In today’s dynamic global business environment, companies are increasingly venturing into international markets, including Israel. While the advantages of expanding your workforce in Israel are many, this comes with the challenge of manoeuvring through a labyrinth of labour laws and compliance requirements. One area often underestimated is that of expense reimbursements, particularly when working under an Employer of Record (EoR) arrangement in Israel.
The Expense Reimbursement Conundrum
At first glance, expense reimbursements may seem like a straightforward process. However, in an international setting, especially under an Employer of Record (EoR) framework, it becomes complex. EoRs have gained popularity for their ability to manage HR services, local compliance, and reduce employer liabilities. Yet, they come with their own set of challenges that can have serious repercussions if not managed carefully.
The Intricacies of Expense Reimbursements with EORs
One challenge is that expenses incurred by an employee are for the business activities of the overseas client and not the EoR. As a result, these expenses cannot be claimed as business expenses by the EoR, which can lead to non-compliance with Israeli Tax & Labour laws. Many EORs often overlook this, thereby putting their clients at risk of costly penalties and tarnishing their reputation.
A Real-World Example
Take the case of David, who works for an international cybersecurity company named CYBERO, which doesn’t have a local entity in Israel and hence uses an EoR (let’s call it EORA). David attended a cybersecurity conference in Europe, accumulating expenses totalling 10,000 NIS.
Because EORA operates in the Human Resources industry and not in cybersecurity, these expenses can’t be claimed as business expenses in EORA’s books without causing compliance issues under Israeli labour laws.
The Tax Implications
Israel’s tax structure is highly progressive, with the highest income tax rate standing at 47%. If David falls into this bracket, he would be liable to pay almost 5,000 NIS in taxes for the 10,000 NIS reimbursed, effectively diminishing the reimbursement value.
The Cost to the Employer
If you, as the employer, decide to cover this tax liability for David, then you’ll have to ‘gross up’ the reimbursement amount. Essentially, you’d need to disburse around 20,000 NIS, almost double the initial expense, to cover the tax and make sure David receives the full 10,000 NIS after taxes.
Solutions
To reduce these complexities, an effective solution would be issuing a company credit card for such expenses. This allows CYBERO to manage the funds directly, negating the need for complicated reimbursements. Another option is to ensure that your EoR provider offers a compliant solution to manage expenses, thereby reducing your compliance risk.
Final Thoughts
Navigating the complexities of expense reimbursements while employing staff in Israel through an EoR can be perilous. These financial and compliance traps can be avoided by thoroughly vetting your EoR partner to ensure they offer a cost effective and compliant solutions that fit within the framework of Israeli labour laws. Understanding these hidden pitfalls will empower you to make an informed choice between local or global EoR options, ensuring your business remains on firm footing when entering the Israeli market.
Call us today for a confidential discussion about your Expense Reimbursement challenges.
