Setting up a company in Israel offers access to one of the world's most dynamic startup ecosystems, favorable tax incentives, and a highly skilled workforce. This guide covers everything from entity selection to ongoing tax obligations.
Choosing the Right Entity Type
Private Limited Company (חברה בע"מ)
The most common structure for businesses in Israel, offering:
- Limited liability protection for shareholders
- Corporate tax rate of 23% on profits
- Ability to issue employee stock options under Section 102
- Access to Preferred Enterprise and PTE tax benefits
- Flexible ownership and governance structures
Foreign Company Branch
A branch of a foreign company may be appropriate when:
- The parent company wants direct control over Israeli operations
- Activities are temporary or project-based
- The branch structure provides transfer pricing advantages
Partnership (שותפות)
Partnerships are pass-through entities useful for:
- Professional services firms
- Real estate investment vehicles
- Joint ventures with specific tax allocation needs
Registration Process
- Company Name Approval: Reserve your company name with the Registrar of Companies (2-5 business days)
- Articles of Association: Draft and file articles defining governance, share classes, and shareholder rights
- Registration Filing: Submit incorporation documents (typically 5-10 business days)
- Tax Registration: Register with the Israel Tax Authority for corporate tax, VAT, and employer withholding
- Bank Account: Open a corporate bank account (may require in-person visit)
- Social Security: Register with Bituach Leumi (National Insurance) for employer obligations
Key Tax Obligations
Corporate Income Tax
- Standard rate: 23% on taxable income
- Preferred Enterprise rate: 7.5% (development areas) or 16% (other areas)
- Preferred Technology Enterprise: 6% (development areas) or 12% (other areas)
- Special Preferred Technology Enterprise: 6% on income up to certain thresholds
Value Added Tax (VAT)
- Standard rate: 18% (as of 2025)
- Exports of goods and services: 0% (zero-rated)
- VAT registration required for all businesses
- Monthly or bi-monthly VAT returns depending on turnover
Employer Obligations
- Income tax withholding from employee salaries
- National Insurance contributions (employer portion: ~7.6%)
- Pension contributions (mandatory 6.5% employer share)
- Severance pay provisions (8.33% monthly accrual)
Tax Incentives for New Companies
Angel's Law (Section 20A)
Israeli angel investors can deduct their investment in qualifying startups from taxable income, subject to limits and conditions.
R&D Tax Benefits
Companies performing R&D in Israel can access:
- Immediate deduction of R&D expenses (vs. capitalization)
- Innovation Authority grants (non-dilutive funding)
- Enhanced deductions for approved R&D programs
IP Migration Benefits
Companies transferring intellectual property to Israel may benefit from favorable amortization rules and reduced tax rates on IP-derived income.
Common Mistakes to Avoid
- Ignoring transfer pricing: Inter-company transactions must be at arm's length from day one
- Late VAT registration: Operating without VAT registration can result in penalties
- Incorrect employee classification: Misclassifying employees as contractors triggers significant liability
- Missing tax filing deadlines: Corporate tax returns due by May 31 (or extended deadline)
- Overlooking withholding obligations: Payments to non-residents require withholding tax
Starting a company in Israel involves navigating complex legal and tax requirements. Tax-IL provides end-to-end support from entity formation through ongoing compliance. Schedule a consultation to discuss your specific situation.