Israel, often called the “Startup Nation,” is a thriving hub of innovation and entrepreneurship. The country has seen strong economic progress, even though it has often faced social and political unrest. Today, the country offers potential in industries like defense, technology, and gemstones. 

What makes Israel a good destination for businesses, particularly startups, is the availability of highly skilled talent. Its population is among the world’s most educated, with over 50% of people between 26 and 50 years old having some level of higher education. That’s another reason why businesses turn to Israel for research and development (R&D), as they can find educated and skillful researchers in the country.

It also has among the highest spending on R&D domestically. Israel maintains a resilient and dynamic economy. It’s on the higher end of both nominal and per capita GDP rankings in the region.

As of 2026, the country’s GDP is USD 666.41 billion, according to the International Monetary Fund (IMF). Its per capita GDP is the second highest in the region at USD 54,370, with Qatar at the top. 

Most importantly, Israel offers a range of tax incentives to attract foreign businesses and startups, particularly in the high-tech sector. The “Law for Encouragement of Knowledge-Intensive Industry,” also called the “New Angel’s Law,” provides tax credits for investors in R&D companies, with benefits available until December 2026. 

The most relevant statistic for businesses to expand into any new country is the ease of doing business. Israel ranks 35th in the ‘Doing Business’ ranking by the World Bank. However, it still has a long way to go to be on par with European countries. Businesses may face hurdles and need professional help setting up entities and financial accounts. 

Professional employer organizations (PEOs) can help businesses navigate the journey of expanding into Israel. Despite the country’s favorable business atmosphere, incredible talent, and tax incentives, there are many challenges to tackle when it comes to typical human resources (HR) tasks. A reliable PEO partner can make HR management and compliance easy.

Israel at a Glance
Location Eastern shore of the Mediterranean Sea
Population Approximately 9.6 million
Median Age 29 years
Working Age Population Over 4.5 million
Literacy Rate 92%
Languages Hebrew (official and widely spoken), Arabic (special status and spoken by the Arab minority), and English (widely understood, especially in business and tourism).
Currency and Exchange Rate Israeli Shekel (ILS); exchange rate typically around 3.5 ILS per USD.
Economy Type High-tech economy with significant contributions from agriculture, manufacturing, and services.
Key Industries Technology (approximately 20% of GDP), defense, pharmaceuticals, agriculture, and services.
Startups Known as the “Startup Nation,” with over 6,000 startups contributing to innovation and economic growth.
Tax Rate Corporate tax rate: approximately 23%; personal income tax rates range from 10% to over 50%.
Employment Laws Comprehensive laws covering minimum wage, working hours (typically up to 8 hours per day), mandatory benefits, and strong worker protections.
Culture Diverse due to its immigrant history, blending Jewish traditions with European influences. Hebrew plays a central role in cultural identity.
Labor Force Distribution High-tech industries employ a large share of skilled workers. Service sectors, including tourism and financial services, are major employers. Foreign workers are also present in several industries.

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Challenges for Foreign Businesses in Israel

Although Israel appears to be a great destination for new foreign businesses, businesses may face challenges. That’s precisely why any business expanding into the country or tapping its talent should consider a professional partner on the ground. 

Here are the main challenges of doing business in Israel:

Geopolitical Risks

Perhaps the biggest challenge for foreign businesses is mitigating geopolitical risks in Israel, which can threaten the business’s growth. Before entering this unique market, a good understanding of the geopolitical dynamics is necessary.

Regulatory Barriers

Israel’s employment laws and worker protections can vary from those in the West, which often creates a barrier from a compliance perspective. A strong understanding of the local laws and regulations can be beneficial.

Cultural Adaptation

Companies expanding into Israel and hiring local talent must respect and abide by the culture, which can be markedly different from other countries. For instance, unlike most countries, work week in Israel is Sunday through Thursday, with weekends on Friday and Saturday. That’s because of religious reasons.

Infrastructure Challenges

Israel has had strong public and private infrastructure, but it’s not evenly distributed. Smaller towns may not have the connectivity and development that cities do.

Language Barriers

Israel is dominated by Hebrew, spoken in and outside business. This can create communication barriers for companies with no Hebrew-speaking resources and leadership.

What are PEOs in Israel?

A Professional Employer Organization (PEO) is a company that partners with small to medium-sized businesses (SMBs) to provide comprehensive HR solutions.

In a co-employment relationship, the PEO becomes the employer of record (EOR) for the client’s employees, handling essential HR functions like payroll, benefits administration, HR compliance, and risk management. This allows SMBs to offload administrative burdens and focus on their core business operations.

The PEO approach differs from the traditional EOR, where the EOR provider assumes full legal employer status for employees in a specific country, taking on all employment-related responsibilities and risks.

This distinction impacts liability, control, and the level of HR support provided.

Who Can Benefit from PEOs in Israel?

  • Small and Medium-Sized Enterprises (SMEs) – PEOs help SMEs manage HR tasks efficiently without an in-house HR department.
  • Startups – Israel’s startup ecosystem benefits from PEOs, ensuring compliance while focusing on innovation.
  • Companies with Seasonal Workforce Needs – PEOs facilitate hiring and managing temporary workers in industries like tourism and agriculture.

Which Services Do PEOs Provide in Israel?

PEOs in Israel offer a wide range of HR services, including: Recruitment and Onboarding PEOs assist in sourcing top local talent, verifying qualifications, and managing onboarding processes. They prepare employment contracts and ensure compliance with Israeli labor laws.

