Many US citizens who are Israel-based freelancers and work for both U.S. and Israeli clients hear about an Israeli tax strategy that classifies U.S. client income as foreign source.

Many US citizens who are Israel-based freelancers and work for both U.S. and Israeli clients hear about an Israeli tax strategy that classifies U.S. client income as foreign source. 

The goal is to stay in Osek Patur status and avoid having to charge Ma'am for Israeli resident clients (Israeli 18% VAT) on the first 120,000 ILS of Israeli revenue.

This strategy can save about $6,660 USD (21,600 ILS) per year.

However, it only makes financial sense at lower income levels. The savings do not increase as income grows.

Once your total income increases, the structural tax benefits of an Israeli corporation begin to outweigh the Osek Patur Ma'am savings. 

These include reduced U.S. self employment tax, reduced Bituach Leumi through salary and dividends, and tax deferral under the 23 percent corporate rate.

The key variable is whether you can pass VAT to Israeli clients.

If your Israeli clients accept the added VAT:

A corporation becomes worthwhile at approximately $80,000 USD per year.

If your Israeli clients will not accept a price increase for VAT and you must absorb the 18 percent (pay it yourself):

A corporation only becomes worthwhile at approximately $110,000 USD per year.

Below these income levels, staying Osek Patur (using the foreign income classification) is typically more advantageous. 

Above these levels, the corporate structure becomes more efficient and produces significantly higher net savings.

I created slides with clean comparison tables and a decision flowchart to make this easier to understand.