ISRAEL GUIDE

Israel – The Economy

The economy of Israel is a developed free-market economy. Israel ranks 35th on the World Bank’s ease of doing business index. It has one of the largest numbers of startup companies in the world, and the third-largest number of NASDAQ-listed companies after the U.S. and China.

American companies such as Intel, Microsoft, and Apple built their first overseas research and development facilities in Israel. Other high-tech multi-national corporations, such as IBM, Google, Hewlett-Packard, Cisco Systems, Facebook, and Motorola have opened R&D centers in the country.

The country’s major economic sectors are technology and industrial manufacturing. The Israeli diamond industry is one of the world’s centers for diamond cutting and polishing, amounting to 23.2% of all exports.

Israel’s quality university education and the establishment of a highly motivated and educated populace is largely responsible for ushering in the country’s high technology boom and rapid economic development by regional standards.

The country has developed a strong educational infrastructure, and a high-quality incubation system for new cutting-edge ideas to create value driven goods and services. These developments have allowed the country to create a high concentration of high-tech companies across the country’s regions. These companies are financially backed by a strong venture capital industry.

Its central high technology hub, the “Silicon Wadi”, is considered second in importance only to its Californian counterpart. Numerous Israeli companies have been acquired by global corporations for their reliable and quality corporate personnel.

Israel also benefits from international trade connections. Israel has signed free trade agreements with the European Union, the United States, the European Free Trade Association, Turkey, Mexico, Canada, Ukraine, Jordan, and Egypt. On 18 December 2007, Israel became the first non-Latin American country to sign a free trade agreement with the Mercosur trade bloc. It has also been part of the OECD since 2010.

Israel is also a major tourist destination, especially for those of Jewish descent, with 4.55 million foreign tourists visiting it in 2019 (about 1 tourist per 2 Israelis).

Small and Medium-Sized Companies

SMEs are of great importance to the Israeli economy. Small and medium enterprises (SMEs) constitute the overwhelming majority of companies in Israel. SMEs account for 99.8% of all employer businesses in Israel, 68.7% of the business sector workforce and 62.3% of business economy value added.

Both medium-sized (50-249 employees) and small businesses (10-49) contribute larger shares of business numbers, employment and value added to the business economy than the OECD average. On the other hand, micro businesses numbers and employment are slightly lower than the OECD average, although micro firms in Israel still contribute more than the OECD average to business sector value added.

Compliance Highlights

• The Israel Tax Authority – The Israel Tax Authority consolidates the various tax divisions: income tax, real estate taxation, VAT, purchase tax, customs, and stamp duty. The Authority provides services on reforms, non-profit institutions and information to employers, representatives, and the public.
• Ministry of Welfare and Social Affairs (משרד הרווחה והביטחון ההחברתי) – the branch of the Israeli government responsible for ensuring the welfare of the public in Israel through overseeing the supply of social services and matters related to employment.

Labor Contracts Law

Companies hiring staff for expanding operations into Israel must ensure contracts and agreements with their employees fit into a framework of employment rules. Laws and regulations provide employees with minimum entitlements, which can be extended by Collective Bargaining Agreements (CBAs) authorized by the Ministry of Economy, in addition to their individual contracts.

Where different levels of entitlement apply to employees, the most beneficial always takes precedence. The Enforcement Unit of the Ministry of Economy or federal or state authorities oversee employment laws that safeguard rights and entitlements of employees.

There is no legal requirement for employment agreements to be in a formal written contract. However, within 30 days of starting work, the employee is given either a written contract or a ‘notice’ highlighting such as responsibilities, scope of work, entitlements and working conditions, disciplinary procedures, termination, and severance payments. In addition to the notification, employees on an oral agreement must still be given written confirmation of any changes to their work schedule or other aspects of their role.

When hiring and then contracting a new employee, there is no legal need for the contract to be in writing, but essential requirements include:

1. The agreement should stipulate the type of employment, open-ended or fixed term and whether a probationary period is included.
2. Oral contracts are legally binding.
3. Under the Foreign Employees’ Law, foreign workers’ contracts must be in writing, in a language they understand.
4. Employment contracts are legally invalid and cannot be enforced if they do not meet statutory minimums.
5. New employees can request a written contract and existing employees on verbal agreements can request written confirmation of changes in their work practices.
6. A contract should be presented or agreed within 30 days of starting work. Employees on an oral contract must be given a written ‘notice’ of the essential points in this period. These include full names, addresses and IDs of employer and employee; position and main duty; salary, working hours, breaks and rest days; social benefits and entitlements with pension fund details; relevant collective agreements.
7. Employers should check prospective new employees are not restricted by a ‘non-compete’ clause with their previous employer.
8. There should be a workplace policy regarding prevention of sexual harassment and if the employer intends monitoring the employee’s computer use.

Main contract types are:

• Indefinite, Open-ended Employment Contracts:  The most common type of contract runs without a specified end date. The Notice of Discharge and Resignation Law requires both parties must give notice of dismissal or resignation. All employers and employees are subject to the laws on termination, which is permitted on reasonable grounds, excluding discrimination, if correct procedures are followed.
• Fixed-term Employment Contracts:  These are for a specified period of time or are attached to a specific project. Termination of the contract by the employer before the agreed period entitles the employee to the balance of the salary that would have been paid for the full term.
• Probationary Periods:  Trial periods are allowed, during which the probationer must be treated the same as a full-time employee.  The probation can be between one and 12 months according to the contract or relevant collective agreement. The required notice period is one day for each month worked up to six months, then two-and-a-half days for each additional month up to 12 months.
• Collective Bargaining Agreements (CBAs):  The Collective Agreements Law is the main legislation governing CBAs. They set out minimum terms and entitlements for workers, such as wages, sick leave, maternity benefits, paid vacations, and notice periods. Collective agreements can apply to specific sectors or companies, or generally with a wider scope.

General collective agreements can be extended by the Ministry of Economy to wider groups of employers and employees. Where workers are covered by contracts, collective agreements, and statutory minimums the most beneficial for the employee always applies.

Employees are permitted to establish a union in their workplace if none exists, with the general rule there should be one ‘bargaining unit’ of at least one third of the workforce.

Payroll – Tax Contributions and Benefits

Income Tax: The Israel Tax Ordinance defines residency on whether an individual’s ‘center of life’ is in Israel. Individuals may be considered tax residents if they are present in Israel for a minimum 183 days in a tax year, or for a total of 425 days in the current tax year and two preceding years. All Israeli residents pay tax on their worldwide income.

Non-residents are taxed at the same rates as Israel residents on their Israel-sourced income and capital gains from assets. Married couples can file separate or joint tax returns.

Health and Social Insurance: Israel’s social security benefits for employees are funded by contributions from employers and workers, with further additions by the government in some categories. National Insurance contributions cover old age and survivors, long term care, disability, accident and work injury, maternity, childcare, and unemployment. Employers must withhold employees’ contributions and remit them to the National Insurance Institute.