Company tax installments, which represent a percentage of the company's monthly sales revenue
- Supplementary company tax installments with respect to certain non-deductible expenses
- Tax withheld from salaries and remittances to suppliers when applicable
- National Insurance
Regulations require invoice specifics and detailed bookkeeping for income tax and VAT. Accounting records must be available for inspection by tax officials in Israel.
Grants and Taxes
The government of Israel encourages domestic and overseas investments, and offers generous grants and loans in support of businesses. One of the biggest benefits available to startups in Israel is the tax holiday that comes with the grant program. If a company is awarded a grant, it becomes eligible to be a privileged enterprise, which allows the business to apply for a tax holiday. Anywhere between two and 15 years of tax breaks can be awarded based on the location of the business and its ownership.
Other Facts About Israel
Here are some fast facts about Israeli culture and business customs that can smooth out the process of conducting business in the country:
- Israel follows the Hebrew calendar. The work week is Sunday through Thursday, and typical office hours are 8:30 am to 5 pm. While some business may be conducted on Fridays, sunset marks the beginning of Shabbat, which continues until sundown Saturday. Pay attention to Jewish holidays, as businesses throughout the country are put on hold during those periods.
- The Israeli workplace is generally casual. The weather is hot, and open-collared or polo shirts and casual trousers for men, and blouses with pants or skirts for women are pretty common, even for important business meetings. However, all professionals should typically avoid wearing revealing clothing.
- Israelis are known for being direct. They don’t often sugar-coat their words, and they call it like they see it. Some believe that this drives efficiency and removes vagueness.
- Israelis consider colleagues to be an extension of their family. They tend to mix business with pleasure, and enjoy socializing with co-workers after hours. In fact, getting to know potential business partners is extremely important to the people of Israel.
- Business associates usually greet one another by shaking hands. However, be mindful of the fact that religious associates might not shake hands with members of the opposite sex.
- When hosting people, it’s a good idea to check with the guests regarding any special requirements for food or drinks, as some Israelis observe the dietary laws of Kashrut.
- It’s common practice in Israel to give gifts to customers and employees during the holidays, most specifically for Rosh Hashanah (usually in September) and Passover (March/April). When visiting the home of a colleague, it is considered polite to bring a gift or gesture for the host, such as flowers or wine.