Starting a small business in Israel? Learn from my mistakes!

Did you come to Israel – or are you planning to come to Israel – hoping hoping to start a small business?  Good for you!  I really mean it.  Israel is the Startup Nation.  It’s a land of opportunity.  It’s the place where you can make many of your dreams come true in amazing ways you never even dreamed of back where you came from.

As long as you’re careful.

For all the opportunities here in Israel, it’s also… (shh) a very bureaucratic place.  And you have to stay on top of the bureaucracy because, unlike in certain larger and more anonymous countries I could name, where you can owe the tax people money for years with absolutely zero consequences, neglecting some of the bureaucracy here in Israel can have serious repercussions.

How do I know?

Um, let’s just say… I’ve learned this the hard way.   Not the extremely hard way, which probably involves jail time.  But the kind of hard way, which involves having your bank accounts frozen and threatening letters from various government agencies.

Setting yourself up as a small business here is actually super-easy.  There are three basic steps, and I’ve found that Rifka Lebowitz’s guide is terrific in terms of explaining these in detail:

1. Register your business for Ma’am (Value Added Tax = VAT):  There are two kinds of businesses, which mostly depends on how much income they bring in, and for both types, you need to open a “tik” (file) – tax-exempt (osek patur) and tax-paying (osek murshe) with the VAT office.
2. Register for income tax:  True, they’re both taxes.  But the VAT people don’t talk to the income tax people and vice versa.  So you have to tell the income tax people you’re a business now.  And then they will hound you forever after (see Tip #1) until you close your business tik, which is very easy to do if you’re no longer running your business.
3. Register with Bituach Leumi:  This is a socialized country You no longer have an employer paying your national insurance, and most importantly, your health insurance to your kupat cholim (HMO, healthcare provider network) – so this is your responsibility now as an independent business person.

In general, skipping one of these steps is a recipe for disaster – so don’t do it.

Here are three mistakes I made along the way through this simple process that I hope you can learn from instead of having to untangle on the other side.  Any tips here are NOT a substitute for a good accountant.  If you think your needs are at all complex, please consult a real tax advisor (not just a blog, for heaven’s sake!) before you take any steps you may regret.

Mistake #1 – Tax ≠ Tax

Sounds like a no-brainer, right?  Except I was lulled into complacency because when you come here, everybody says , “Oh, you don’t have to file taxes in Israel unless you’re owed money back.”  We weren’t owed money back, so I didn’t file taxes.  And it turns out that’s a mistake.

The truth is – if you have a business, you DO have to file taxes.

The reason most people don’t have to file taxes in Israel is because employers have your mispar zehut (identity number) and report your income and any bonuses, withholdings, etc. directly to the government.  The government then tells them how much tax to take off each paycheque, based on your income along with a pretty easy-to-understand system of zikuim (“credits”) for various situations, such as number of kids, aliyah status, etc.  So for most people, you only file if you’ve paid too much in a given year, such as (perhaps) if your situation has changed and your spouse lost a job partway through the year.

Remember, this isn’t tax advice, people.  This is just a generalization about how things work.

But when you have your own small business (duh), the tax folks don’t know how much you have coming in, so you have to let them know each year. 

In my defense, I thought I was doing this already.  If you have a small business, you do file yearly reports of your income to the tax people.  But it turns out that (see above) VAT is NOT THE SAME as personal income tax. 

So learn from my mistake – you actually have to do both:  (1) File a yearly VAT report (it’s basically a one-line return that says how much your business took in) AND (2) File a yearly personal income tax return, which includes income from your small business and any actual jobs you may have had in the previous tax year.

By the way, there is a super-easy SHORT TAX RETURN that you can fill out if your income (joint income if you’re married) is under a certain limit – I believe it was 60,000nis last year.  So don’t bother with the complicated long form if you’re below that threshold: look for the “mekutzar” short form if you can.

Potential consequence:  Freezing your bank accounts, months of painful paperwork reconstruction, eventually I have heard that they can bar you from leaving the country if you owe too much in taxes.  Don’t do it!

Mistake #2 – Tax ≠ Bituach Leumi

To some extent, the government here in Israel is very centralized, and I’ve found that contrary to popular belief, there’s actually surprisingly little surplus bureaucracy or paperwork here.

But.

But.

But.

For all everybody says this is a socialized country, that healthcare is free, or whatever… there’s no free lunch.  Either you or your employer has to pay for it.  No employer?  You’re on your own.

Just like the VAT people aren’t the same as the income tax people, neither of them are the same as the Bituach Leumi people.  Just because you’ve opened your tik (file) as a small business does not mean you’re ready to go.

Frankly, this mistake was just dumb of me.  And lazy.  When I registered myself as a small business, the helpful guy in the office TOLD ME TO GO ACROSS THE STREET AND REGISTER WITH BITUACH LEUMI.  He said it, and I did it – immediately.  I left the office building, walked across the street (waiting for the light to turn green – I’m such a law-abiding citizen!), and marched right up to the big Bituach Leumi building in downtown Haifa.

Which was closed.

So I figured I’d go another day.

But really – when is it a good time to go visit Bituach Leumi?  The answer is never… there was always something more urgent to do.

Don’t do this.  Really.  This is a problem that grows and grows and grows, and eventually I was hit with a very big and very unpleasant bill that I could have avoided if I’d made the trip downtown or to my local Bituach Leumi office much, much sooner. 

Potential consequence:  Fines, penalties, and they can start automatically taking everything you owe out of your bank account at exactly the most inconvenient time.  Forget privacy – every government agency has its tendrils on your money, so don’t mess around.

Mistake #3 - Keep good records!!!

I’m throwing this last mistake in as a bonus – you can have it for free. 

Having had to scramble to reconstruct missing income information for one of the years that I was “running” my “business” – I’m using quotation marks liberally because I wasn’t making much money, so I wasn’t really keeping track of things in the most rigourous fashion.

Kind of a mistake. 

Fortunately, it wasn’t the biggest mistake I’ve made – see #1 and #2 for those.  And fortunately as well, I eventually got around to ordering a lovely receipt book online (complete with cartoon pictures of me!) and have since kept fastidious records.

I’m actually not kidding.

Having messed up with the first two mistakes listed here has put the fear of the Tax Lord into me but good, and these days, I never, ever, ever mess around with accounting these days. 

Happily, as an osek patur (small, tax-exempt business), I can get away with my current system of old-fashioned paper receipts plus an Excel spreadsheet to track them all.  I believe this is known as “single-entry bookkeeping,” which just means carefully listing any money you have coming in.

But please – beyond reading all of this carefully and making sure you don’t make the same mistakes I do – if you have any questions, any doubts, any concerns… please consult an actual tax professional.  There’s no substitute for good advice. 

You can always hire somebody to help you set up the business who will tell you what you need to do going forward.  Once everything is set up properly, it really is easy to maintain your small business, doing everything you’re supposed to do to steer clear of problems with various government agencies.

Potential consequence:  All of the above… plus great, BIG Israeli-sized headaches.  Just… don’t.

Have you learned any lessons about starting or running a small business here in Israel?  I’d love to hear about them in the Comments!

Tzivia / צִיבְיָה

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