Israel Economy Overview

Currency

New Israeli Shekel (ILS, ₪)

Working hours

42 hours/week

Public/bank holidays

9 – 10 public holidays

Capital

Jerusalem

Languages

Hebrew (official), Arabic & English

Population

9.4 million

Minimum hourly salary

ILS 29.12 per hour

Tax year

1st Jan – 31st Dec

Date format

DD/MM/YYYY

Misclassification penalties

Misclassifying employees as independent contractors can lead to penalties, including fines, back payment of wages and benefits, and additional tax liabilities. The Israeli labor laws are strict, and the Ministry of Labor and Social Services enforces these regulations to ensure compliance.

Fun fact

With more than 6,000 high-tech companies and start-ups, Israel has the highest concentration of hi-tech companies in the world (apart from Silicon Valley).

Businesses looking to expand globally might find Israel’s market to be an excellent starting point. Israel’s economy is based on high-tech, agriculture, manufacturing, tourism, and diamonds. The country’s strong focus on STEM education ensures a well-trained, innovative workforce.

Israel has one of the highest concentrations of startups in the world, second only to Silicon Valley, with over 6,000 startups. This makes it an attractive destination for business expansion, particularly in the high-tech areas of Tel Aviv and the industrial hubs of Haifa.

Taxes

Employer Tax: 7.5% – 19.83%

National insurance

3.45% – 7.5%

Health Tax

4.25% – 5.98%

Employee Tax: 10% – 47%

National insurance

0.4% – 12%

Health insurance

3.1% – 5% (depending on the income per month)

Income tax

Israel has an income tax of 10% to 50% (depending on annual income)

Gross Income (ILS)

Up to 84,120

84,120 – 120,720

120,720 – 193,800

193,800 – 269,280

269,280 – 560,280

560,280 – 721,560

More than 721,560

Tax Rate

10%

14%

20%

31%

35%

47%

50%

Understanding Israel's Taxes and Incentives

In September 2023, the Israeli Knesset passed a law exempting foreign banks from paying taxes on interest from loans to “preferred technological” businesses.

This exemption, part of a series of 2023 laws, lasts until the end of 2026 and covers various types of debt financing income, such as gains from exchange rate changes and benefits tied to the Israeli index.

This law aims to foster Israel’s high-tech industry by providing significant benefits to both foreign and domestic investors, encouraging tax-efficient financing and investment in technology companies.

Eligibility for Preferred Technological Enterprise

  • Must have at least 5% Israeli ownership before receiving the loan.
  • Must have earned at least ILS 30 million (~$8 million) in technological income the previous year.
  • The loan must be at least $10 million and used for business purposes like investing in other tech companies.
  • The company must maintain or grow its staff and pay levels during the loan’s term, verified by annual tax returns and accountant approval.

Benefits for Foreign Lenders

No withholding tax approval needed for each interest payment, simplifying compliance.

Investment Tax Breaks

  • Investors can deduct 20% of their investment in tech companies from their “preferred technological income” over five years.
  • To qualify, the company must have averaged ILS 75 million in technological income over three years before the investment and must invest at least $20 million for at least 80% control of the investee company.
  • This deduction allows investors to write off intangible assets, creating a valuable “tax asset

Hiring and Employment in Israel

Before hiring or recruiting employees in Israel, it’s crucial to understand the country’s labor laws and regulations. Terminating an employee involves a strict process requiring a hearing before issuing written notice. Initially, employees are entitled to 12 paid vacation days per year, which increase over time, reaching a maximum of 20 days after 12 years of service.

Employers are required to make monthly payments and pay taxes on gross wages, totaling 28.28% of the salary. Israel has eight public holidays, which may vary by region. There is no 13th or 14th-month pay. A Value-Added Tax (VAT) of 17% is added to the cost of hiring unless certain conditions exempt the company, such as the employee not working with Israeli clients or companies.

The Israeli workweek runs from Sunday to Thursday, totaling 42 hours. Overtime is regulated, with the first two hours paid at 125% of the normal rate, and additional hours at 150%. Employment contracts typically include a trial period ranging from one to twelve months.

