IsraelLawWithholding Tax on Payments to Foreign Contractors in Israel: A Complete Guide
Quick answer: When an Israeli company or individual pays a fee to a non-resident service provider — a foreign consultant, software developer, contractor, or adviser — Section 170 of the Income Tax Ordinance [New Version] 5721-1961 requires the Israeli payer to withhold income tax at source before transferring any funds abroad. The standard rate is 25% of the gross payment for non-resident individuals and the corporate income tax rate of 23% for foreign companies. The withholding obligation falls entirely on the Israeli payer: if they pay without withholding, the Israel Tax Authority (ITA) holds them personally liable for the full withheld amount plus interest and penalties. A foreign contractor can reduce or eliminate Israeli withholding in two ways: by obtaining a reduced-rate withholding certificate (ishur nikui mimas) from the ITA before invoicing, or by relying on an applicable tax treaty that covers service income. Neither route is automatic — both require advance action.
Every year, thousands of foreign professionals and companies provide services to Israeli clients: software developers in Eastern Europe building for Israeli startups, US law firms advising on Israeli M&A transactions, UK accountants auditing Israeli subsidiaries, freelance designers and consultants of all kinds. Many of them invoice Israel as they would any other client and expect to receive the full invoice amount.
They are often surprised when payment arrives short. The missing amount is Israeli withholding tax, deducted by the Israeli payer under Section 170 of the Income Tax Ordinance. The Israeli client is not trying to shortchange the contractor. They are complying with a statutory obligation, and paying without withholding would expose them to direct ITA liability.
What Section 170 says and when it applies
Section 170 of the Income Tax Ordinance [New Version] 5721-1961 is the primary withholding-at-source mechanism for payments to non-residents. It directs every person who pays income to a non-resident that is chargeable to Israeli income tax to deduct the tax from the payment and remit it to the ITA. The obligation falls on the payer, not on the non-resident recipient, even though it is the non-resident's income tax liability being satisfied.
The triggering condition is that the income must be chargeable to Israeli tax. Under Section 4A of the ITO, income is Israel-source when it arises from activity performed in Israel, from property situated in Israel, or from a business operated in Israel. Services performed physically in Israel — a foreign consultant who flies to Tel Aviv and delivers a workshop, a foreign engineer who installs equipment at an Israeli factory — create clear Israeli-source income. Services performed entirely abroad for an Israeli client are more complex: the ITA's default position is that where the ultimate economic benefit flows to Israel, the income has an Israeli nexus, but this analysis turns on the specific facts of each engagement.
The Withholding Tax Regulations (Takkanot Mas Hachnasah (Tashlumim she'einam Tamid Hekhret Nikui Mimas)) specify categories of payment that do not require withholding, primarily where the non-resident clearly has no Israeli tax liability. These exemptions are narrow. When uncertain, withholding is the conservative and legally correct default.
In Practice — Services Performed Outside Israel: A French software development house signs a contract to build a custom platform for an Israeli startup. All coding is done in Paris; the French developers never visit Israel. The Israeli startup's legal and tax advisers must still assess whether the payment constitutes Israel-source income before paying without withholding. The ITA's published guidance and case law distinguish between a simple sale of a finished software product (likely not Israel-source income) and an ongoing development service contract where specifications, project management, and testing oversight come from the Israeli client (more likely to be treated as Israel-source). When uncertain, many Israeli companies either request an ITA ruling or apply for a withholding certificate before paying.
Who is the payer required to withhold
Any person (Israeli company, individual, partnership, trust, or other entity) that pays income to a non-resident chargeable to Israeli tax must withhold under Section 170. The obligation is not limited to large companies or formal employment relationships.
Common scenarios where the withholding obligation arises:
- Israeli tech company paying a foreign software contractor or SaaS developer
- Israeli law firm paying referral fees to a foreign law firm for client introductions
- Israeli real estate developer paying management fees to a foreign parent company
- Israeli individual paying a foreign architect or designer for personal project work performed in Israel
- Israeli startup paying a foreign board member's director fees
- Israeli company paying royalties or license fees to a foreign IP holder
The obligation does not disappear because the payment is structured as a wire transfer to a foreign bank account, invoiced in foreign currency, or made through an intermediary. The ITA looks to the substance of the payment, not its form. An Israeli company that pays a foreign contractor through a foreign subsidiary to circumvent Section 170 remains the withholding agent under the ITO if the economic substance shows the payment is Israeli-source.
