How each model works
- EOR: an Israeli provider employs the worker, runs payroll, pension and benefits, and invoices you a fee. You direct the day-to-day work.
- Subsidiary: you incorporate an Israeli company that employs staff directly and serves the parent, usually on cost-plus.
Comparison
| Employer of record | Own subsidiary | |
|---|---|---|
| Speed | Days to weeks | Several weeks |
| Upfront cost | Low | Incorporation, tax files, agreements |
| Ongoing cost | Monthly fee per employee | Audit, accounting, transfer pricing |
| PE risk | Not removed by itself | Lower, if structured well |
| IP | Contractual assignment chain needed | Owned/assigned through intercompany agreement |
| Section 102 options | Generally not available | Available through a trustee |
| Best for | 1–5 hires, testing the market | Growing teams, R&D centres |
The stock option point
Israeli employees value Section 102 options highly because gains can be taxed at 25% instead of marginal rates. Section 102 requires the employee to be employed by the issuing company or a related employer. EOR employees usually cannot get Section 102 treatment, so their options are taxed less favourably. For tech hiring, this alone often pushes companies to a subsidiary early.
Labour law and EOR limits
Israeli law regulates manpower contractors, and in some circumstances long-term placed workers can be treated as employees of the end client. Make sure the EOR is properly licensed and the arrangement is reviewed. EOR also does not change who concludes contracts, so sales roles can still create PE risk for the foreign company.
When to switch from EOR to subsidiary
- Headcount passes roughly five to ten people, so EOR fees exceed entity costs.
- You want to grant Section 102 options.
- You hire senior sales or management staff.
- You apply for Israel Innovation Authority grants or incentive benefits.
Plan the transfer of employees carefully: continuity of seniority, severance funds and pension must carry over.
Further reading
This guide is general information, not advice for your situation. Tax rates and thresholds change; confirm current figures before acting. Tax-IL advises on tax structure and registrations; bookkeeping, payroll and banking are handled by your accountant and bank.
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