Israel offers excellent and solid infrastructure to do business for foreign investors and corporate entities across all sectors. The Israeli banking system is highly modern, automated, and computerized, which contribute to its robust and well-established international banking system.

Foreign investments have been instrumental in Israel’s economic growth and prosperity. The government actively promotes foreign investment by providing various incentives under the Encouragement Capital Investment Law of 1959. There are no limitations on foreign investments except in the defence and telecommunications industries. 

Israel Business Entities

Any foreign company or private investor looking to do business in Israel need to decide under which business structure to operate. At present, the most popular company structures among foreign investors are companies and partnership. As a general rule, there are no limitations on nationality among shareholders of a company formed in Israel. 

Companies

Private and public limited liability companies are the two most common forms of business structures in Israel. 

Public limited companies are entities whose shares can be listed on a stock exchange or offered to the public. 

All companies, whose shares are listed and traded on the Tel Aviv Stock Exchange (TASE), are regulated by the Israel Securities Authority and subject to comply to all of its requirements. Meanwhile, all other companies not structured as public limited companies are considered private companies. 

All foreign-owned companies looking to operate in Israel are deemed to register with the country’s Registrar of Companies under the special status, “foreign company”.

Foreign companies looking to issue securities on the Tel Aviv Stock Exchange (TASE) are mandated to follow all rules and requirements by the Securities Authorities. Companies that are looking to issue securities must have a local representative based in Israel who will assume all duties and responsibilities for a company’s activities, such as in the case of financial reporting and taxation purposes. 

Partnerships 

Partnerships in Israel are governed by the Partnership Ordinance of 1975.

In the event that a partnership is formed for the purpose of conducting business in Israel, it is deemed to register with the Registrar of Partnerships at the Ministry of Justice. 

 An Israel partnership consists of individuals and/or corporations. It may not have more than 20 partners, with the exception of partnerships of lawyers or auditors engaging in their respective professions. 

In essence, a partnership is not obligated to report to file annual reports of any kind. However, all partnerships are deemed to register with the tax authorities and social security authorities as a separate entity. 

A partnership can take the form of a general or limited partnership. In a general partnership, each partner will be responsible for the partnership’s liabilities without limitation. Additionally, partners are entitled to act on behalf of the partnership. Consequently, the limited partners; liabilities are limited to the extent of their share capital contributions. 

In a limited partnership structure, there must be at least one general partner whose liabilities are unlimited. 

In Israel, joint ventures are not necessarily mandated to register as a partnership. However, for legal reasons, the partnerships ordinance has its own set of criteria for determining whether a partnership should register a partnership. 

Cooperatives

Activities of Israel cooperatives are governed by the Cooperatives Ordinance. 

Cooperatives are deemed to register with the Registrar of Cooperative Societies at the Ministry of Justice. 

Members of a cooperative in Israel may include individuals and other cooperative societies. 

Cooperatives must follow existing restrictions regarding membership in a cooperative society and the contents of a cooperative’s Articles of Incorporation.  

Cooperatives are uncommon in Israel and is only beneficial to businesses in the agriculture and transportation sectors. 

Non-Profit Organizations

The vast majority of entities that function as non-profit organizations in Israel must be registered with the Registrar of Non-Profit Associations. This entity oversees the registration and related activities. 

Israel Company Formation Process

All foreign-owned Israel companies must register with the Registrar of Companies and Tax Authorities. 

The Registrar of Companies accepts documents in English. Other requirements for the successful registration of a company in Israel are as follows:

• Application form to register the company, such as Form No. 1 of the Company Registrar
• A copy and Hebrew0translated company’s articles of association. The translation must be certified by a notary public. 
• A list of directors and their respective passport numbers. 
• The pre-determined fees for company registration. 

The Articles of Association must state the following details:

• Company name 
• Objectives
• Composition of capital stock
• Number of shares per shareholder
• Rules for company management

Once the company registration process is finalized, the Registrar of Companies will issue a certificate of incorporation and a nine-digit company number. 

Setting up a business in Israel usually takes 11 days to complete, depending on the business size, required documents, and the type of business. 

In detail, it takes two days to obtain company registration documents and duly certified by an attorney, two days to file in the Registrar of Companies, the Ministry of Justice, and up to seven days to register for taxes, including value added tax at the Ministry of Finance, Income Tax Department, and the National Insurance Institute. 

Israel Company Formation Minimum Share Capital 

Minimum investment will depend on a company’s scope and size. Take note that there is a standard registration fee of NIS 2,645 for in-person and NIS 2,176 for online processing. 

Minimum investment is NIS 1,862 plus value added tax for document certification by an attorney. 

Israel Company Reporting Requirements

Private companies are required to perform annual reporting to the Companies Registrar. The annual report must describe the corporate structure of the company, with the audit confirming its financial reports were presented to the shareholders. 

A private company is required to pay an annual fee of NIS 1,500. 

A private company must inform the Companies Registrar of any changes, including change of business name, articles of association, issued or registered share capital, and board composition. 

Israel Company Management Structure

A private limited company is managed by a board of directors that will be responsible for supervising the general manager, who in turn will be responsible for the daily operations of the company. 

Certain management decisions are strictly reserved for the jurisdiction of the board of directors and other company’s shareholders. 

Israel Company Management Restrictions

There are no restrictions on foreign managers and directors. 

Directors’ and Officers’ Liabilities

Directors of an Israeli company have the following duties and obligations:

Duty of Care

• Show proactiveness, using reasonable means to obtain crucial information in the decision-making process. 
• Must be familiar with a company’s affairs, reasonably monitor management and supervise committee that the board has delegated authority to. 