Standard withholding rates
The ITO and its subordinate regulations set the following standard withholding rates for payments to non-residents:
| Recipient Type | Standard Rate | Notes |
|---|---|---|
| Non-resident individual | 25% | On gross payment; no deduction for expenses |
| Non-resident company | 23% | Corporate income tax rate; on gross payment |
| Dividends to non-residents | 25% | 30% if recipient holds >10% of paying company |
| Interest to non-residents | 25% | Lower rates for certain approved instruments |
| Royalties to non-residents | 25% | IP license payments treated as royalties |
Withholding is calculated on the gross amount of each payment, not on estimated net profit. A foreign consultant who charges NIS 100,000 for a project, incurring NIS 60,000 in costs to deliver it, will still have NIS 25,000 withheld (25% of 100,000). The ITO does not allow expense deductions at source. The foreign contractor must file an Israeli tax return to claim actual expenses and recover over-withheld amounts, a process that typically takes 12 to 24 months.
In Practice — The Cost of Getting This Wrong: An Israeli startup pays USD 200,000 in development fees to a US LLC over 12 months without withholding, relying on the contractor's assurance that "US companies don't pay Israeli tax." The ITA audits the startup two years later and assesses it for the full NIS equivalent of the 23% withholding that should have been deducted (approximately NIS 175,000), plus annual interest at the ITO rate and a penalty of up to 30% for non-willful failure. The startup cannot recover this from the US contractor after the fact without a contractual indemnity clause, and enforcing that against a foreign party is its own problem. The startup absorbs the full cost.
How to obtain a reduced-rate or exemption certificate
The main tool for reducing or eliminating Israeli withholding on service payments is an ishur nikui mimas (withholding tax certificate) issued by the ITA. The certificate specifies a reduced rate, anywhere from 0% to the full statutory amount, based on the ITA's assessment of the non-resident's actual Israeli tax exposure. A 0% certificate is issued where the ITA is satisfied the non-resident owes no Israeli tax, whether because the income is not Israel-source or because an applicable treaty eliminates the liability.
Either the Israeli payer or the foreign contractor (through an Israeli representative) can apply. In practice the foreign contractor usually initiates it, since they bear the economic cost of withholding if no certificate is in place.
The application process:
- Establish which ITA district office has jurisdiction. Applications go to the ITA district office covering the Israeli payer's registered address. With multiple Israeli clients, any one of them can be used; the certificate applies to all Israeli-source payments during its validity period.
- Prepare the application file. The file must include: a description of the services and contractual relationship, the contractor's tax identification number and country of residence, evidence of home-country tax registration (a recent return or a tax residency certificate), the contract or a draft, and, if relying on a tax treaty, a tax residency certificate from the competent authority of the contractor's home country.
- Submit and follow up. Applications are submitted in writing (by mail or in-person; some district offices now accept digital submissions through the ITA portal). The ITA's statutory target for processing is 30 business days for complete applications. First-time applications from new foreign entities frequently take 45 to 75 calendar days in practice. Incomplete applications restart the clock.
- Certificate validity. The ITA typically issues certificates for one calendar year. A certificate issued mid-year covers all payments during the remainder of that year. Annual renewal must be applied for before expiry; withholding reverts to the statutory rate if the certificate lapses.
In Practice — Timing the Certificate Application: A German IT consulting firm signs a six-month contract with an Israeli fintech company in February. The contract value is EUR 150,000 payable in monthly installments. The German firm applies for an ITA withholding certificate in January, before the contract starts. The ITA processes the application and issues a 0% certificate in March, citing the Germany-Israel double tax treaty (business profits taxed only in Germany where there is no Israeli permanent establishment). Payments made in February and March, before the certificate arrived, were withheld at 23%. The German firm files an Israeli non-resident tax return for those two months to recover the withheld amounts, and payments from April onward are paid at gross. Apply for the certificate before the contract begins, not after payments start.
