IsraelLaw
Israeli tech companies, startups, and professional firms regularly hire people they never expect to see in an Israeli office. A backend developer in Berlin, a sales lead in London, a data analyst in Toronto. The arrangement is appealing: access to global talent, no Israeli work-permit complications, no need for a foreign subsidiary. The Israeli side often assumes a standard employment contract and a monthly wire transfer is enough. That assumption tends to create more exposure than it removes.
This guide covers what both the Israeli employer and the foreign employee need to know: which country's law governs the relationship, how taxes work, what permanent establishment means in practice, and what options exist for companies that want to stay compliant without setting up a foreign entity.
1. Which Employment Law Applies?
The default rule under private international law is that the employment law of the country where the employee performs their work governs the relationship. This principle, sometimes called lex loci laboris, applies in most of the countries Israeli companies hire into: the EU member states, the United Kingdom, the United States, Canada, and Australia all follow it in some form.
Practically, this means an Israeli company hiring someone who lives and works in Germany is bound by German employment law. German mandatory notice periods, German severance rules, German statutory vacation, German Works Constitution Act consultation rights if the employee is later included in a collective redundancy: these apply regardless of what the contract says about Israeli law governing the relationship.
Parties can choose Israeli law as the governing law in their contract. Israeli courts and foreign courts will often respect that choice for matters the parties can legitimately agree on, such as bonus calculation methods or intellectual property ownership. What they cannot agree on is to strip the employee of mandatory protections the local law grants them. A German employee who was owed a German-law termination payment cannot be deprived of it by a clause saying "Israeli law applies."
For employees in countries with weaker mandatory employee protections, choosing Israeli law may actually give the employee stronger rights than local law would. Israeli employees generally have minimum notice periods, severance pay rights, and mandatory pension contributions under the Wage Protection Law 5718-1958, the Severance Pay Law 5723-1963, and the Pension Insurance Expansion Order. Whether those protections apply to a foreign-based employee under a choice-of-Israeli-law clause is fact-specific and territory-specific.
Before writing the employment contract, the Israeli company should get a one-page summary of the mandatory employment rules in the employee's country. At minimum: minimum notice period, any mandatory severance, statutory minimum vacation, and whether the country requires a written employment agreement in a specific form. This costs less than the first dispute it prevents. If the foreign legal review reveals that local rules are substantially more protective than what the company was planning to offer, the company can reconsider the structure before anyone has signed anything.
2. Israeli Income Tax Withholding
Section 164 of the Income Tax Ordinance 1961 requires Israeli employers to deduct income tax at source from wages paid to employees. The obligation applies to wages that are Israeli-source income. Income is Israeli-source if it is earned from work performed in Israel or if the employee is an Israeli tax resident.
A foreign national who works entirely from their own country, is not an Israeli citizen, and spends fewer than 183 days per year in Israel is generally not an Israeli tax resident and is not generating Israeli-source income from their remote work. The Israeli employer accordingly has no Israeli income tax withholding obligation on their wages.
The employee pays income tax in their own country on their employment income. For the employee, the arrangement looks straightforward: they receive their salary, pay taxes where they live, and the Israeli company's withholding procedures are irrelevant to them.
Two complications arise. First, if the employee visits Israel periodically for meetings, training, or client work, the days worked in Israel may generate partial Israeli-source income. The Israel Tax Authority's position is that work performed physically in Israel by a non-resident is taxable in Israel on a pro-rata basis under most of Israel's bilateral tax treaties. The employer should track those days and may need to withhold on the Israel-portion of the salary for visit periods.
Second, the arrangement should be documented. If the Israel Tax Authority audits the company and sees wage payments going to a foreign individual without any withholding, it will ask why. Having a clear record showing the employee's tax residency abroad, their physical work location, and the absence of regular Israeli-based work is what answers that question cleanly.
The Israel Tax Authority's withholding rules are designed for straightforward cases. When an employee starts traveling to Israel regularly for work, the arrangement shifts from clearly exempt to ambiguous, and the company needs to work out the pro-rata withholding with its Israeli accountant. Some companies avoid the complication entirely by keeping in-person work below a threshold (typically under 30 days per year) and treating all visits as short-term business trips rather than part of the employment performance. That threshold is not a statutory safe harbor; it reflects common practice, and the Tax Authority can question it.
3. The Permanent Establishment Risk
Permanent establishment (PE) is a tax concept defined in bilateral tax treaties between countries. If an Israeli company has a PE in another country, that country can tax the profits attributable to the PE as if it were a local company. The PE risk from remote employees is one of the most discussed topics in international tax since remote work became widespread.
