As the owner of a business, you must open files with the various tax authorities in Israel. The opening of these files is not a complicated process, and it can be done quickly without dealing with excessive bureaucracy. The tax authorities involved in the establishment of a business are VAT (Value Added Tax), income tax and National Insurance. We will examine and present clearly the process required for opening a file for the self-employed and for limited liability companies.
Process for Opening an Independent Business File (Individual or Partnership)
The opening of a file for an individual's business (an exempt dealer or authorized dealer) and a partnership file requires registration and reporting to three authorities: VAT, Income Tax and National Insurance Institute.
Value Added Tax:
First, one must register as a dealer in the regional VAT office closest to the place of business or business activity, not later than the date on which the dealer commences business activities.
For the purpose of registration, the following documents must be filed:
Form 821, signed and completed.
Identification certificate (if a partnership is involved, the ID certificates of all the partners must be submitted). If the partnership was registered as a registered partnership, it must furnish the registration certificate from the Partnerships Registrar.
Photocopy of purchase/rental contract for place of business.
Supporting documentation for the existence of the dealer's bank account. When a joint bank account with a spouse is involved, the spouse must come to the VAT office when submitting the documents and sign an affidavit on the existence of the joint bank account.
Additional documents testifying to the establishment of the business and the activities will probably be required for registration purposes.
After submitting the documents and at the end of the registration process, a temporary authorized dealer certificate will be issued; the original authorized dealer certificate will be sent by mail.
After the registration, it will be determined whether the dealer is obligated to report monthly or bi-monthly (based on the projected turnover – projected turnover above NIS 1,500,000 requires monthly reporting and Online reporting), and VAT payment forms will be issued. If the dealer is interested, he will be entitled to obtain a user code and password for online reporting and payment.
To the extent a partnership of several people is involved, there are certain differences in the documents to be submitted: completion of Form 821A in addition to Form 821, the identification certificates of all the partners, supporting documentation on the existence of the partnership's bank account, confirmation of partnership's registration with the Partnerships Registrar (if registration was carried out) and appointment of one representative of the partnership, to be responsible for VAT-related activity.
When the amount of the dealer's projected annual turnover is less than the "determining amount" as prescribed in the Value Added Tax Law (the amount is updated periodically – as of January 2017 is NIS 99,006), the dealer will be classified as an "exempt dealer".
An exempt dealer does not have monthly/bi-monthly reporting and payment requirements. Instead, an exempt dealer must file annually (by January 31), a statement on turnover during the prior year.
Moreover, an exempt dealer is not allowed to issue tax invoices – only receipts for transactions effected, and is not allowed to deduct the inputs tax included in the tax invoices issued to him.
If the final annual turnover exceeds the "determining amount", contact the VAT Office and change the classification from exempt dealer to authorized dealer.
Notwithstanding the aforesaid, professions listed in Regulation 13 of the Value Added Tax Regulations (Registration) are obligated to register as an authorized dealer, regardless of their turnover.
A list of examples of businesses required to register as authorized dealer:
Architects, engineers, physicians, psychologists, accountants, insurance agents, attorneys, etc.
Those dealers not defined as exempt dealers will be defined as authorized dealers.
On the date the business commences activity, written notice should be sent on Form 5329 (attached hereto) to the Assessing Officer in the area in which the business operates, about the opening of the business, and provide the following details: full name, identification certificate, private address, nature of the business, business address, telephone number, date of opening the business, name of the business, and the dealer number for VAT.
After the income tax registration, a request for monthly or bi-monthly advance payments will be sent. The tax advances are determined either as a certain percentage of turnover or a fixed monthly amount. The tax authorities will send a full or partial exemption from withholding tax. At the end of the year, the amount of advances paid during the year and amounts withheld will be deducted from the tax liability.
Employment of workers:
If workers are employed in the business, ensure that a withholding tax file is opened with the Assessing Officer in the area in which the business operates, and on regular reporting of salaries and payments made, including the transfer of withholding tax.
