Quick Answer: Every self-employed person registered as an osek patur or osek murshe in Israel, and every Israeli company, must make monthly advance income tax payments — mikdamanot (מקדמות) — under Sections 175–182 of the Income Tax Ordinance 5721-1961. The Israel Tax Authority (ITA / Rashut HaMisim) sets your monthly rate as a percentage of gross turnover, based on the prior year's actual tax liability. First-year businesses receive a default industry rate. Payments are due by the 15th of the following calendar month via the ITA's Shaam online portal. Underpayment triggers index linkage and interest under Section 190; you can request a rate reduction at any time if income falls significantly.

Foreign nationals who register as self-employed in Israel or open a local company almost always expect to file and pay tax once a year — the way it works in the United States, the United Kingdom, and most of Europe. Israel does it differently. The Israel Tax Authority collects income tax monthly throughout the year through a mandatory installment system called mikdamanot. Missing or underpaying those installments is one of the most common compliance mistakes foreign business owners make in year one.

This guide walks through the full advance payment system: who must pay, how the ITA sets your rate, how to file and pay on time, what happens when income drops and you need a lower rate, and the consequences of getting it wrong. It also covers the specific rules for new immigrants (*olim chadashim*) during the 10-year exemption period and for foreign nationals operating in Israel through a branch or subsidiary.

1. What Are Advance Tax Payments (Mikdamanot)?

Advance tax payments are pre-payments of the annual income tax liability, collected by the ITA during the tax year rather than after it ends. The legal basis is Sections 175–182 of the Income Tax Ordinance 5721-1961 (*Pekudat Mas Hachnasa*), which together create a comprehensive system for self-employed individuals and companies to pay estimated tax in real time.

Rather than waiting until April of the following year for the annual tax return (*doch shnatee*) — when a self-employed taxpayer might owe a large lump sum — the ITA collects installments proportionate to monthly turnover throughout the year. At year-end, the total advance payments are credited against the actual liability. If advance payments exceed the final tax, the ITA refunds the surplus with index linkage and interest under Section 159A of the Income Tax Ordinance. If they fall short, the taxpayer pays the deficit with the return, potentially with linkage and penalties.

Advance payments are not a fixed shekel amount but a percentage of each month's gross revenue. A month with NIS 30,000 in turnover generates a higher advance payment than a month with NIS 15,000 — the rate scales with actual revenue rather than a fixed quarterly estimate.

In Practice: The ITA's Shaam online portal (available at misim.gov.il) displays each registered taxpayer's current advance payment rate, the monthly amounts due, and payment history. A foreign business owner who cannot read Hebrew can still navigate the portal with help from an accountant (*roa cheshbon*) or tax advisor (*yoetz mas*). The ITA requires all payments to carry the correct taxpayer file number (*mispar tik*) — a common mistake is paying to the VAT account rather than the income tax account, which delays crediting.

2. Who Must Make Advance Tax Payments

The obligation extends to a wide range of business structures operating in Israel:

  • Osek patur — self-employed individuals with annual turnover below the VAT exemption threshold (NIS 120,000 in 2026) who are exempt from charging VAT but still owe income tax and Bituach Leumi contributions.
  • Osek murshe — self-employed individuals or businesses above the VAT threshold, registered as licensed dealers charging VAT at 18%.
  • Israeli companies (amutot and regular Ltd. companies) — all privately held Israeli companies, regardless of whether they are foreign-owned, must make advance company income tax payments under the same Section 175 framework. The corporate advance tax rate reflects the prior year's effective corporate tax liability divided by turnover.
  • Partnerships (shutafuyot) — Israeli partnerships are taxed at the partner level, and each partner must make individual advance payments based on their share of partnership income.
  • Foreign company branches (sniph zar) — a foreign company registered as an Israeli branch is subject to advance payments on its Israeli-source income under the same rules as an Israeli company.