Payroll Management

Israel’s payroll system includes mandatory social security contributions, income tax deductions, and pension fund payments. Payroll must be managed according to the local rules, if any. For instance, Israel mandates payment of one month’s salary for each year worked as severance pay.

Generally, PEOs handle:

  • Timely salary payments in Israeli Shekels (ILS)
  • Income tax remittance to the Israel Tax Authority
  • Calculation of overtime pay, bonuses, and severance payments if the company provides

Employee Benefits Administration

In Israel, employees are entitled to certain benefits. Also, as a Jewish-majority country with also a significant Muslim population, businesses must take into consideration religious holidays when calculating paid leaves.

PEOs ensure compliance with Israel’s employment benefits, including:

  • Mandatory pension contributions
  • Paid time off other than eight national holidays, which are not included 
  • Paid sick leave and maternity/paternity leave
  • National health insurance contributions
  • Additional private insurance and perks based on company policies

HR Compliance and Legal Advisory

PEOs help businesses draft employment contracts aligned with Israeli labor laws. They may also ensure the contracts are created in the local language for maximum clarity. 

PEOs ensure compliance with the Israeli Labor Law. Also, they implement the standard workweek regulations, which is 42 hours per week, and minimum wage, which is adjusted annually.

Risk and Compliance Management

PEOs mitigate risks by ensuring compliance with Israel’s occupational health and safety laws, managing labor inspections, and handling workplace disputes.

Training and Development Many

While not all PEOs provide leadership and technical training programs, some may offer these services to help employees develop their skills and advance their careers. Israeli labor is skillful, but training may still be necessary to accommodate workers with the company culture. A PEO may help organize industry-specific workshops and online training courses tailored to business needs.

Termination Processing

Israeli labor laws regulate employee termination processes. PEOs ensure that termination notices, severance pay, and legal documentation are handled in compliance with local regulations.

In Israel, employees are entitled to severance pay if dismissed. The notice period varies based on tenure, and legal justification must be provided for terminations. For example, the notice period is shorter for the first year (one day for every month worked) and longer if the employee has been with the company for two years or more (14 to 21 days). 

PEOs help businesses manage these obligations to avoid legal repercussions.

What PEOs Can’t Do?

While PEOs offer a wide range of HR services, they typically do not cover:

  • Core Business Operations
  • Strategic HR Planning
  • Complex Employee Relations Issues
  • Legal Representation in Court Cases
  • Financial Management
  • Company Culture and Employee Engagement Initiatives

Clarifying your company’s needs with a PEO provider before partnering is important. Even though PEOs don’t provide strategy or operation services, they cover the lion’s share of the HR and compliance responsibilities, which makes them a worthy investment.

Benefits of PEOs in Israel

Many businesses expanding into Israel rely on PEOs due to their numerous benefits.

Compliance with Israeli Labor Laws

Israel has strict labor regulations, including mandatory pension contributions and severance pay. These laws may also vary by industry. PEOs ensure businesses adhere to local laws and avoid penalties or lawsuits that may ultimately hurt their growth in the country.

Easy Market Entry

Establishing a legal entity in Israel can be time-consuming and costly. A PEO allows companies to enter the market quickly by hiring employees and managing HR tasks on their behalf. This way, businesses don’t necessarily need to establish a local entity.

Focus on Strategy and Marketing

Outsourcing HR functions to a PEO enables businesses to focus on growth and strategic priorities without administrative burdens. Companies can instead focus on an expansion marketing strategy. 

Israel, with its strong culture and geopolitical tensions, can be a tough market to break into. PEOs free the business to use all their resources for the more pressing tasks in their expansion.

Cost Efficiency

PEOs reduce HR-related costs, including payroll management and compliance expenses. They also provide access to competitive employee benefits, improving talent retention. In comparison, establishing an HR wing locally is a more expensive endeavor.

Adapting to Israel’s Economic Environment

Israeli labor laws and tax regulations are subject to change. PEOs keep businesses informed about updates, ensuring compliance and smooth operations. For instance, Israel regularly updates its minimum wage to keep it relative to the inflation rate, and businesses must abide by it.

PEOs in Israel Can Simplify Your Expansion!

Israel’s economy has shown a strong performance over several decades. Also, it offers a highly skilled workforce, especially for research and innovation. While any business may benefit from expansion into Israel, tech companies benefit the most, thanks to the ready availability of tech talent and favorable laws. 

Companies may get bogged down with HR and local compliance issues if they try to manage things independently. Hiring a PEO is a good idea, as partnering with a PEO can optimize your workforce management and reduce administrative challenges. That way, businesses can focus on strategy and innovation.

Unsure which PEO to pick in Israel? Contact Remote People, your trusted PEO, to be the best solution for your business. We provide top-rated PEO services that help unlock your business potential in Israel. Reach out today to get started!

Frequently Asked Questions

A PEO is a third-party service provider that manages HR functions such as payroll, benefits, compliance, and recruitment. PEOs work as co-employers, handling most HR functions for foreign clients in the country.

PEOs ensure compliance with Israel’s employment laws, tax regulations, and social security requirements. Israel offers some flexibility and discretion in bonuses and overtime pay but has strict regulations in other matters like notice periods and severance pay.

Foreign companies can hire personnel in Israel without establishing a local entity by availing of an employment of record (EOR) service by a PEO. 

 

In such a scenario, the PEO or EOR provider becomes the employer of the local employees, taking on typical HR responsibilities, including payroll and taxation.