Quick Answer: A foreign company can lawfully hire employees in Israel without an entity. Three routes exist: an Employer of Record (EOR) that holds a manpower contractor licence and becomes the legal employer; direct registration of your foreign company as an employer with the Israel Tax Authority and the National Insurance Institute; or a registered branch under the Companies Law 5759-1999. The EOR route takes one to two weeks but has a hard statutory ceiling. Under Section 12A of the Employment of Employees by Manpower Contractors Law 5756-1996, a worker placed with the same client for more than nine consecutive months becomes that client's own employee by operation of law, with seniority backdated to day one.

The question comes up almost every week. A software company in Boston finds the algorithms engineer it has been hunting for eighteen months, and she lives in Haifa. A German medical device manufacturer wants a regulatory affairs specialist on the ground in Tel Aviv. A London fund needs an analyst who can read Hebrew filings. In each case the company wants one person, not an Israeli subsidiary with a board, an auditor, and annual filings.

Israel makes this workable, and the number of foreign companies employing here without a local company has grown sharply since remote hiring became normal. What Israel does not do is soften the employment law that applies once the person starts working. Israeli protective legislation attaches to work performed on Israeli soil. Where the paying company is incorporated makes no difference to it, and neither does the governing law clause in the contract. Below are the three structures and the statutory floor that applies under all of them, along with the two traps that catch foreign employers most often: the nine-month rule and permanent establishment.

1. The Three Legal Routes for a Foreign Company

Before comparing providers or reading anyone's sales page, it helps to see the whole map. There are exactly three ways a foreign company puts an Israeli worker on a compliant payroll.

  • Employer of Record (EOR). A licensed Israeli company employs the worker under an Israeli employment contract and invoices you for salary, statutory costs, and a service fee. The EOR is the employer in law. Setup takes one to two weeks. This is the fastest route and the one most foreign companies start with.
  • Direct registration as a foreign employer. Your existing foreign company opens a withholding file (tik nikuyim) with the Israel Tax Authority and a matching employer file with the National Insurance Institute, then runs an Israeli payroll itself through a local bookkeeper. No Israeli company is incorporated. This route is underused because few advisers mention it, and it removes the nine-month problem entirely.
  • Israeli subsidiary or registered branch. A private limited company (chevra ba'am) registered with the Registrar of Companies, or a branch registered as a foreign company under section 346 of the Companies Law 5759-1999. Incorporation takes about seven to fourteen business days once documents are apostilled. This is the destination for most companies that stay in Israel beyond a year or grow past a handful of employees.

The routes are not mutually exclusive over time. A sensible sequence is to start with an EOR while you test the market, then move to direct registration or a subsidiary before the nine-month clock runs out. What causes problems is drifting past the ceiling because nobody was watching the calendar.

In Practice — Registering as a Foreign Employer Without Incorporating: A foreign company can hold an Israeli payroll file without any Israeli company behind it. The application goes to the regional assessing officer of the Israel Tax Authority for the withholding file, and to the National Insurance Institute for the parallel employer file. You will need the certificate of incorporation with an apostille, translated articles of association, a board resolution appointing an Israeli resident representative, that representative's Israeli ID, and a power of attorney. The Tax Authority requires a local representative who can be served and who carries responsibility for the withholding obligations, which mirrors the requirement under section 68 of the Value Added Tax Law 5736-1975. Allow four to eight weeks end to end, longer if apostilles are slow in your home country. Monthly filings are then due by the 15th of the following month for both the Tax Authority and the National Insurance Institute. See our guide on appointing an Israeli representative for a foreign company for what that role carries.

2. How an Employer of Record Actually Works Under Israeli Law

Israeli law contains no statute called "Employer of Record." The term is commercial. Legally, what an EOR does falls under the Employment of Employees by Manpower Contractors Law 5756-1996 (chok ha'asakat ovdim al yedei kablanei koach adam), the statute the Knesset passed to regulate temporary staffing agencies after a wave of abuses in the 1990s.

