How a French Company Legally Hired Its First Employee in Israel

Result: First Israeli employee hired compliantly by a French-owned company through a proper withholding file, National Insurance registration, and mandatory pension · Timeline: 4 weeks from instruction to first lawful payslip · Challenge: Foreign employer tried to pay an Israeli worker from France · Authority: Israel Tax Authority and National Insurance Institute · Financial Impact: Avoided exposure on roughly NIS 3,200 per month in unpaid statutory employer costs

Background

The client was a French software company based near Paris that had set up a small Israeli subsidiary the year before to be close to local engineering talent. They found their first hire quickly, a senior developer in Tel Aviv, and offered him a gross salary of NIS 22,000 a month. The founders, both based in France, assumed the simplest path was to add him to the French payroll and wire his salary across each month, the way they paid a contractor in Lisbon.

That assumption would have created a tax and labour problem in Israel within the first pay cycle. A person working in Israel for an Israeli company is an Israeli employee, and Israeli employment law does not care where the founders sit or where the money originates. The company contacted us after the developer's accountant told him the arrangement looked wrong.

The Challenge

Two separate things were being confused. The first was the permanent establishment question that worries every foreign group, namely whether paying a worker creates a taxable Israeli presence. That was already resolved here, because the group had an Israeli subsidiary that would be the legal employer. The real challenge was operational compliance, and there is a lot of it.

Before paying a single salary, an Israeli employer must open a withholding file (tik nikuyim) with the Israel Tax Authority under the Income Tax Ordinance 1961, register as an employer with the National Insurance Institute (Bituach Leumi), and set up a mandatory pension arrangement under the General Expansion Order for pension insurance. Each of these is a precondition, not a year-end cleanup. The founders also did not realise that Israeli employer costs sit well above the headline salary, or that severance accrues from day one, or that an Israeli payslip must meet the specific itemisation the Wage Protection Law 1958 demands.

Paying the developer from France would have left him with no Israeli tax credits applied, no National Insurance coverage, no pension, and no severance accrual, while exposing the subsidiary to retroactive assessments and penalties once the gap surfaced. The fix was not complicated, but it had to be done in the right order and before the first payment.

In Practice: Under the Income Tax Ordinance 1961, an Israeli employer must open a withholding file (tik nikuyim) with the Israel Tax Authority before the first salary is paid. Operating payroll without one exposes the company to penalties and disallowed deductions, and back-registration on a NIS 22,000 salary can trigger assessments covering every month the worker was paid incorrectly. Opening the file through an Israeli accountant takes about 1 to 2 weeks.

What We Did

We treated the build as a sequence, because the National Insurance registration and the pension setup both depend on the withholding file existing first.

We opened the withholding file with the Israel Tax Authority in the subsidiary's name and registered the company as an employer with the National Insurance Institute. The developer completed a Form 101 (tofes 101) declaring his tax credit points, which is what allows the correct withholding from his very first payslip rather than over-deducting and forcing him to chase a refund. We then set up his pension arrangement under the General Expansion Order, which obliges the employer to contribute toward both pension savings and severance and obliges the employee to contribute his own share, all starting from the statutory point in the employment.

The employer cost math was the part that genuinely surprised the French founders. On top of the NIS 22,000 gross salary, the company carries employer National Insurance and health contributions, a pension contribution, and a severance contribution. Taken together, these added roughly NIS 3,200 a month to the true cost of the employee, money the founders had not budgeted because it does not appear on a French cost model. We mapped this out before the contract was signed so the offer reflected the real number.

Running this from France meant building a remote payroll cycle that worked across the time difference. We appointed an Israeli payroll accountant to file the monthly returns and produce a compliant payslip each month, set up the bank authorisations so salary and statutory payments left the subsidiary's Israeli account on time, and prepared an Israeli-law employment contract in place of the French template the founders had wanted to reuse. The directors signed the necessary resolutions abroad and never needed to land in Israel. Our guide to registering a company in Israel as a foreigner and our answer on whether a foreign-owned Israeli company can hire employees cover the framework these founders had to put in place.

In Practice: Under the General Expansion Order for mandatory pension, an Israeli employer must contribute toward the employee's pension and severance in addition to salary, while the employee contributes his own share, with the obligation starting from the statutory point in employment. On a NIS 22,000 salary, the employer's pension and severance contributions alone come to several hundred shekels a month, and they accrue whether or not the company sets up the fund. Severance liability begins to build from the first day under the Severance Pay Law 1963.

The Outcome

Four weeks after the founders instructed us, the developer received his first lawful Israeli payslip. The withholding file was open, the National Insurance registration was active, the pension and severance arrangements were funded from the correct starting point, and the contract reflected Israeli law rather than a translated French one. The developer had full social coverage from day one, and the subsidiary had no hidden liability accruing in the background.

The financial impact was the exposure the company avoided. Had it paid him from Paris for even a few months, the roughly NIS 3,200 a month in statutory employer costs would have come due retroactively, alongside penalties and disallowed deductions once the Tax Authority or the employee's own filing surfaced the gap. By building the structure correctly before the first payment, the founders converted an open-ended risk into a predictable, budgeted monthly cost.

The Ongoing Obligations the Founders Inherited

Opening payroll is the start, not the finish, and we walked the French directors through what running an Israeli employer actually requires month to month. Every month the company files a withholding return that reports salary, income tax, and National Insurance, and pays those amounts over to the authorities by the statutory deadline. At year end it files an annual reconciliation, the Form 126, tying the monthly reports together, and issues the employee his annual tax summary. Miss the monthly filing and the penalties accrue automatically, which is why we put the Israeli accountant on a fixed monthly cycle rather than leaving it to the Paris finance team to remember.

Israeli labour entitlements were the second category the founders had not priced. Beyond pension and severance, an Israeli employee accrues paid annual leave under the Annual Leave Law 1951, paid sick days under the Sick Pay Law 1976, and an annual recuperation payment (dmei havra'a) that has no equivalent in a French contract. The Hours of Work and Rest Law 1951 governs overtime and the weekly rest day, and the Wage Protection Law 1958 dictates exactly how the payslip must itemise every component. None of these are optional add-ons the employer can negotiate away, and a contract that ignores them is simply read as granting the statutory minimum.

We built all of this into the employment contract and the payroll setup from the start, so the developer's first year ran without a single corrective filing. For the founders, the lesson was that hiring in Israel is less about the one-time setup and more about committing to a compliance rhythm. Our answer on whether a foreign-owned Israeli company can hire employees lays out these recurring duties for other non-resident owners.

Key Takeaways

What this case illustrates for non-residents in similar situations:

1. Where the worker sits decides the law. A person working in Israel for an Israeli company is an Israeli employee, and the founders' location abroad does not change the obligations.
2. Compliance comes before payroll, not after. The withholding file (tik nikuyim), National Insurance employer registration, and pension setup are preconditions to the first salary, and the order matters.
3. Budget the real cost. Employer National Insurance, pension, and severance add meaningfully above the gross salary, and severance accrues from the first day under the Severance Pay Law 1963.
4. You can run Israeli payroll from abroad. With an Israeli accountant, bank authorisations, and an Israeli-law contract, foreign directors can employ staff in Israel without ever visiting.

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Facing a Similar Situation?

If your company is about to hire its first person in Israel, the gap between a French or American cost model and the real Israeli employer cost can be large, and the compliance steps are unforgiving about sequence. Getting the structure right before the first payslip is far cheaper than fixing it later.

Contact us for a confidential consultation about your Israeli legal matter.