Using a tax treaty to reduce Israeli withholding on service income
Israel has a treaty network with over 60 countries. Most of those treaties follow the OECD Model Tax Convention, under which business profits (including service fees) are taxable only in the contractor's country of residence, provided the contractor has no permanent establishment (mossad kavu) in Israel.
Where a treaty applies, a foreign service provider with no Israeli permanent establishment can argue its fees are not chargeable to Israeli tax and that Section 170 withholding should not apply. The ITA accepts this argument, but requires the treaty claim to be made through the certificate process. The Israeli payer cannot simply decline to withhold on the contractor's say-so.
The key steps for treaty-based relief on service income:
- Confirm that Israel has a DTA with the contractor's country of residence that covers business profits
- Confirm that the contractor has no Israeli permanent establishment: no fixed place of business in Israel, no employee or agent in Israel who habitually concludes contracts on its behalf
- Obtain a tax residency certificate (ishur toshavut mas) from the competent authority of the contractor's home country (in the US this is an IRS Form 6166; in the UK an HMRC letter; in Germany a Wohnsitzbestätigung from the Finanzamt)
- Submit the certificate application to the ITA with the residency certificate and a statement that the contractor has no Israeli PE
The ITA will assess the PE claim as part of the certificate review. Where an Israeli company sends detailed work specifications to a foreign contractor, manages the contractor's day-to-day work, or has the contractor participate regularly in internal Israeli meetings, the ITA may conclude that the contractor effectively operates from a dependent arrangement in Israel that constitutes a PE — thereby eliminating the treaty exemption.
In Practice — When Permanent Establishment Kills Treaty Relief: A UK marketing agency provides ongoing digital marketing services to an Israeli e-commerce company. Over 18 months, the agency's account manager participates in weekly internal strategy meetings in Tel Aviv (both in-person and by video), has access to the Israeli company's internal systems, and signs off on campaign decisions with Israeli management. The ITA, reviewing the certificate application, concludes that the degree of integration into the Israeli company's operations brings the engagement close to a dependent-agent PE. The ITA issues a 10% (rather than 0%) withholding certificate, citing uncertainty about the PE analysis. The agency and its Israeli client restructure the contract to limit the account manager's decision-making authority in Israel before the next certificate renewal. The lesson: treaty-based 0% certificates are not guaranteed where the working relationship resembles employment or an embedded operation.
The Israeli payer's reporting and remittance obligations
An Israeli company that withholds under Section 170 must comply with a parallel set of reporting and remittance obligations. Failure is treated as a separate offence from any tax shortfall.
The key obligations are:
- Remittance deadline. Withheld amounts must be remitted to the ITA by the 15th of the month following the month of payment. A payment made on October 31 must be remitted by November 15.
- Annual reporting. The Israeli payer must file an annual withholding reconciliation return (doch nikui mimas) with the ITA by March 31 of the following year, listing all payments to non-residents and the amounts withheld.
- Certificates of deduction. The payer must issue the non-resident contractor with a certificate showing the gross payment, the withholding rate applied, and the amount withheld, equivalent to the Form 867 (tofes 867) used for resident employees. The contractor needs this to file an Israeli tax return and claim a refund of any over-withheld amount.
- Bank documentation. Israeli banks processing outgoing international wire transfers above USD 10,000 (or equivalent) to non-residents require evidence that the Section 170 withholding obligation has been addressed: either a withholding certificate showing the payer's compliance, or the non-resident contractor's ITA certificate specifying a reduced or zero rate. Banks that process payments without this documentation risk regulatory exposure with the Bank of Israel.
In Practice — Bank Documentation Requirement: An Israeli startup's CFO attempts to wire USD 80,000 to a Canadian software company for six months of development work. The Israeli bank asks for documentation showing that Section 170 withholding has been handled before processing the transfer. The startup has three options: (a) present an ITA certificate issued to the Canadian company authorising a reduced or zero rate; (b) show a receipt confirming that 23% was withheld and remitted to the ITA; or (c) request an internal bank exception review, which involves ITA involvement and delays. Having the Canadian company apply for the certificate before the first payment — option (a) — is the path that causes least friction.
What foreign contractors should do before invoicing an Israeli client
A foreign contractor who wants to receive the full invoice amount from an Israeli client, rather than 75% or 77% of it, needs to act before the first payment is due. These steps apply to both companies and individuals.