Under the OECD Model Tax Convention, which most of Israel's bilateral tax treaties follow, a PE can arise in two ways relevant to remote employees:
- Fixed place of business: The employee's home office, if the Israeli company requires or effectively uses it as a regular place of business, can constitute a fixed place of business in the employee's country. The November 2025 update to the OECD Model Commentary clarified that a home office does not automatically create a PE, particularly when the employee chooses to work from home and the company does not regularly provide office space in that country. But if the company closes its foreign office and directs employees to work from home as a deliberate cost-saving measure, the analysis changes.
- Dependent agent: An employee who habitually concludes contracts in the Israeli company's name, or who habitually plays the principal role in concluding contracts that are routinely approved without material modification, is a dependent agent. That creates a PE regardless of whether they have a fixed office. A sales employee who signs contracts, a country manager who commits the Israeli company to commercial terms, or an account executive with authority to agree pricing without prior Israeli approval may all qualify.
If a PE exists, the employee's country can require the Israeli company to file a local corporate tax return, attribute profits to the PE, and pay local corporate tax on those profits. It may also require VAT registration if the PE is making local supplies. The Israeli company would still be subject to Israeli corporate income tax on its worldwide profits, though the double taxation treaty should provide relief through a foreign tax credit.
The practical test for a dependent agent PE is contract authority, not title or seniority. A developer with the title "Senior Engineer" who never commits the company to anything has essentially no PE risk. A business development representative with authority to negotiate and sign sales contracts has significant PE risk in the country they work from, even if every contract is below a threshold that also requires Israeli signoff. When structuring the role, limit the foreign employee's authority to recommendations and proposals rather than binding commitments, and document that Israeli sign-off is required for all commercial agreements.
4. Social Security and National Insurance
Social security is handled separately from income tax, and the rules can produce double-contribution scenarios that are more expensive than they look.
Under the National Insurance Law 5755-1995, Israeli employers pay National Insurance (*Bituach Leumi*) contributions for their employees. The standard rule is that contributions are due for employees who work in Israel. For employees who work entirely outside Israel, Israeli NII contributions are generally not due from either the employer or the employee.
The employee's country has its own social security system. For employees in EU member states, the UK, the US, and many other countries, the employer may be required to register as a foreign employer and pay employer-side social security contributions in that country. This obligation exists regardless of whether the employer has a PE there.
Bilateral social security totalization agreements eliminate double contributions by designating one country's system as the applicable one for a given employment relationship. Israel has totalization agreements with a number of countries. Where an agreement applies, the employer and employee contribute to one system only, and the agreement provides for portability of benefit entitlements. Where no agreement applies, the employee pays into their own country's social security while the Israeli employer may face obligations in both systems.
Checking whether a totalization agreement exists, and what it says about remote workers employed by companies in the other treaty country, should be one of the first steps when setting up a cross-border employment arrangement.
5. The Employment Contract
A well-drafted employment contract for a cross-border arrangement should deal explicitly with the following:
- Governing law and jurisdiction: State which country's law governs and which courts have jurisdiction for disputes. As noted above, the choice of law cannot override mandatory local protections, but it determines what the parties expect and simplifies disputes about non-mandatory terms.
- Work location: Specify the country and city where the employee works. This matters for tax, for employment law classification, and for PE analysis. If the employee can work from anywhere, that flexibility has compliance consequences the company should understand.
- Intellectual property: Israeli law under the Patents Law 5727-1967 and Copyright Law 5768-2007 provides that work created in the course of employment belongs to the employer. Many foreign legal systems have comparable provisions, but they vary. The contract should contain an explicit IP assignment clause covering all materials, software, and inventions created in connection with the employment.
- Confidentiality and trade secrets: Even if the employee's country recognizes implied confidentiality duties, an explicit clause referencing the Commercial Torts Law 5759-1999 and local equivalent is better than relying on implication.
- Notice and termination: State the notice period applicable under local law and confirm whether the company is offering anything beyond the statutory minimum. If Israeli-law notice is more generous than local law requires, the contract should say so and confirm that the more generous term applies.
Many Israeli companies send their standard Israeli employment contract to foreign employees with the salaries converted to the local currency. This creates several problems at once: the contract refers to Israeli statutory rights that the employee may not have, it fails to include local mandatory provisions that the company is required to give (in the EU, for instance, the EU Transparent and Predictable Working Conditions Directive requires specific written information), and it may not be enforceable in the employee's jurisdiction if it was never translated into the local language. A bilingual contract reviewed by local counsel in each country the company hires into is the minimum required standard.
6. The Employer of Record Option
An Employer of Record (EOR) is a company incorporated in the employee's country that acts as the formal employer for local compliance purposes. The Israeli company enters a service agreement with the EOR rather than a direct employment contract with the employee. Under that structure:
- The EOR employs the worker under a local-law employment contract.
- The EOR handles payroll, withholds local income tax, and pays local employer social security contributions.
