With easy access to both Europe and the Middle East, Israel can be a good location for international contractors to find new clients and projects, either short or long term. Like most countries, Israel has specific laws and regulations that pertain to self-employed contractors.
If you are planning on working in Israel as an independent contractor, you may need some background to get you started. This guide explains the essentials, as well as a few of the unique rules you will face contracting in Israel.
Your Options for Getting Paid as a Contractor in Israel
You will need to qualify and register as a self-employed (atzmai). This means opening files with three offices:
- Income tax
- Value-added tax and
- National Insurance Institute (NII).
In addition, some business types will require a license.
Qualifying as a self-employed is an important step, and you should make every effort to not appear as a ‘de facto’ employee of your client. This means invoicing as a business, and making all of the required registrations and tax payments. It also includes maintaining some degree of autonomy in your work.
When you set up your contracts, you will need to designate the currency of payment, method (wire, check, etc.) and timing. If you don’t want to go to all of the trouble this entails you can also use an umbrella company in Israel to handle payments for you, as well as all statutory contributions, tax withholding, and helping you get a work permit.
Social Security in Israel
Once you have your contracts and payment method set up, you will have to pay social security in Israel, even if you are still making contributions in your home country. Once you have registered with NII, payments are made monthly and cover basic health services, child allowances and maternity benefits.
The social security contribution rates are 5.97% to 17.83% depending on income level.
Do you need a visa to work in Israel?
Any foreign national contracting in Israel will need a work permit, and if you are self-employed you may need to find an umbrella company to help you sort that out. In effect, you are hired by the umbrella company and they can sponsor the permit for you.
Tax Payments in Israel
The income tax in Israel for both employees and self-employed ranges from 10% to 46%, and must be paid monthly against the year-end tax bill. You will also need to pay a VAT of 15.5% on all revenues as a self-employed contractor. However, you can deduct the VAT that you pay on business-related expenses during the year.
If you make less than a certain amount each year, you may be exempt from VAT taxation. And so, it is worth checking the current threshold as this could affect your net monthly income.
Are you a tax resident in Israel?
There are two tests for tax residency in Israel
- If you are present for 183 days in the calendar year or
- If you are present for 30 days in the current year and 425 cumulative days in the two preceding years.
The good news is that new tax residents in Israel are exempt for 10 years from paying tax on income earned abroad. However, you may still have to pay taxes at home on your Israeli income and will need to look to a tax treaty to avoid double taxation.
Double Taxation Treaties
Not every country has a tax treaty with Israel that offsets double taxation of workers, including the US, which means to avoid double taxation some contractors will have to set up an Israeli corporation. There are some countries however that do have double taxation treaties, including the UK and Germany, which means you will be taxed in either Israel or at home, but not both.
When you add up the income taxes, VAT and insurance, even with a treaty your total net income may only be 50% of your contract rate. Keep this in mind when negotiating your rates with potential clients
How do I stay compliant while contracting in Israel?
As a foreign contractor, you will be concerned about compliance with Israeli law and regulations, as you are working and living within its borders. Your primary compliance risks are:
- Firstly, meeting tax and social contribution requirements
- Secondly, business registration for limited companies
- And finally, work permit validity and sponsorship
That is a lot to overcome, especially for new nomads contracting in Israel, and you might need the help of an umbrella company to take over many of these tasks. Contractor Taxation has licensed, verified umbrella companies in Israel who are ready to assist you with setting up your contract and making sure that your payments are secure. Here are some of the benefits of using an umbrella company:
- Handles all client payments, tax withholding and any social contributions
- Issues you a payslip each month, to an Israeli or foreign account
- Can sponsor work permits
- Helps set up the Israeli contract with the client
- Moderates any disputes with your client
- Advises on access to totalization and double taxation treaties
Unless you are prepared to handle all of this on your own, you may find that an umbrella company is a valuable partner as you embark on contracting in Israel. Please contact Contractor Taxation with your questions about how an umbrella company can work for you.