The law imposes two requirements that matter to you as a client. A manpower contractor must hold a licence issued by the Ministry of Labour, and it must post a financial guarantee that the State can call on for the benefit of workers if the contractor defaults. Both requirements exist to protect the employee, but they also protect you: a licensed provider with a posted guarantee is far less likely to leave you facing a claim from an unpaid worker.

The structure involves two contracts. The EOR signs an Israeli employment contract with the worker, in Hebrew or in English, satisfying the Notification to Employee (Employment Terms) Law 5762-2002, which requires written particulars within 30 days of the start date. Separately, the EOR signs a services agreement with you. The worker takes day-to-day direction from your managers, which is exactly what the statute anticipates and exactly what creates the nine-month exposure discussed below.

Section 13 of the Law adds a further obligation that surprises foreign employers. Where a collective agreement applies at the workplace where the manpower employee is placed, the terms of that agreement apply to the placed worker too. For a foreign company with no Israeli workplace this is usually academic, since the worker sits at home or in a co-working space. It becomes real if you later open an Israeli office where other terms apply.

In Practice — Verify the Licence Before You Sign: Ask any prospective provider for its manpower contractor licence number and the name on the licence, then confirm it against the Ministry of Labour's register of licensed manpower contractors. Two distinctions matter. A licence as a kablan sherutim (service contractor, used for cleaning, security, and catering) is not the same as a licence as a kablan koach adam (manpower contractor), and only the latter covers placing a worker under your direction. Second, check that the licence is held by the Israeli entity that will actually sign the employment contract, not by an affiliate in another country. Where a provider operates without the required licence, an Israeli Regional Labour Court is likely to treat the placement as a direct employment relationship between the worker and you from the outset, which is precisely the outcome you engaged the EOR to avoid.

3. The Nine-Month Rule: Israel's Hardest EOR Ceiling

Section 12A is the provision almost no foreign company has heard of, and it does more damage than anything else covered here.

The Employment of Employees by Manpower Contractors Law provides that where a manpower contractor's employee has worked for the same actual employer for more than nine consecutive months, that worker is deemed an employee of the actual employer. Not "may be treated as." Deemed, by operation of statute. The Minister of Labour has power to permit limited extensions in defined circumstances, but for an ordinary commercial placement nine months is the ceiling.

Two consequences follow, and both are expensive.

First, seniority runs from the first day of the placement, not from the nine-month mark. Everything that accrues with seniority accrues from day one: severance under the Severance Pay Law 5723-1963, annual leave scaling, advance notice periods, and pension entitlement. If a dispute surfaces three years later, the court counts from the original start date.

Second, you become the employer of an Israeli employee while having no Israeli employer registration. That means unremitted withholding, unpaid national insurance, and no pension arrangement in your name. The Israel Tax Authority and the National Insurance Institute will look for those payments from you, with interest and linkage differentials, and the deemed employment date also becomes a strong fact for a permanent establishment argument.

Several workarounds circulate, and Israeli labour courts have seen all of them. Rotating the worker between EOR vendors while the work and the manager stay the same does not reset the clock, because section 12A counts time with the actual employer, not with the contractor. A one-month gap inserted to break continuity is treated as artificial where the worker returns to the same role. Relabelling the arrangement as a service contract while the worker still reports to your team does not change the substance. Israeli labour law is consistently substance-over-form, and the Regional Labour Courts apply that principle without much sympathy for creative structuring.

In Practice — How the Nine-Month Clock Plays Out: A US-headquartered SaaS company placed three engineers in Israel through a Tel Aviv EOR in January 2025 at NIS 32,000 gross each. Nobody diarised the section 12A date. In February 2026, fourteen months in, one engineer resigned and filed a claim in the Tel Aviv Regional Labour Court seeking severance and pension contributions calculated against the US parent as her true employer from day one. Working from a NIS 32,000 monthly salary, fourteen months of severance exposure alone is roughly NIS 37,300 per employee, before pension shortfalls, advance notice, and the claimant's legal costs. The company settled, then registered a withholding file and moved all three engineers onto a direct Israeli payroll. The fix that would have cost nothing: a calendar reminder at month seven, giving eight weeks to complete the Tax Authority and National Insurance Institute registrations before the ceiling hit.

