Withholding tax on payments to suppliers: who withholds, how much, and what happens to the money withheld

What is withholding tax?

Withholding tax at source, or “withholding” for short, means that whoever pays income withholds tax from it at the time of payment, in the manner and at the rates that were set. The duty is set in section 164 of the Income Tax Ordinance: it applies to employment income and to types of income that the Minister of Finance has set, among them payments for services or assets, and it also applies to the State. Whoever withheld must pass the tax on to the assessing officer and file a report by the set date.

For the supplier, the withholding is not an additional tax. The tax withheld is credited against the tax that will be imposed on its taxable income. This guide deals mainly with payments by businesses to suppliers, from both sides: the business that pays and the supplier that received less than the invoice amount. Withholding from salary is described briefly further on.

Who must withhold tax from a payment to a supplier?

The duty to withhold from a payment for services or assets does not apply to every payer. The Income Tax Order (Determination of Payments for Services or Assets as Income), 5737-1977 (צו מס הכנסה (קביעת תשלומים בעד שירותים או נכסים כהכנסה), התשל״ז-1977), defines which payers’ payments are subject to withholding, among them:

• The State, local authorities, associations of towns, the Bank of Israel, the National Insurance Institute (Bituach Leumi) and other public bodies listed in the Order, as well as a government company.
• Anyone who must keep a double-entry accounting system.
• A company, or anyone whose business turnover in any tax year exceeded the amount set for that year in Schedule A to the Order, subject to the small business exception below.
• A financial institution, a hospital, a health fund (kupat holim) and an institution of higher education.

The payment is subject to withholding whether it is in money or in money’s worth, directly or indirectly, including reimbursement of expenses.

Among the exceptions:

• Small business: payments by an individual, by a partnership of individuals or by a company that is not a parent company or a subsidiary are not regarded as “payments for services or assets” if, in each of the three tax years before the year preceding the year of payment, the turnover did not exceed the amount in the Schedule, and the payer was not required to keep double-entry accounts (section 2A of the Order).
• A private payment by an individual: a payment that an individual made and that does not have to be recorded in the books of their business is not included in the definition.
• Payment to bodies the regulations do not apply to: no tax is withheld from a payment to the State, a local authority, the Bank of Israel, the National Insurance Institute, a banking institution, an insurance company and the other bodies in Schedule A to the regulations.
• A small payment: regulation 2(a) excludes from the duty to withhold a payment for an asset or service whose value does not exceed the amount in section 2(b) of the Public Bodies Transactions Law, 5736-1976 (חוק עסקאות גופים ציבוריים, התשל״ו-1976). The amount is adjusted and published in a notice in Reshumot (the official gazette).

Certain types of payment have separate withholding regulations, for example construction and transport work, insurance commissions, and the pay of artists, lecturers and directors. A withholding tax certificate lists the types of payment it applies to, and rent appears in it on a separate line.

How much is withheld: without a certificate and with a withholding tax certificate

The regulations set a base rate, and the assessing officer has the power to reduce it for a particular supplier, and even to reduce it to zero.

Two details worth knowing:

• Payment in money’s worth: for the purpose of the withholding, the payer sets the amount of the payment according to what it cost the payer, and the assessing officer may increase or reduce it. Under an Israel Tax Authority instruction, a withholding tax certificate is not valid for payments in money’s worth or for barter transactions.
• The maximum rate: for a payment for services or assets, the rates are those in the table. Withholding “at the maximum rate” is set in other regulations: in the regulations on withholding from salary, for example when an employee did not fill in Form 101, and in the regulations on withholding from certain types of pay, under which tax is withheld at the maximum rate from the pay of artists, examiners, lecturers, providers of office services and directors.

How does a supplier get a withholding tax certificate, and how is the rate changed?

