Tuesday, May 30, 2006

Israeli accounting

Yesterday I went to Petach Tikva (the same one that was for sale on EBay) for a meeting with an accountant. Some of you may be surprised that I would travel such a distance to meet an accountant when there are plenty of accountants in the north. I have found a problem with a lot of Israelis and especially Israeli accountants that they only know how to think horizontally. I am an out of the box person and I only think laterally. This comes into play when I try to explain to an Israeli accountant what I want to do and he looks at me strangely and says you can't do that.
So I got a recommendation from a former petach tikvan that if I want to talk to a creative accountant then I need to speak to his guy in Petach Tikva. So I called the guy up and set up an appointment and went down to Petach Tikva, which happens to be in the middle of nowhere for those of you thinking of going.

I started off by telling him about my diaper venture that I never followed through with because of the Israeli accountant's advice, which is the reason I was looking for a person who understood the way things really work. I explained to him that I was probably hiring a bunch of doctors soon and I could either do it the standard way by having the parent company pay them on US W-9s or I could start a company here, bill the company for the entire amount and pay them as Israeli employees.

He started off by explaining what kind of headache I would be getting into if I opened a company here and how much simpler it would be if I did it the standard way. I told him that was the advice that I would expect from an Israeli accountant and what I was thinking was more along the lines of how much money could I save the doctors by doing it in Israel, along the lines of tax benefits, pension plans and so on. Because if we could do that correctly then I could take an administrative fee off the top and everyone would win. The doctors would take home more money, I would earn more money and the parent company would be paying the same amount. Only various governments would lose out.

He took a second and then came up with social security tax. If you are self-employed in Israel and report to the US government, which is a good idea if you ever want to see the motherland again especially when you are paid on a US tax stub, then you have approximately 15% social security tax, which you don't have to pay if you are an employee of an Israeli company. So off the top, before anything else I saved them 15%. There is also keren hishtalmut, which is a savings plan that lets you put money away tax free and at the end of 6 years you get it as a lump sum, tax free. Then there is kupat gemel (pension fund), which I still have to learn about, but basically it sounds like if they decided to take a year vacation, they would be able to get "pitzuim" and take a salary, which they can't do as self-employed people.

After we finished talking he was excited about the idea and he's going to charge me a lot of money to write it up and give me some spreadsheets so I can convince future employees that I am right.

In short, if you are going to receive $1000 on a W9, which would leave
you with $600 after everything, it might be more worth it to become an
Israeli employee and receive $900 which would leave you with $650 and
a lot of extra benefits. I still have to get the exact numbers before
I decide whether it is 100% worth it and how many employees I need to make it more worth it then headache.


bluke said...

What about income taxes? They are much higher in Israel. In addition, there is 5% health tax and 5% social security tax. I find it hard to believe that paying them as Israeli employees saves them money. Last but not least, some people might actually want to pay social security taxes so that they get their 40 quarters and qualify for Social Security so that when they retire they can collect.

rockofgalilee said...


What you are missing is the Israeli tax laws and international treaties which say that you have to pay Israeli taxes, if you live in Israel, on your worldwide income. If you don't declare it as income then you will have a problem explaining to the tax authorities how you are living like a king on a $1000/month salary. They have ways of knowing when you buy an SUV, whose monthly gas bill is more then your salary.

In the event that someone wants to receive some of the cash in the US to get their 40 quarters, there are ways to do that as well. There is a minimum that you have to earn to qualify as part of your 40 quarters, and if you do just that and no more you still save a lot of money.

Basically, the idea is to offer the options and let the employees decide how they want their money.

There's also the option of billing a US company from a non-existant foreign company and cashing the check on the black market. Then it's not taxable by anyone. But I wouldn't advise that method.