This summer, I’ve heard from about ten families per week making Aliyah. Many are professionals with established careers in the United States who want to continue working remotely once they arrive in Israel.

As an example, a marketing professional from New York, named Jeff, moved to Ramat Bet Shemesh with his family this summer. He planned to keep his job with the same firm back in the U.S. and quickly realized the tax complexities that came with his decision. His first question was simple. How should he structure his income?  For years, the go-to answer was to open an Israeli company.  But as the tax world changes, it is something to reassess.

Should you open an Israeli company or continue working as you currently are on your U.S. payroll or consultant payments? Let’s dive into the reasons why it may make sense, and why it may not.

Key Takeaways

• Income earned while physically working in Israel is taxable in Israel, even for new immigrants, since the 10-year holiday only covers certain passive income.
• Without a U.S.-Israel totalization agreement, remote workers often face double charges to both U.S. social security and Israeli bituach leumi.
• Setting up an Israeli company can eliminate U.S. social security obligations by shifting the arrangement so the Israeli company employs you locally.
• Forming a chevra baam can be costly and complex due to incorporation fees, reporting requirements, and mandatory audited financial statements.
• U.S. anti-deferral rules like Subpart F and GILTI may tax profits from your Israeli company even before dividends are distributed, making professional guidance essential.
• Other structures may give you better benefits than an Israeli LTD offer.

The 10 Year Holiday and Why It Does Not Apply Here

New immigrants to Israel are often told about the famous 10-year tax holiday that exempts certain types of foreign income from Israeli taxation. Unfortunately, many people misunderstand what this covers. The exemption is designed for passive income, like interest, dividends, or capital gains generated abroad. It does not exempt income that is earned while physically working in Israel.

This means if you are sitting in Bet Shemesh doing marketing work for your New York employer, those earnings are entirely subject to Israeli taxation even if the paycheck comes from the U.S.

Why is an Israeli Company Actually a Good Idea? 

Many U.S. employers pay their workers on a W-2 U.S. payroll basis. Others hire contractors on a Form 1099 basis. Some olim choose to register in Israel as an esek patur or esek murshe to bill their U.S. client directly.

No matter how you slice it, if you are physically working in Israel, your income is subject to Israeli tax law. That includes not only income tax but also bituach leumi, which is Israel’s equivalent of social security. On the U.S. side, there is also an obligation to pay Social Security tax. For many people, this creates the frustrating scenario of paying into two different systems at once.

Add to that, potential NY state tax if you stay on a U.S. payroll.  

No Totalization Agreement Between the U.S. and Israel

Many countries have negotiated agreements with the United States that coordinate social security systems and prevent double taxation on wages. Israel, unfortunately, does not have such an agreement. 

Without a totalization treaty, there is no relief from paying both U.S. social security and Israeli bituach leumi on the same income. This double tax burden is one of the most painful surprises for new olim who continue working remotely for U.S. employers.

How an Israeli Chevra Can Offer Relief

One option to escape the double tax is establishing an Israeli company, also called a chevra baam or limited company. By shifting your working arrangement so that your U.S. employer pays the Israeli company for services rendered, you remove yourself personally from the U.S. social security system. Instead, the Israeli company pays you a salary as a local employee. That salary is only subject to Israeli payroll taxes, including bituach leumi. This structure can remove the obligation to also pay into the U.S. system, which for many professionals represents a significant savings. It can also save you from NY or other state taxes.

So, for Jeff, this sounds like a no-brainer, right?  After looking at a quick projection, opening up an Israeli company would save him well over $25,000 between U.S. social security tax and NY taxes.  A no-brainer to open that Israeli company.  While it isn’t a bad idea, I made him wait a few minutes to understand why some alternatives may save him more.

The Hidden Costs of Forming a Company

Forming a chevra baam is not a universal solution. For some, it works beautifully. For others, it creates more problems than it solves. The first issue is cost. 

Running a company in Israel is not inexpensive. There are incorporation fees, annual maintenance requirements, and professional fees for accountants and auditors. Unlike a small business, which can often be managed with basic bookkeeping, a company requires audited financial statements and ongoing compliance.

Beyond the costs, Israel has steadily increased the complexity of reporting for private companies. International transactions are flagged more quickly. The reporting requirements have become more demanding. Each year, owners are required to calculate how much they can leave in the company and how much they are obligated to take out as distributions. The administrative burden can be overwhelming for those unfamiliar with Israeli corporate filings.

U.S. Tax Complications – Subpart F and GILTI

Even though an Israeli company can solve the double social security problem, it may create a new U.S. tax problem. The U.S. has a set of anti-deferral rules, such as Subpart F income and GILTI, or Global Intangible Low Taxed Income (recently renamed to NCTI).

These rules are designed to prevent Americans from shifting active business income into foreign corporations and deferring U.S. tax. An Israeli company owned by a U.S. citizen can easily fall into these rules. Depending on the level of income, profits may be subject to immediate U.S. taxation regardless of whether you take dividends out of the company.

In recent years, additional categories like NCTI have made this area even more complicated. Instead of saving money, you may find yourself paying more to both governments.

Balancing Benefits and Risks

So, what is the right choice? Well, for Jeff, it wasn’t to open an Israeli company.  Actually, there were other factors involved, and eventually, he opened up an S corporation of all things.  Would I suggest an S-corporation for all clients? Heck no! There can be significant issues with having an S-Corp.

The answer to what entity to open is that it is dependent on your specific situation. For some families, the savings from avoiding U.S. social security tax far outweigh the cost of running a company and managing U.S. anti-deferral rules. 

For others, the cost and complexity of corporate filings in both countries are simply not worth the headache. Some people may be better off sticking with their U.S. payroll and their 401K contributions. For others, it may make more sense to open an Israeli corporation, and maybe just use a service to give you an Israeli payroll instead. Others may prefer negotiating with their U.S. employer to restructure the arrangement in a way that minimizes double taxes.

Why Every Situation is Unique

Aliyah is a major life change, and the financial decisions that come with it are deeply personal. No two situations are alike. Jeff’s family from New York landed in Bet Shemesh and needed a solution that accounted for their U.S. employer’s payroll system, their long-term plans in Israel, and their appetite for administrative burden. 

Another family may have different priorities. That is why reviewing the options with a professional who understands both the U.S. and Israeli tax systems is critical. The wrong choice can create unnecessary costs and complications that follow you for years.

Final Thoughts: Get Advice Before You Decide

Opening a chevra baam is an excellent option for many, but it is not the best solution for everyone. The key is to weigh the pros and cons of your situation. Other structures can also offer different savings, which may be better for your specific situation. 

If you are making Aliyah this year and planning to work remotely, do not make these decisions alone. Reach out and get guidance on the best structure for you. With the right planning, you can minimize taxes, avoid unnecessary costs, and set yourself up for a smooth financial transition to your new life in Israel.