Salaried employees are excluded — their employer withholds income tax at source through the *nikhui mas* system on each payslip, so no separate advance payment is required. A person who is both salaried and self-employed — for example, a foreign national who works part-time for an Israeli employer and also runs a freelance business — must make advance payments only on the self-employment income; the salary withholding covers the employment income.

In Practice: Foreign nationals operating in Israel through a foreign company without registering a branch or subsidiary sometimes believe they have no Israeli tax obligations. If the company has a permanent establishment (PE) in Israel under Section 3 of the Income Tax Ordinance or under the applicable double tax treaty — which can arise from a home office, a fixed place of business, or an employee with authority to conclude contracts — then Israeli corporate advance payments apply. The ITA has intensified PE audits since 2024 and has assessed retroactive advance payment underpayment penalties for up to seven years in some cases.

3. How the ITA Sets Your Advance Payment Rate

The advance payment rate (*shiur mikdamanot*) is expressed as a percentage of monthly gross turnover. For an established business, the ITA calculates this rate annually, after the prior year's tax return is processed:

Rate = (Prior year's actual income tax liability) ÷ (Prior year's gross turnover) × 100

For example, if your 2025 tax return shows NIS 180,000 in income tax on NIS 1,200,000 in gross turnover, the ITA sets your 2026 advance rate at 15%. Each month in 2026 you report turnover and pay 15% of it. If January 2026 turnover is NIS 100,000, you pay NIS 15,000 by February 15.

This rate is recalculated each year after the prior return is filed and processed. The ITA notifies each taxpayer of their updated rate via the Shaam portal. If you have not yet received a notification, log in to the portal and check your current rate under "advance payments."

New businesses in their first year cannot use the prior-year formula because no prior year exists. The ITA assigns a default rate from industry tables (*shiurei mikdamanot lenachzikei sach-choal*) published annually by the Commissioner of Income Tax. These industry default rates typically run 4%–20% depending on sector, with professional services (law, medicine, consulting) at the higher end and certain retail and agricultural categories at the lower end. A new business owner should confirm their assigned default rate with the ITA immediately after registration, as incorrect default rates are common when the ITA's industry classification does not match the actual business activity.

In Practice: The ITA issues annual advance payment notices by January 31 of each year. A notice that has not arrived by mid-February likely means the prior year's return was not filed, which triggers a separate problem. Do not wait for the notice to calculate your payment — log in to Shaam, confirm your rate, and pay by the 15th deadline. The ITA does not accept "I did not receive the notice" as a defense against late payment interest.

4. How to Calculate and Pay Each Month

The advance payment process has three components: reporting monthly turnover, calculating the amount owed, and submitting payment on time.

Step 1 — Determine your monthly gross turnover. Gross turnover means total revenue from business activity before deducting any expenses. For VAT-registered businesses (*osek murshe*), gross turnover for advance tax purposes is the pre-VAT invoice total — VAT collected from clients is excluded. For osek patur businesses that do not charge VAT, gross turnover equals total invoiced amounts.

Step 2 — Apply your advance rate. Multiply this month's gross turnover by your assigned rate percentage. This is your advance payment amount.

Step 3 — File and pay via Shaam. Log in to the ITA's Shaam system at misim.gov.il. Navigate to "advance payments" (*mikdamanot*) and submit the monthly report (*diwuach mikdamanot*) declaring your turnover figure and the calculated payment amount. Complete the bank transfer or credit card payment within the same session. The ITA generates a payment confirmation (*ishur tashlum*) that should be saved.

Step 4 — Meet the deadline. Advance payments are due by the 15th calendar day of the month following the reporting month. June turnover is due by July 15. There is no grace period — a payment received on July 16 accrues one day of index linkage and interest. For osek murshe businesses that file VAT on a two-month cycle, the ITA may group advance payments on the same two-month schedule, but income tax and VAT are always filed and paid to separate accounts.

Alternative payment channels. In addition to the Shaam online portal, payments can be made at any Israeli post office (doak), at licensed payment kiosks, or via bank wire using the ITA's published account details and the taxpayer's file number. The ITA website provides an electronic payment form (*toofas tashlum*) for each period.

