Permanent Establishment Risk in Israel: Hiring Employees Without an Entity (2026)

What a PE is

Under Israel's tax treaties (which generally follow the OECD model) a foreign company is taxed in Israel on business profits only if it has a PE here. Without a treaty, Israeli domestic law can tax business income from Israeli activity even more broadly.

• Fixed place PE: an office, branch or workplace at the company's disposal, which can include a home office used regularly for the business.
• Dependent agent PE: a person in Israel who habitually concludes contracts, or plays the principal role leading to contracts, on the company's behalf.
• Service PE: some treaties tax services performed in Israel above a day threshold.

Typical risky scenarios

• A country manager or salesperson in Israel who negotiates and closes deals.
• A senior executive who manages the company from Israel (which can also raise residency questions).
• A team working from a rented Israeli office paid by the foreign company.
• An employee who relocates to Israel and keeps working for the foreign employer from home.

What a PE costs

Israel can tax the profit attributable to the PE at 23% corporate tax, with registration, return and bookkeeping obligations, possible penalties and interest for past years. Separately, an employer paying Israeli salaries must withhold Israeli income tax and National Insurance and comply with Israeli labour law, whether or not a PE exists.

Ways to reduce the risk

• Set up an Israeli subsidiary that employs staff and serves the parent on cost-plus.
• Use an employer of record for very small or temporary teams, understanding its limits.
• Limit the authority of Israel-based staff to conclude or negotiate contracts.
• Track days and activities of travelling staff where treaty service-PE thresholds apply.

A subsidiary does not make PE risk disappear automatically: if its employees habitually conclude contracts for the parent, the parent can still have a dependent-agent PE.

Remote employees after relocation

This is the most common modern case: an employee moves to Israel (often making Aliyah) and keeps working remotely. The salary is Israeli-source employment income. The employer may need to run Israeli payroll, and the company should assess whether the employee's role creates a PE. Solutions include moving the employee to an Israeli entity, an EOR, or restructuring the role.