Before commencing activity, the business must register with National Insurance, in the branch closes to their residence. Registration is done through multi-year reporting form (attached hereto), which is to be filed with National Insurance.
After the registration, the dealer will be sent a booklet for advance National Insurance payments. The payment amount will be calculated based on the estimated annual income that will be provided by the dealer when completing the multi-year reporting form.
In addition to the registration processes discussed, every dealer is required to ensure that the following books and reports are maintained.
Proper accounting – Every dealer must ensure compliance with the Accounting Regulations and retain all the relevant documents for a period of 7 years.
Payment of income tax and VAT advances – Every dealer so required is obligated to ensure timely payment of income tax and VAT advances.
Filing of annual report – The tax year commences on January 1 and ends on December 31. Every dealer is obligated to file an annual report of his income and expenses for the tax year not later than on the April 30 subsequent to the end of the tax year (if the dealer is represented by a representative, there are different deadlines for filing reports, because the representatives work according to quotas for filing the reports).
Representation – Every dealer is allowed to be represented before the tax authorities by an accountant, tax advisor or attorney.
Process for Opening Company VAT File in Israel:
The opening of a company file in Israel requires registration and reporting to three authorities: VAT, income tax and National Insurance.
Value Added Tax:
After opening the company's file with the Companies Registrar, one must register as a company in the regional VAT office closest to the location of the company or its business operations not later than the day the company commences business activities.
For the purpose of registering, the following documents must be submitted:
Form 821 signed and completed.
The company's certificate of association.
Photocopy of the purchase/rental contract for the place of business.
Supporting documentation for the existence of a bank account of the company or a photocopy of a cancelled check.
Minutes on the appointment of directors and signatories.
Company's official stamp.
Particulars of the company's directors.
Additional documents testifying to the establishment of the company and its activities that will likely be required for the purpose of registration.
On the date the company begins dealing (i.e., the date on which the company's business activities commence) written notice is to be given on Form 4436 to the Assessing Officer in the region in which the company conducts its activities, on the opening of the company and to provide the following particulars: corporation's name, corporate ID number, corporation's address, description of the business, telephone number, date of commencement of activities, particulars of employees for opening a withholding tax file, details about the directors and shareholders and details about the representatives (CPA, attorney, other).
After registering in the Income Tax Authority, it will be determined whether the company is required to report once a month or once every two months, and the reporting forms will be produced for the payment of income tax pre-payments. The prepayments are determined as a certain percentage of turnover, and may be changed according to changes in turnover or in the industry.
Additionally, the Tax Authorities will send a full or partial exemption from withholding tax, and the company will be required to pay pre-payments of surplus expenses (non-deductible expenses) on a monthly basis. At the year-end, deducted from the tax liability will be pre-payments paid during the year, amounts withheld at the source and the pre-payments in respect of surplus expenses.
Employment of workers:
To the extent the company has employees, it should be ensured that a withholding file is opened with the Assessing Officer in the region in which the business operates (within the framework of the opening of the Income Tax file), and current reporting on salaries and total payments made, including the transfer of withholding taxes.
There is no need to open a National Insurance Institute (NII) file. Registration of a withholding tax file with NII will be done automatically after opening an Income Tax withholding file.
Additional points of emphasis:
In addition to the registration processes detailed in the article, every company is obligated to ensure that it maintains the following books of account and reports:
Maintenance of books of account – every company must insist on compliance with the accounting regulations and to retain the relevant documents for a 7-year period.
Payment of Income Tax and VAT pre-payments – every company that is so required, is obligated to insist on timely payment of income tax and VAT pre-payments.
Filing of annual returns – the tax year beings on January 1 and ends on December 31. Every dealer has the obligation to file an annual report on its income and expenses for the tax year just ended not later than the subsequent April 30 (if the dealer is represented by a representative, there are different times for filing the reports, because the representatives work according to quotas for submitting the reports).
Representation – every dealer is allowed to be represented before the tax authorities by an accountant, tax consultant or attorney
Annual reporting to the Companies Registrar.