Under the Israel Tax Authority’s implementation directive for 2026, certificates are produced in an automatic computerized process, without an application, for anyone who meets the criteria:

• The annual process: eligibility was checked in December 2025, and a certificate was produced for every taxpayer with an active income tax file who met all the criteria. The 2026 certificates are valid, as a rule, until 31 March 2027; the date that counts is the one shown on the certificate itself.
• Electronic certificate only: the certificates are not printed and are not sent by post. A supplier can produce its certificate as a PDF file on the Israel Tax Authority website.
• No certificate was produced: a taxpayer that did not receive a certificate because of deficiencies receives a letter listing them. The system checks again twice a week, and after the deficiency has been corrected, a certificate is, as a rule, produced automatically, without contacting the assessing office; in some cases you need to contact the assessing office, for example a new business. Such deficiencies include, among others, an annual tax return that was not filed, failure to report regularly on withholdings or VAT, a final debt that was not settled, and books found to be inadmissible.
• Revocation during the year: a taxpayer with deficiencies is sent a warning, and if the deficiencies are not corrected within 30 days, the certificate is revoked. A certificate is also revoked on suspicion of issuing fictitious invoices. In exceptional cases, for example suspicion of tax evasion in aggravated circumstances, and if the VAT file was closed, the certificate is revoked immediately.

An application to change the rate. The assessing officer may permit reduced withholding in writing, if in their opinion an overpayment of tax may arise. An individual who applies for an exemption files the application on Form 2542, which is on the Israel Tax Authority website. Under the directive, you apply in writing to the coordinator of the central unit at the assessing office, with a detailed application, giving reasons and supported by documents. The coordinator may invite you to a meeting, and the answer is given in writing. An objection to the coordinator’s decision can be filed in writing with the assessing officer or the deputy.

A new business. If a new business is given a certificate, it is given for a period of up to half a year, and as a rule at a rate not lower than 5%, unless the assessing officer was persuaded otherwise for special reasons. A new file of an “exempt dealer” (small business not charging VAT) under the conditions of the directive, and a new file of a “micro business” (עסק זעיר), receive an exemption from withholding automatically.

What the payer must do

1. Check the certificate before paying. Every payer that must withhold must check the validity of the supplier’s certificate through the Israel Tax Authority’s online services, shortly before the payment. Under the directive, a certificate that was not produced by the Israel Tax Authority’s computer system, for example a handwritten certificate, is a “misleading certificate”. On the Israel Tax Authority website, you can find out the withholding rate by the payer’s ID number and the supplier’s file number. The printout is supporting evidence if the payer produced and signed it, and the payer keeps it for audit.
2. Withhold at the time of payment at the rate in the certificate, or under regulation 2 when there is no certificate.
3. Give the supplier a certificate of the withholding at the time of withholding. The certificate includes the name and address of the person withholding, the withholding file number, the amount from which tax was withheld, the amount of tax and the date of payment.
4. By the 16th of every month (a payer for whom the Israel Tax Authority set bimonthly reporting reports by the date set for it): file a report on the recipients, on the payments and on the tax withheld in the previous month, and pay the tax withheld by the same date.
5. A card for each supplier: record the payment details on the supplier’s payment card within a week of the day of payment.
6. By 20 March: give the supplier an annual certificate of the payments in the previous tax year and of the tax withheld from them. The form that the Israel Tax Authority publishes (0806/0857) says that it must be issued “even when no tax was withheld from the payment”.
7. By 30 April: file online with the assessing officer an annual report on the payments subject to withholding (Form 0856). The Israel Tax Authority extends the deadline from time to time by notice; for tax year 2025 it was extended to 31 May 2026.

A payer that had to withhold and did not, or did not report, is exposed to an assessment: the assessing officer may assess, according to their judgment, the amount of tax the payer should have withheld, and the assessment does not release the payer from any other liability under the Ordinance.

Withholding in an agreement with a supplier or with a customer

The duty to withhold is placed on the payer by the regulations made under section 164, and a payer that did not withhold is exposed to an assessment under section 167. So a clause in the agreement saying that “the supplier is responsible for all taxes” does not release the payer, toward the Israel Tax Authority, from checking the certificate and withholding; it can only settle between the parties who bears the consequence. See also Independent contractor agreement: what it must include.

When drafting a services agreement, a contractor agreement or a supplier agreement, it is worth writing expressly:

• that the consideration is stated before the withholding tax, and that the amount withheld and paid to the assessing officer is regarded as part of the payment to the supplier.
• that the payer will give the supplier a certificate for each withholding, and an annual certificate by 20 March.
• what happens when the supplier’s certificate expires or is revoked during the engagement.

What happens to the money withheld?