- The Israeli company pays the EOR a monthly fee that covers the employee's gross salary plus employer contributions plus the EOR's service fee.
- The Israeli company retains effective control over the employee's daily work through the service agreement.
The EOR arrangement eliminates the Israeli company's direct employment law exposure in the foreign country and largely resolves the social security double-contribution problem. It does not eliminate all PE risk: if the arrangement looks like a sham designed to disguise what is substantively an Israeli-company employment relationship with contract-concluding authority, tax authorities in both countries can look through the structure. But for employees who genuinely function as individual contributors without binding commercial authority, the EOR is an effective compliance solution.
EOR services are commercially available through a number of global platforms. Pricing typically runs between USD 500 and USD 1,500 per employee per month depending on country. For small headcounts in one or two countries, this is usually cheaper than setting up a foreign subsidiary, maintaining foreign accounting, and filing foreign corporate tax returns.
7. If the Employee Moves to Israel
What starts as a purely foreign employment relationship sometimes changes. A foreign employee who makes aliyah, marries an Israeli citizen, or takes a long posting in Tel Aviv may become an Israeli tax resident. That changes everything: the Israeli employer's withholding obligation applies, the full Israeli labor law framework applies (including mandatory pension contributions, vacation accrual, and severance pay), and any existing foreign-law employment contract may need to be amended or replaced.
Under the Income Tax Ordinance, a person becomes an Israeli tax resident when Israel is their center of life, applying a presumption based on days present: more than 183 days in Israel in a tax year, or more than 30 days in that year combined with more than 425 days over the past three years, creates a presumption of Israeli tax residency that the individual can rebut. Once the employee becomes an Israeli tax resident, the Israeli employer must withhold income tax in the standard way and comply with Israeli labor law in full.
The transition moment is often not obvious to either side. Israeli labor law under the Employment Service Law 5719-1959 and related legislation generally applies from the date Israeli residency is established, not from when the company notices it happened. If a company has been paying an employee without Israeli-law compliance for two years and the employee was in fact Israeli-resident for the last eighteen months of that period, the exposure covers the period of non-compliance retroactively.
Include a clause in the employment contract requiring the employee to notify the company within 30 days if they relocate to Israel or spend more than 100 days in any calendar year in Israel. That notification clause does not transfer legal liability from the company to the employee, but it creates a clear obligation and a basis for restructuring the arrangement if the employee's status changes. Without it, Israeli-based compliance obligations can quietly accumulate for months before anyone addresses them.
Frequently Asked Questions
Generally no. The default rule under private international law is that the labor law of the country where the employee performs their work governs the relationship. An Israeli company hiring a developer who lives and works in Germany is bound by German employment law: German notice periods, German severance rights, German mandatory vacation, and German anti-discrimination rules. The parties can choose Israeli law as the governing law in their contract, but that choice cannot strip the employee of mandatory protections they would have had under the law of their home country.
No, unless the employee is an Israeli tax resident or the work is performed partly in Israel. Under Section 164 of the Income Tax Ordinance, Israeli employers must withhold income tax from wages earned in Israel. A foreign national who performs all their work outside Israel is not generating Israeli-source income and falls outside the withholding obligation. The employee pays income tax in their own country. The Israeli employer should retain documentation confirming the employee's foreign residence and work location in case the Israel Tax Authority ever queries the arrangement.
If the employee has authority to conclude contracts on behalf of the Israeli company, or habitually plays the principal role in concluding contracts that are routinely approved without material modification, most tax treaties define that as a dependent agent permanent establishment. That exposes the Israeli company to corporate income tax in the employee's country on the profits attributable to the PE. Even without contract authority, a fixed home office used regularly for the company's business can constitute a fixed-place PE under some treaty interpretations. The November 2025 OECD model commentary update clarified that a home office does not automatically create a PE, but Israeli tax counsel should review the specific treaty before the employee starts work.
It depends on whether Israel and the employee's country have a bilateral social security (totalization) agreement. Where such an agreement exists, it designates one country's social security system as the applicable one, avoiding double contributions. Where no agreement exists, the employee typically contributes to their own country's social security, while the Israeli employer may also face Israeli National Insurance obligations under the National Insurance Law 5755-1995. This double-contribution scenario is one of the main reasons Israeli companies use an Employer of Record for foreign staff.
An Employer of Record (EOR) is a third-party company incorporated in the employee's country that officially employs the worker, handles payroll, withholds local taxes, and pays local social security contributions. The Israeli company pays the EOR a monthly fee and directs the employee's work under a service agreement rather than a direct employment contract. The EOR becomes the legal employer for local compliance purposes, eliminating the Israeli company's direct exposure to foreign labor law, tax withholding, and much of the permanent establishment risk from the employment relationship itself.