Fiduciary Duties

• Also known as duty of loyalty and good faith, a director must refrain from conflict of interest with the company. This includes competing with and exploiting business opportunities with the company for personal gain. 
• Must act in the best interest of the company and all of its shareholders, not merely his or her interests as a shareholder. 
• Must use his or her independent discretion when voting in the board and cannot be a party to a voting agreement. 

Disclosure Duties

• A director must disclose information to the board of any personal interest he or she may have. 
• A personal interest pertains to any entity in which he or she holds at least 5% of shareholding, or in which he or she has the right to appoint at least one director or CEO for the company. 
• For extraordinary transactions, a director must also disclose any personal interest of his or her family members. 
• A director/s is required to disclose whether they have been convicted of certain offenses. 

Israel Taxation Regime on Companies

Corporate Income Tax

• Levied on resident and non-resident companies operating in Israel. 
• Israel resident companies are subject to corporate income tax on their worldwide income, while non-resident companies are liable to tax only on income accrued in Israel. 
• Corporate tax rate is 23% in 2022. Business operations qualifying under the Encouragement of Capital Investments Law are entitled to reduced corporate income tax rates, depending on their location and other special conditions. 

Taxable Income

• Taxable income will be based on income declared in the financial statements as prepared in accordance with generally accepted accounting principles. 
• Expenses may be deducted if they are wholly or exclusively been incurred in the production of table income. 
• Depreciation may be claimed with respect to fixed assets use in the production of taxable income. 

Capital Gains

• Real capital gains of a company in Israel are subject to a flat tax rate of 23%. 

Withholding Tax

• Dividends paid to an Israel resident is subject to withholding tax at 25%. 
• A 30% withholding tax is applicable where at the time of receipt of the dividend or any time during the next 12 months an individual has controlled at least 10% of the payer company by reference to any measure of control. 

Value Added Tax

• VAT is imposed on goods and services supplied in Israel by businesses, including on the importation of goods and services, and is paid by the buyer. 
• Current rate is 17% as of 2021. 

Dividends Paid to Foreign Corporate Shareholders

• Subject to withholding tax rate of 25%. For a substantive shareholder, at least 10% of the measures of control, the withholding tax rate is 30%. 
• Rates may be lower or exempt, under applicable double tax treaty. 

Dividends Received from Foreign Companies

• An Israeli tax resident is taxed at 25%, as well as an additional 3% if the taxable income is paid to an individual shareholder exceeding NIS 647,640.

Interest Paid to Foreign Corporate Shareholders

• Subject to withholding tax at 25%. 
• Exemptions are levied to foreign corporate shareholders on the interest on traded bonds, loans provided to the state in foreign currency, loans provided to an Israeli resident in foreign currency, and foreign currency bank deposits.

IP Royalties Paid

• Gross royalties paid to a non-resident corporate shareholder are subject to a withholding tax rate of 25%. 
• Reduced rates or exemption, levied to an applicable tax treaty. 

Foreign Occupational Companies

• Controlling shareholder, holding 10% or more shares in a Foreign Occupational Company, with profits deriving from Special Occupation is taxed on deemed dividends according to the relative proportion of its profits. 
• A Foreign Occupational Company is a foreign-owned corporation which, inter alia

         1. Being held by no more than five persons.

         2. At least 75% of its shares are controlled, directly or indirectly by an Israeli resident/s.

         3. Controlling shareholders are engaging in Special Occupation for the benefit of the     

             company.

         4. 50% of the company’s income is from Special Occupation. 

Special occupation includes the following occupations, including doctors, professors, brokers, lawyers, journalists, accountants, appraisers, and economists. 

Thin Capitalization Rules

There are no tax measures against thin capitalization in Israel. 

Transfer Pricing Rules

Israel’s transfer pricing rules are based on OECD guidelines and applicable to transactions between Israeli resident entity and a related non-resident entity. 

If requested by the Israel Tax Authorities, a company must submit a detailed transfer pricing study to justify the prices it charges and the prices that are charged by related foreign entities. 

Companies must attach a statement to their annual tax return confirming their cross-border transactions with third parties that were carried out in arms-length terms. 

Registration and Stamp Duties

Israel has no stamped duty on signed documents. 

Property and Property Transfer Taxes

Israel does not levy any property or property transfer taxes when you purchase a privately-owneed real estate in the country.

Real Property Purchase Tax

A purchaser of real property or shares in a property association must pay purchase tax at 6% of the asset’s total purchase price. 

No purchase price is assessed on the purchase of a residential property of a value up to NIS 1,600,175. 

Land Appreciation Tax

Capital gains derived from the disposal of land or shares in a property association are taxable under the Land Taxation Act, at rates between 20% and 50%, depending on the identity of the company and period of ownership. 

Israel Double Taxation Treaties

Israel has enforced up to 54 tax treaties with other countries. The treaties function to prevent double taxation by guaranteeing an investor’s state of resident, providing either a tax credit for tax which has been paid in Israel, or alternatively, that the Israel sourced income will be exempt from tax in Israel, or in the country of residence of the foreign investor. For instance, Israel has signed a convention with the Grand Duchy of Luxembourg for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital. 

Damalion’s seasoned consultants are specialists in company formation in Israel. We can expertly manage and oversee the registration and incorporation of your Israel business with the concerned authorities in charge, offering comprehensive support when drafting documents, opening a bank account, taxation assistance, and many more. Our global service network will work closely with you and provide assistance in Israel company formation services and more. Feel free to reach out to a Damalion expert for more information. 

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.