4. The Employment Rights That Apply Regardless of Structure

Whichever route you choose, the same statutory floor applies to a person working from Israel. These entitlements cannot be waived, reduced, or displaced by a foreign governing law clause. A Regional Labour Court will apply them to work performed on Israeli soil.

  • Minimum wage. Under the Minimum Wage Law 5747-1987, the 2026 monthly minimum is NIS 6,443.85, equivalent to NIS 34.64 per hour. This is a gross floor; national insurance, pension, and severance provisioning sit on top of it.
  • Wage payment timing. The Wage Protection Law 5718-1958 requires salary to be paid by the 9th of the month following the month worked. Late payment triggers statutory delay compensation, which accumulates quickly and is awarded routinely.
  • Working hours. The Hours of Work and Rest Law 5711-1951 sets a standard week of 42 hours, with overtime at 125 percent for the first two hours beyond the daily norm and 150 percent thereafter, plus a weekly rest period of at least 36 consecutive hours.
  • Annual leave. The Annual Leave Law 5711-1951 provides 16 days per year in the early years of employment, which works out to 12 working days on a five-day week, rising with seniority. Unused leave is payable on termination.
  • Sick pay. Under the Sick Pay Law 5736-1976, employees accrue 1.5 days per month to a ceiling of 90 days. The first day is unpaid, the second and third are paid at 50 percent, and from the fourth day the employee receives full pay.
  • Recuperation pay. Dmei havraa is mandatory under a general expansion order, at approximately NIS 471 to NIS 478 per day in 2026, starting at 5 days after the first year of employment and increasing with seniority.
  • Pension and severance provisioning. The mandatory pension expansion order requires employer contributions of 6.5 percent for pension plus 8.33 percent for the severance component, against 6 percent from the employee. Contributions begin after six months, or from the third month backdated to day one where the employee already holds an active pension fund. Our guide on mandatory pension for foreign employees covers the mechanics.
  • Severance pay. The Severance Pay Law 5723-1963 provides one month's salary per year of service on dismissal, and in defined circumstances on resignation as well.
  • Advance notice. The Advance Notice for Dismissal and Resignation Law 5761-2001 requires one day per month during the first year, rising to a full month after a year of service.
  • Equality and harassment. The Employment (Equal Opportunities) Law 5748-1988 and the Prevention of Sexual Harassment Law 5758-1998 both apply. The latter obliges employers to publish a written policy and designate a responsible officer.

Confirm current rates before you budget. Minimum wage, recuperation pay, and national insurance thresholds are all adjusted periodically, and the National Insurance Institute publishes updated figures each January. For a fuller treatment of the statutory picture, see our guide on Israeli employment law for foreign employers.

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5. What It Actually Costs to Employ Someone in Israel

Foreign companies routinely underestimate Israeli employment cost by comparing gross salary to gross salary. Israeli employer burden is meaningful, and an EOR fee sits on top of it.

Employer national insurance is charged at a reduced rate on the first tranche of monthly salary, roughly the first NIS 6,300 in 2026, and at a higher rate above that, subject to a maximum insured income ceiling. Combined with the 14.83 percent pension and severance provision and recuperation pay, plan on a statutory employer burden of roughly 20 to 30 percent over gross, weighted toward the upper end for higher salaries. The National Insurance Institute publishes the exact bracket rates; check them rather than working from an older figure.

EOR service fees come in two shapes. Flat monthly fees typically run from about NIS 800 to NIS 1,800 per employee. Percentage fees typically run 8 to 15 percent of gross salary, which becomes the expensive option quickly at Israeli tech salaries. For a NIS 40,000 engineer, a 10 percent fee is NIS 4,000 a month, or NIS 48,000 a year, against roughly NIS 15,000 a year on a flat NIS 1,250 arrangement.

Three cost items appear on invoices and catch people out. Israeli VAT at 18 percent may apply to the service fee, and whether a foreign client qualifies for zero-rating on exported services is fact-specific; raise it with the provider before signing rather than after the first invoice. Second, most providers charge a one-time onboarding fee of roughly NIS 1,500 to NIS 3,000 per employee. Third, providers commonly require a security deposit equal to one or two months of total employment cost, held against termination liabilities.