In Practice: A very common error among foreign business owners is confusing the VAT payment to the VAT Authority (Maamad) with the advance income tax payment to the Income Tax Authority. These are two separate payments, to two separate government accounts, with two separate file numbers. A foreign national registered as an osek murshe in Israel owes VAT on the VAT filing cycle and income tax advance payments on the 15th of each month. Paying one without the other results in penalties on the missed account, even if the total amount paid to the government was correct in aggregate.

5. Requesting a Rate Reduction (Hagasha)

The advance payment rate is based on prior-year performance. If your current year's income is significantly lower than the prior year — because of a slow quarter, a lost client, seasonal factors, or an economic downturn — you have the right to request a reduced advance payment rate.

This right is established by Section 180 of the Income Tax Ordinance. The process, known as hagasha l'hafchatat shiur mikdamanot, involves submitting an application to the ITA's assessing office (*misrad sheuma*) with evidence of the income reduction. The application should include:

  • A comparison of this year's actual turnover figures versus the equivalent period last year.
  • Updated financial projections for the remainder of the year.
  • Supporting documents: bank statements, invoices, contract terminations, or any other evidence of reduced activity.

The ITA assessing office reviews the application and, if satisfied, issues a revised rate notice. The new lower rate applies from the month the application is approved — it does not retroactively reduce payments already made. If the ITA approves a reduction and your actual annual income turns out to be higher than projected, the ITA will assess the underpayment with interest and linkage at year-end. There is therefore a trade-off: requesting a reduction that turns out to be too aggressive creates a larger year-end payment with interest, whereas overpaying advance payments creates a refund with linkage — which may be preferable.

In practice, an experienced Israeli accountant will calculate a "safe harbor" reduction request — a projected income figure low enough to reduce payments materially but not so low that year-end adjustments create a penalty exposure.

In Practice: The ITA assessing office for self-employed foreign nationals depends on the taxpayer's registered address in Israel. Tel Aviv taxpayers file at the Tel Aviv 1 or Tel Aviv 3 assessing offices; Jerusalem taxpayers at the Jerusalem assessing office. Applications submitted online via the Shaam portal reach the correct office automatically when logged in with a valid taxpayer file number. The ITA typically processes reduction requests within 14–21 business days. During the review period, taxpayers should continue making payments at the original rate — stopping payments while the reduction is under review generates a shortfall with interest.

6. Penalties and Interest for Late or Insufficient Payment

Israel's system for penalizing advance payment shortfalls is less punitive than in some jurisdictions, but the linkage mechanism means that even a moderate delay accumulates meaningful additional cost.

Index linkage (*hatsmadat madad*). Under Section 190 of the Income Tax Ordinance, any late or underpaid advance payment is subject to linkage to the Consumer Price Index from the due date until actual payment. Israel's CPI linkage on tax debts is not a penalty — it is a mandatory inflation adjustment that the ITA applies automatically. In a period of 3–4% annual inflation, a six-month delay adds approximately 1.5–2% to the amount owed.

Annual interest (*rius*). In addition to linkage, interest accrues under Section 187 of the Income Tax Ordinance on unpaid advance payment amounts from the original due date. The statutory rate is set annually by regulation; in 2026 it stands at 4% per year above the Bank of Israel's rate, applied to the CPI-linked balance. The combined effect of linkage and interest on a six-month delay is roughly 4–6% of the outstanding amount.

What the ITA does not impose for advance payment shortfalls is a separate surcharge penalty (*knas*) as long as the taxpayer files the required monthly reports and pays something — even if the amount paid is less than the technically correct advance. The penalty system is designed to incentivize filing and partial payment rather than non-filing. A taxpayer who files monthly reports showing actual turnover but pays at a rate lower than the ITA's assigned rate will owe linkage and interest on the gap, but does not face an additional penalty for the underpayment itself.