Notice periods for termination vary by length of service but are usually no more than 30 days. Non-compete agreements are enforceable if they are reasonable in scope and duration. Employers are generally required to compensate employees after termination.

Employees accrue more vacation days over time and are entitled to sick leave and family leave, including maternity and paternity leave. Employers contribute to social security, health insurance, and severance pay plans. Severance pay can be managed through a fund, eliminating the need for separate payments upon termination.

Expansion Opportunities in Israel

Expanding into Israel offers a wealth of opportunities for businesses, driven by its dynamic high-tech sector and a highly skilled workforce. Israel is home to over 6,000 startups, making it one of the world’s leading hubs for innovation and technology.

The country’s strong focus on STEM education ensures a steady supply of qualified professionals, with approximately 45% of the population having a tertiary education, according to the OECD.

The country’s progressive tax incentives, especially for technological enterprises, and its strategic location as a bridge between Europe, Asia, and Africa, further enhance its appeal. However, businesses must navigate a complex regulatory environment, including detailed labor laws, tax obligations, and compliance requirements.

By understanding these regulations and leveraging Israel’s unique advantages, companies can effectively tap into this vibrant market and drive significant growth and innovation. With careful planning and strategic investment, expanding into Israel can be a highly rewarding endeavor.

Israel Employer of Record (EOR)

Similar to a Professional Employer Organization (PEO), an Israel Employer of Record (EOR) hires employees on behalf of a company, managing all employment-related legalities and compliance.  The Israel EOR becomes the official legal employer of your Israel team. This method is fast and efficient, making it perfect for companies that need to quickly deploy staff on the ground. 

An EOR handles payroll, benefits, taxes, and compliance with local labor laws, allowing businesses to focus on their core activities. They may also provide additional services, such as Israel talent acquisition and visa support.

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Recruitment Agencies

An Israel recruitment agency can help you source employees in Israel quickly and cost-effectively. Israeli recruiters often work in tandem with Professional Employer Organizations or Employers of Record (see below) to ensure that your Israeli team is hired and paid in full compliance with local laws.

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Israel Professional Employer Organization (PEO)

Partnering with a Professional Employer Organization (PEO) allows companies to employ local staff in Israel without the need to establish a legal entity. This approach is quicker and less expensive, making it ideal for businesses testing the Israeli market or those with limited operations.

PEOs handle administrative tasks and ensure that companies comply with Israeli regulations, reducing the complexity and risk associated with hiring local employees.

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Business Opportunities in Israel

Israel, often referred to as the “Start-Up Nation,” presents a wide array of compelling business opportunities across various sectors. The country’s strong emphasis on innovation, research and development, and entrepreneurship creates a fertile ground for businesses to flourish.

Business Opportunities Reasons
Cybersecurity Israel is a global leader in cybersecurity, with a robust ecosystem of start-ups, established companies, and research institutions. The increasing demand for cybersecurity solutions worldwide creates significant opportunities for businesses in this sector.
Agritech Israel’s advanced agricultural technologies, including precision farming, water management, and desert agriculture, offer opportunities for businesses to develop and export innovative solutions to address global food security challenges.
Healthtech Israel’s cutting-edge medical research, coupled with its strong healthcare system and digital health initiatives, provides opportunities for businesses in medical devices, digital health solutions, and personalized medicine.
Cleantech With a focus on sustainable technologies, Israel offers opportunities in renewable energy, water treatment, and energy efficiency solutions. The global shift towards environmentally friendly technologies further enhances the potential of this sector.
Fintech Israel’s vibrant fintech ecosystem, supported by its strong IT infrastructure and skilled workforce, creates opportunities in areas such as blockchain, payments, and financial analytics. The country’s embrace of digital banking and cashless transactions further fuels this sector.

Accelerate your Israel Business Expansion

Israel offers huge potential for businesses looking to tap into its innovative market. With strong government support for research and development, including funding and tax breaks, it’s an attractive spot for growth.

Plus, its strategic location, highly educated workforce, and solid trade links make Israel an ideal hub for expanding into the Middle East and beyond

For more information, get in touch with our business expansion team.