In Practice — A Worked Cost Example at NIS 30,000 Gross: Take a mid-level developer on NIS 30,000 per month. Pension and severance provisioning at 14.83 percent adds NIS 4,449. Employer national insurance, blended across the two brackets, lands in the region of NIS 3,000 to NIS 3,500. Recuperation pay of 5 days at approximately NIS 475 spreads to about NIS 198 per month. Statutory employer cost therefore sits near NIS 37,650 to NIS 38,150. Add a flat EOR fee of NIS 1,200 and the all-in monthly figure is roughly NIS 38,850 to NIS 39,350, or about 30 percent over the headline salary. On a percentage fee of 12 percent instead, the same hire costs about NIS 41,250 a month, a difference of nearly NIS 29,000 across a year. For a detailed breakdown of the payroll tax side, see our guide on employer payroll taxes and national insurance in Israel.

6. Permanent Establishment: When Hiring Creates an Israeli Tax Presence

An EOR does not insulate you from Israeli corporate tax. This is the most consequential misunderstanding in the market, because EOR marketing frequently implies otherwise.

The Israel Tax Authority assesses permanent establishment by looking at the activity carried on in Israel, not at the identity on the payslip. Under Article 5 of Israel's tax treaties, which follow the OECD Model, a foreign company has a permanent establishment where it maintains a fixed place of business in Israel, or where a dependent agent habitually concludes contracts in its name or habitually plays the principal role leading to the conclusion of contracts. Neither test asks who employs the person.

What the person does is what matters. Roles that rarely create a permanent establishment on their own include software development for a product sold abroad, research work, back-office processing, and technical support. Roles that create real exposure include sales, business development, a country manager title, anyone with signing authority or effective negotiating authority, and anyone described publicly as your Israeli office. The Tax Authority has also published guidance on internet activity by foreign companies in Israel, which considers factors beyond physical presence when assessing whether a digital business has a taxable presence here.

Where a permanent establishment is found, the profit attributable to Israeli activity is subject to Israeli corporate tax, currently 23 percent, and the company must file Israeli returns. Transfer pricing rules under section 85A of the Income Tax Ordinance then apply to the attribution, typically producing a cost-plus computation on the Israeli functions. Assessments frequently arrive years after the fact, when the Tax Authority reviews an unrelated matter and notices Israeli-based staff on LinkedIn.

In Practice — The Title on the Business Card Matters: Two foreign companies each hired one person in Israel through the same EOR. Company A hired a backend engineer who committed code to a repository managed from Amsterdam and had no customer contact. Company B hired someone with the title "Country Manager, Israel," who met Israeli customers, negotiated pricing, and signed a standard order form that headquarters countersigned as a formality. Both paid the same EOR fee. Only Company B faces a serious dependent agent argument under Article 5 of the applicable treaty, with attributable profit taxable at 23 percent and transfer pricing documentation required under section 85A of the Income Tax Ordinance. Before you finalise a job title, an email signature, or a LinkedIn description for an Israeli hire, have Israeli tax counsel review it. Changing a title costs nothing in month one and is very hard to unwind in year three.

7. Two Problems an EOR Creates for Technology Companies

For companies whose value sits in intellectual property or in equity incentives, the EOR structure introduces two issues that have nothing to do with payroll.

Intellectual property does not reach you automatically

Under sections 132 to 134 of the Patents Law 5727-1967, a service invention made by an employee in the course of and in consequence of employment belongs to the employer unless agreed otherwise. Section 34 of the Copyright Law 5768-2007 works similarly for works created in the course of employment. The employer in an EOR arrangement is the EOR, not you.

That means the invention or the code vests first in the EOR. Getting it to you requires a written chain of assignment: employee to EOR, then EOR to client. Reputable providers build this into their templates. Others do not, or their assignment clause covers copyright but is silent on patents and inventions. Read the actual clause. A gap here is invisible until a due diligence lawyer finds it during your Series B, at which point you are chasing signatures from a developer who left eighteen months ago. Our guide on employee invention rights in Israel covers the statutory framework and the compensation question that sits alongside it.