Non-filing penalties. Failing to file the monthly advance payment report altogether — even if no payment is owed — triggers a fixed administrative penalty under Section 191C of the Ordinance, currently NIS 2,280 per unfiled period. This penalty applies separately from any underpayment interest and stacks per unfiled month.

In Practice: The ITA's Enforcement and Collection Authority (Rashut Givia v'Gviya) begins collection action on advance payment arrears after 90 days without payment or resolution. Collection tools include a bank account freeze (akavat cheshbon) and a restraint on leaving Israel (tzav atzira) for debts above approximately NIS 15,000. Foreign nationals who plan to travel from Israel regularly should treat advance payment arrears as a priority — a travel restriction discovered at Ben Gurion Airport is both disruptive and usually requires full immediate payment to lift.

7. Interaction With VAT and Bituach Leumi Payments

Self-employed foreign nationals in Israel juggle three separate payment streams that go to different government accounts on different filing cycles. Mixing them up — or treating them as a single obligation — is a reliable way to end up with penalties on two accounts at once.

Advance income tax payments (mikdamanot) go to the Israel Tax Authority, income tax account, under the taxpayer's income tax file number. Payment is due the 15th of each following month.

VAT payments (*mas erech musaf*) — for osek murshe businesses — go to the VAT Authority (Maamad), a separate division of the ITA, under the taxpayer's VAT file number. Payment is due on a monthly or bi-monthly cycle depending on turnover; the standard due date is the 15th for monthly filers and the 15th of the second month for bi-monthly filers. The ITA has been phasing in a requirement (rolling out through 2026) that VAT-registered businesses use Shaam for VAT reporting, which brings both payments onto the same portal but still requires separate submissions to separate accounts.

Bituach Leumi contributions (National Insurance Institute). Self-employed individuals pay National Insurance contributions monthly based on their declared income, under Sections 345–360 of the National Insurance Law 5755-1995. In 2026, the self-employed contribution rate is approximately 17.83% of income above the NIS 6,331 monthly minimum wage threshold, with a lower 6.72% rate on income up to the minimum wage. Bituach Leumi payments go to the NII directly, not the ITA — a third separate payment channel. Failure to pay Bituach Leumi on time accrues interest at the same linkage-plus-annual-interest formula as income tax.

Set a recurring calendar reminder for the 15th of each month. All three payments share that calendar date but go to different accounts under different file numbers — a single missed transfer to the wrong account can leave one authority paid and another accruing interest.

In Practice: An Israeli chartered accountant typically handles all three filings for a monthly retainer of NIS 600–1,500 for a straightforward osek murshe business. For foreign nationals who cannot read Hebrew and are unfamiliar with Israeli systems, this cost is almost always worth it in the first two years of operation. The accountant will also monitor the advance payment rate set by the ITA and flag when a reduction application would be advantageous — something a first-time foreign business owner is unlikely to identify on their own.

8. New Immigrants and Foreign Nationals: Special Considerations

Two categories of taxpayer have advance payment situations that differ from the general rules: new immigrants (*olim chadashim*) during the 10-year exemption period, and non-resident foreign nationals receiving Israeli-source income.

New immigrants during the 10-year exemption. Under Section 14(a) of the Income Tax Ordinance, a new immigrant's foreign-source income is exempt from Israeli tax for 10 years. This exemption reduces the advance payment obligation on foreign income to zero — there is no obligation to make advance income tax payments on income earned outside Israel from foreign clients or foreign employers. However, advance payments still apply to any Israeli-source income: revenue from Israeli clients, Israeli rental income, or income from Israeli customers.

Since January 2026, a separate reporting obligation under Amendment 268 to the Income Tax Ordinance requires new immigrants to file annual returns disclosing worldwide income — even during the exempt period. This reporting obligation does not create a payment obligation on exempt income, but it does require filing a nil-payment return for foreign income. The annual return filing interacts with the advance payment reconciliation at year-end: only Israeli-source income generates advance payments and year-end adjustments.