- Identify whether your income is genuinely Israel-source. If all work is performed in your home country, with no activity in Israel and no Israeli employees or agents, discuss with your Israeli client whether the income clearly falls outside Section 170. Do not rely on the client's legal team alone; get an independent Israeli tax opinion if the contract value is significant.
- Check if Israel has a DTA with your country. Israel has treaties with over 60 countries. If yours is among them and the treaty covers business profits, you may be entitled to a 0% withholding certificate on the basis that the income is taxable only in your home country (absent an Israeli PE).
- Obtain a tax residency certificate from your home authority. This is the core document the ITA requires. Allow two to eight weeks; processing times vary by country. US residents use IRS Form 6166, UK residents apply to HMRC, EU residents to their national tax authority. The certificate must typically be apostilled before the ITA accepts it.
- Appoint an Israeli tax representative if needed. Israeli tax advisers handle Section 170 certificate applications regularly. They know which district office to approach, what each office requires, and how to push along stalled applications. For contracts above USD 50,000, the cost of professional help is usually recovered in the first payment that arrives gross.
- Apply for the ITA certificate well before the first invoice date. Aim for 90 days before the expected first payment. Late applications leave the Israeli payer with no option but to withhold at the statutory rate while the application is pending.
- Include a withholding clause in the contract. The contract should specify how withholding will be handled: whether the invoice amount is gross (the contractor bears the withholding) or net (the Israeli client grosses up). If the contract is silent, the withholding reduces what the contractor receives.
Frequently Asked Questions
Potentially not, but the exemption is not automatic. Even where a tax treaty eliminates Israeli tax on the service income (because you have no Israeli permanent establishment), your Israeli client is still required by Section 170 to withhold at the statutory 23% rate unless they hold an ITA-issued certificate authorising a lower rate. Getting that certificate requires you to submit a current tax residency certificate from your home authority, evidence that you have no Israeli PE, and supporting contractual documents. Only after the ITA reviews and approves will a certificate be issued and your client be permitted to pay you gross.
Amounts withheld before a certificate is obtained are not automatically refunded. You must file an Israeli non-resident income tax return for the relevant tax year (the Israeli tax year runs January to December), report the Israeli-source income, claim a deduction for your actual expenses if applicable, and calculate the Israeli tax actually owed. Where a treaty exemption applies and Israeli tax is zero, the full withheld amount should be refunded. The ITA processes refund claims within 6 to 18 months as a rule, though complex cases with large amounts can take longer. You are not entitled to interest on over-withheld amounts that are eventually refunded, which is an additional cost of not having the certificate in place at the start.
No. Section 170 places personal liability on the Israeli payer. If they pay you gross without a valid ITA certificate in place, the ITA holds them liable for the withholding that should have been deducted, plus interest and penalties. The Israeli payer cannot later recover this from you without an explicit indemnity clause in the contract, and enforcing that against a foreign contractor is its own problem. In practice, Israeli companies refuse to pay foreign contractors gross without either an ITA certificate from the contractor or an internal assessment confirming the payment is not Israel-source income.
For B2C digital services (a foreign company selling software subscriptions, digital content, or apps directly to Israeli consumers), Israeli VAT at 17% may apply — Israel extended VAT to digital services to Israeli consumers in 2019. Israeli income tax withholding under Section 170 is a different issue and is less commonly applied to arms-length commercial sales to unrelated customers, because the income is more analogous to a sale than to a service relationship. However, where a foreign company provides ongoing digital services under a dedicated contract to a specific Israeli corporate customer — particularly where the customer integrates the foreign platform into its own business — the analysis is closer to a service arrangement and Section 170 withholding becomes relevant. Each situation requires its own assessment.
Israeli banks are required by Bank of Israel regulations to confirm Section 170 compliance before processing outgoing international transfers to non-residents above the reporting threshold. The cleanest way to satisfy this is to present the ITA certificate issued to the foreign contractor. Alternatively, the Israeli payer can show documentation that withholding was deducted and remitted. Banks do not make the tax analysis themselves; they require the Israeli company to certify compliance. Companies that regularly pay foreign service providers should keep a file of current certificates for each contractor, renewed annually, to avoid transfer delays.