The modern world is steadily becoming one big, connected workplace, and countries across the globe are competing to attract innovation, talent, and startup founders. One of the most successful contenders is Israel, whose government is resolute to make them the global center of business, technology, and innovation.
Having all of this in mind, you're probably considering starting your own business and becoming self-employed in Israel. This article will provide you with information on how to register.
Disclaimer: Be aware that this article is not a substitute for legal advice. Please always check official websites or seek legal advice before you take action.
Self-employment in Israel
If you intend to register your business and be self-employed, Israel offers two legal entities you can register: the osek patur and the osek murshe. Osek patur is the standard form you choose as an individual entrepreneur. It is ideal if you want to start your business from scratch and don't expect to earn more than 107,692 shekels per year (for 2023). Osek murshe is the more complex form of establishing a small or medium business. With osek murshe, you have to register to pay VAT (but also can get refunds on it), and there are no upper limits to your turnover. Osek murshe is a step you hope to get to when your business starts to grow and develop. For this article, we will focus on what it takes to register as an osek patur.
Registering as osek patur (individual entrepreneur) in Israel
As we already mentioned, the osek patur is the individual entrepreneur running a business. A small annual turnover characterizes this business form, and they are not obliged to charge VAT on their services. One significant limitation to have in mind when opening an osek patur is that not all professions and services can exist within this legal form. It is a wise idea to check whether your business is eligible to be an osek patur (here's information - in Hebrew). Alternatively, you can consult one of our legal experts.
Open a bank account for individual entrepreneur activities
The first step you need to complete when registering as an individual entrepreneur is to open a bank account. Although the osek patur is not separate from its owner, it is good practice to open up a different bank account, which you will only use for business matters. This way, you can separate the business costs from your personal and household expenses.
If you're not looking to become an independent contractor, but hire one - learn how you can do it compliantly in Israel.
Register with the VAT Department in Israel
Next up is registration with the VAT Department, which is a compulsory action. As an osek patur, you do not register as a VAT payer unless your annual turnover is upwards of 107,692 shekels per year (for 2023). However, you still have to register your business with them, as that step makes all the following possible.
Register with the Income Tax office in Israel
Your next move is registering with the Income Tax office (Mas Ahnassa). Here is where your annual tax rate will be assessed, as the income tax is progressive, and it varies between 10% and 47%. You will be getting the document stating your tax rate by mail from the Income Tax office. Keep in mind that all expenses of running your business, such as rent, equipment, business trips, and consumables, can be written off your annual tax.
National Insurance Service for individual entrepreneurs in Israel
The last step in establishing an osek patur is the National Insurance Service - Social security (Bituah Leumi). The payments for social security and contributions are based on your income after expenses, and they are monthly. A pro-tip is to contact a tax expert or accountant to help you establish how much you have to pay in your first year, as well as what costs of running the business are deductible. You may want to set aside some money for these payments, as they may not start happening right away. This way, you won't fall behind with payments, and even if there happens to be a difference in the amount you need to pay, it won't burden you too much financially.
Keep in mind: The atsarat on (הצהרת הון) is a declaration of assets, obliging the entrepreneur to declare his/her assets and liabilities. It is mandatory for anyone self-employed (whether they own osek patur or osek murshe) and any shareholder who holds more than 10% of a limited liability company's shares. Therefore, an osek patur owner is obliged to make the declaration within 120 days of receipt of the tax authorities' application.
Reporting taxes as an individual entrepreneur in Israel
Reporting taxes for the osek patur is reasonably straightforward. The osek patur must declare its income and annual profit to 3 authorities:
- VAT Office: The Annual Declaration (This document is where you state that you have not exceeded the limit in turnover established for that year.)
- Income Tax: Annual balance sheet
- Income Tax and Social Security: Regular annual report on your advance payments
Who cannot register as an osek patur?
While osek patur is the form of choice for many up-and-coming professionals eager to start their own companies, some professions can not register with this legal form.
1. Professional occupations, such as architect, engineer, private detective, lawyer, chartered accountant, doctor, management consultant, interpreter, insurance agent, psychologist, dentist, medical clinic.
2. Literary professions, such as teacher, university professor, author
3. Other sectors of activity: driving school directors, real estate agents, school or kindergarten headmasters, car dealers
If your business practice falls under the scope of the list above, you must register your company as an osek murshe at the VAT office.
Can foreigners be self-employed in Israel?
As a foreigner, you cannot work as a private entrepreneur yourself, since you need an Israeli ID to register. Unless you are in the process of obtaining citizenship in Israel, or you want to open a limited liability company, you will need a resident to act as a representative for your business. The representative can be both a physical person and a legal entity, and they act as a guarantee to the tax authorities. However, one program, established by the Israeli government, lets you set up a company and work in Israel: the Innovative Visas Program. If your business is technologically innovative, you can apply for this visa and work with the local landing pads for foreign entrepreneurs.
There you are - we hope this article helped you navigate the basics of setting up as an individual entrepreneur in Israel.
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