Non-resident foreign nationals with Israeli-source income. A non-resident who earns income in Israel — from Israeli clients as a freelancer, from Israeli rental property, or from an Israeli employer during a work assignment — is generally subject to withholding at source rather than the advance payment system. The Israeli payer (the client or employer) is required to withhold at the applicable rate under Section 164 of the Income Tax Ordinance and remit directly to the ITA. This withholding typically substitutes for the advance payment obligation, as long as the non-resident does not have a permanent establishment or registered business structure in Israel. A non-resident who does register a business (as an osek patur or osek murshe) crosses over into the advance payment regime and must make monthly payments on all Israeli-source business income.

In Practice: An oleh who made Aliyah in 2022 and still has significant consulting income from foreign clients in 2026 is within the 10-year exemption window. That foreign consulting income generates no advance payment obligation and no Israeli tax. If the same oleh also has NIS 5,000/month in Israeli apartment rental income, only the rental income triggers advance payments — at the ITA's assigned rate for that income stream, calculated on the rental yield. The ITA will typically assign a default rate of around 10–15% for rental-income taxpayers in the first year, consistent with the Section 122 flat-rate option. A tax advisor should confirm whether the flat Section 122 rate or the actual advance-payment-plus-annual-return route is more efficient for the oleh's specific situation.

Frequently Asked Questions

Log in to the ITA's Shaam portal at misim.gov.il using your Israeli identity number and the password assigned during registration. Navigate to "advance payments" (mikdamanot) to see your assigned rate. For a brand-new business, the ITA assigns a default rate from industry tables — typically within 2–4 weeks of registration. If no rate appears, contact your local ITA assessing office directly. Your accountant can also access your rate on your behalf with a power of attorney registered with the ITA.
You should still file the monthly report on Shaam by the 15th, even if you cannot pay the full amount. Report your actual turnover honestly. The ITA will apply CPI linkage and 4% annual interest on the underpaid amount — but no separate penalty for underpayment as long as you filed. If your income has dropped substantially, file a reduction application (hagasha) at the same time. Missing the report entirely — even with a zero-turnover month — risks the non-filing penalty of NIS 2,280 per period.
No. Advance payments are pre-payments on account — they do not substitute for the annual income tax return. Every self-employed person and company in Israel must file an annual return (doch shnatee) by the statutory deadline, typically April 30 for individual self-employed taxpayers (and later for companies, under extension agreements). The return reconciles actual tax liability against advance payments made during the year. If your advance payments exceed the true liability, you receive a refund with linkage; if they fall short, you pay the deficit. Filing the annual return on time is independent of whether you made all advance payments correctly.
Yes. An Israeli subsidiary (chevrat bat) is a separate Israeli legal entity and must register with the ITA, file corporate income tax returns, and make monthly advance company income tax payments under Section 175 of the Income Tax Ordinance. The rate is based on the prior year's effective corporate tax rate (23% of taxable income in 2026) divided by annual turnover. In the first year, the ITA assigns a default rate. The parent company's advance payment obligations in its own jurisdiction are entirely separate from the Israeli subsidiary's obligations.
Yes, in principle. A credit balance on your advance payment account — shown in your Shaam dashboard after the prior year's return is processed — can be used to offset current-year advance payment obligations. You must request this offset formally through the ITA; it does not happen automatically. Alternatively, you can request a refund of the credit, which the ITA pays with CPI linkage from the original payment date. Most tax advisors recommend requesting a refund rather than carrying the credit forward, to avoid administrative complexity in tracking the offset across periods.

Related Guides

Tax & Finance in Israel — Overview Self-Employment Tax in Israel for Foreigners VAT in Israel for Foreign Businesses Annual Income Tax Return in Israel Bituach Leumi for Foreigners in Israel Deductible Business Expenses in Israel
Adv. Eli Shimony

Adv. Eli Shimony

Licensed Israeli Attorney

Adv. Eli Shimony advises foreign nationals, expats, and international businesses on Israeli tax compliance, including self-employment registration, advance payment obligations, and annual tax filing.

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