From the supplier’s point of view, the tax withheld is a payment on account of its tax:

• Credit against the annual tax: the withholding is credited against the tax that will be imposed on the recipient’s taxable income in the tax year in which it was withheld, or in the following year, as the assessing officer chooses.
• Credit against the advance payments: an amount withheld at source in the tax year is regarded as a payment on account of the advance payments for that income, and the recipient may offset it against the advance payments, provided it has a written certificate of the withholding.
• The income is still reported: the withholding does not release the recipient from including in its income return the payments it received.
• Refund: a person who overpaid tax, by withholding or otherwise, according to a return based on proper books or documents, receives the balance within 90 days of filing the return, or on 31 July of the year after the tax year, whichever is later, under the conditions in section 159A(b) of the Ordinance. Under section 160(a), a person who proved to the satisfaction of the assessing officer that they overpaid tax is entitled to a refund with linkage differentials and interest, if the return for that year was filed no later than six years after it.

So a supplier that received less than the invoice amount checks three things: that the rate withheld matches its certificate, that it received a certificate of the withholding, and that it will receive an annual certificate by 20 March.

Withholding tax from salary, in short

Tax is also withheld at source from salary, under section 164. The employer withholds from the month’s salary at the time of payment, according to the Schedule to the regulations on withholding from salary. A few main rules:

• Form 101: the employee fills in an employee card (Form 0101) within a week of starting work or on the day they first received a salary, whichever is earlier, and on every 1 January. Changes in the details are reported to the employer within a week, and an employee who has another job declares this to one of the employers.
• Maximum rate: an employer withholds tax at the maximum rate from the salary of an additional job that the employee declared, from the salary of an employee who did not fill in Form 101, and from a “partial” salary. In the regulations, a “partial salary” is a salary for work of up to five hours a day, or of more than five hours a day but less than eight hours a week. If an employee declared on Form 0130 that they have no other taxable income, tax is withheld from such a salary according to the ordinary table. The assessing officer may also order reduced withholding (tax coordination).
• Tax coordination: the assessing officer may order the withholding to be reduced or increased when an overpayment or underpayment has arisen or may arise, for example when there are several employers or other income, and the employer must comply with the order.
• Reporting and certificates: the employer reports and pays the tax it withheld by the 16th of every month, gives the employee Form 106 by 31 March or on the day employment ends, and files an online annual report (Form 126) by 30 April.

On checking Form 106 against the payslips: Form 106: what it is and what to check in it. On checking the payslips themselves: payslip review.

Frequently asked questions

How much is withheld from a supplier who has no certificate?

Under regulation 2 of the regulations on withholding from payments for services or assets: 20%, and 30% if the supplier has not proved to the satisfaction of the assessing officer that it kept admissible books and filed the reports, and has no written confirmation of this from the assessing officer. The supplier’s situation is checked through the Israel Tax Authority’s online services. Tax is withheld at the maximum rate from the pay of artists, examiners, lecturers, providers of office services and directors.

How do you know a supplier’s withholding rate?

You check through the Israel Tax Authority’s online services, shortly before the payment. On the Israel Tax Authority website you enter the payer’s ID number and the supplier’s file number; the printout, when the payer produced and signed it, serves as supporting evidence and is kept for audit.

Until when is a 2026 withholding tax certificate valid?

As a rule, until 31 March 2027. The date that counts is the one on the certificate: a new business is given a certificate for a period of up to half a year, whoever issues the certificate may set an earlier expiry date, and a certificate can be revoked during the year.

My client withheld tax from me. How do I get the amount back?

The tax withheld is credited against the tax on your taxable income in the year in which it was withheld, or in the following year, as the assessing officer chooses, and you can offset it against the advance payments when you have a written certificate of the withholding. If tax was overpaid, it is refunded after the return is filed, under the conditions in section 159A of the Ordinance.

Must a small business withhold tax from suppliers?

It depends on the turnover and on the duty to keep accounts. An individual, a partnership of individuals or a company that is not a parent company or a subsidiary does not have to, if in each of the three tax years before the year preceding the year of payment the turnover did not exceed the amount in the Schedule to the Order, and they were not required to keep double-entry accounts.

By when must the payer give an annual certificate of the withholding?

By 20 March of each year, for the payments in the previous tax year and the tax withheld from them. The form that the Israel Tax Authority publishes says that it must be issued even when no tax was withheld.

We pay a supplier abroad. Do the same rules apply?

No. A payment to a foreign resident is governed by section 170 of the Ordinance, which requires the payer to withhold tax at the time of payment, unless the assessing officer permitted otherwise. This guide does not deal with those rules.