Section 102 stock options generally do not work

Section 102 of the Income Tax Ordinance is what makes Israeli equity compensation attractive: grants through a trustee, held for at least 24 months, are taxed on sale at 25 percent as capital gains rather than at marginal income rates approaching 50 percent.

The relief depends on the grant flowing through an employment relationship with the granting company or a company within its group. A worker employed by an unrelated EOR does not sit inside that group. Grants to such workers generally fall outside the section 102 capital gains track and are taxed under section 3(i) as ordinary income at marginal rates when exercised. The tax difference on a meaningful grant runs to hundreds of thousands of shekels, and it lands on the employee, who will not be pleased to discover it at exit.

Practical consequence: if equity is part of your Israeli compensation package, an EOR is a stopgap rather than a plan. Companies that intend to grant options should incorporate an Israeli subsidiary and file the section 102 plan with the Israel Tax Authority at least 30 days before the first grant. See our guide on Section 102 employee stock options in Israel for the filing mechanics and trustee requirements.

8. Termination, and Knowing When to Open Your Own Entity

Israeli dismissal procedure is more formal than in most common law jurisdictions, and it applies to EOR employees exactly as it applies to anyone else.

Israeli labour courts require a hearing (shimua) before dismissal. The employee must receive written notice of the hearing a reasonable time in advance, stating the concerns; must have a genuine opportunity to respond, with representation if requested; minutes must be kept; and the decision must be taken after real consideration rather than announced as a formality. Skipping or staging the hearing regularly produces awards in the Regional Labour Courts running from tens of thousands of shekels upward, separate from severance.

In an EOR arrangement the EOR is the legal employer and must run the hearing. Commercially, you decide. Courts have looked through that gap where the client made the decision and the contractor merely processed it, so involve the EOR properly and early rather than announcing a decision it has to rubber-stamp.

Two protections deserve specific attention. Under the Women's Employment Law 5714-1954, an employee who has completed six months of service and is pregnant cannot be dismissed without a permit from the Employment of Women Commissioner at the Ministry of Labour, and protection continues for a period after maternity leave ends. Separately, where the section 14 arrangement under the Severance Pay Law is in place, the severance component accumulated in the pension fund discharges the severance obligation, which is why confirming that arrangement is documented at the outset matters so much at the end.

As for when to stop using an EOR, the honest answer is that four signals should trigger the decision, and any one of them is enough: you are approaching month seven of a placement; you have reached three or more Israeli hires; you want to grant equity; or your Israeli hire has a commercial rather than a technical role. Our guides on registering a company in Israel as a foreigner and opening a foreign branch office in Israel set out what each option involves. If your Israeli hire is not an Israeli citizen or permanent resident, add work visa sponsorship to the analysis, since an EOR can sponsor but the process runs through PIBA on its own timeline; our guide on work visas in Israel covers that.

In Practice — A Clean Migration From EOR to Direct Employment: Moving an employee off an EOR is a termination from the EOR and a fresh hire by you, and it needs care. Agree with the provider in writing that seniority carries over and that the accumulated pension and severance funds transfer to a policy in the new employer's name; without that, the employee loses continuity and may claim severance from the EOR at the transition. Budget six to eight weeks: four to eight weeks for the Tax Authority withholding file and the National Insurance Institute employer file, running in parallel with a 30-day notice period to the EOR under most services agreements. Issue the new Israeli employment contract before the last EOR payslip so there is no gap month, and confirm the section 14 arrangement is documented in the new contract from day one. Employees notice the transition, so explain it before HR does.

Hiring in Israel without an entity is legitimate and common, and an EOR solves a real problem quickly. The mistake is treating it as a permanent structure. It is a bridge with a nine-month span, so put the expiry date in a calendar the day you sign, and have someone look at the job title before the offer letter goes out. For the classification question that sits next to all of this, see our guide on contractor versus employee status in Israel.