Company formation in Israel, like any type of investments, does not given a foreign investor the right to obtain an Israeli citizenship. Only four types of individual classifications have the right an Israeli citizenship, including Jews, spouses, children, and grandchildren of Jews. 

Known as a premier Startup Nation, Israel is now home to more than 6,000 startups. A country with a robust domestic economy, a sophisticated technology sector, a well-balanced taxation regime, and transparent business rules, Israel is an ideal jurisdiction to start a company for foreign investors. In terms of ease of doing business, Israel ranks 35th out of 190 economies, performing exceptionally well in the categories of company formation (28th), paying taxes (13th), and protecting small-sized investors (18th).

Rules in Starting a Business as a Non-Resident

The Israel tax authorities do not have an infrastructure in place to control foreigners who own a business directly in the country. For this reason, foreign investors need to create special structures, laws, and budgets for allocation. If a non-citizen wants to invest in Israel, he or she needs to have a resident representative. 

By rule, Israel does not give foreigners additional preferences when it comes to procedures of visiting or the length of stay in the country. Non-resident business owners in Israel may visit the country under an existing visa or visa-free regime. Successfully establishing a company in Israel does not mean that investors may obtain an Israel citizenship. The role of a resident representative is to register the business according to the rules and regulations set forth by the Israeli government. An Israeli representative can be a natural person or a legal entity. The representative will act as a guarantor to the tax authorities for filing tax reports and paying taxes as a foreign-owned business. 

The Israeli guarantor does not necessarily need to hold any position in the company or be a part of the board of directors. His or her responsibility to the tax authorities is considered a separate status instead. Therefore, an Israeli guarantor will not be involved in any decision-making, management, and involved in the distribution of profits and other critical processes within the business organization. However, an Israeli guarantor will be responsible for the timely, accurate, and fully taxes of a company to concerned authorities. In the eyes of the Israeli authorities, the Israeli guarantor is the 100% owner of the company and is liable with all his properties. This can make the process of searching for a guarantor more complicated, unless foreign investors have close relatives or family members who are Israeli residents. 

Types of Business Structures in Israel

An individual in Israel may open and operate a business under two major classifications, depending on the annual business income- The Osek Patur and Osek Murshe.

Osek Patur

• Osek Patur is the simplest business classification in Israel. 
• Suitable when financial turnover is no more than 100,419 NIS per annum. 
• Annual turnover of the company is limited and recalculated each year. 
• Must pay value added tax (VAT) for trading transactions. 
• Specialists such as doctors, architects, real estate agents, and auditors are required to register as Osek Murshe of the annual turnover is below the upper limit.

Osek Murshe

• Legal entity not limited to an upper turnover limit, thus enabling a company to expend quickly. 
• Must pay value added tax as a result of its trading operations. 
• Reimbursable value added tax on such expenses such as purchase of raw materials, accommodations, rend, and more. 
• Business registration process permits the employment of workers in the business. 

• The most popular legal form for foreign investors is the limited liability company. 
• Foreign citizens may also register such as a sole trader or entrepreneur if they are married to an Israeli citizen and plan to go through the process of obtaining an Israeli ID card. 

Companies

• The most common business entity in Israel among foreign investors is the limited liability company structure with capital stock. 
• It is considered a separate legal entity in which the liability of each shareholder is limited to their share capital. 

Partnerships

• Can take the form of a general or limited partnership. 
• Personal liability of partners is not limited, unless they are limited partners of a limited partnership structure. 
• A limited partnership must have at least one general partner. 
• A limited partner is not permitted to take part in the supervision or management of the partnership. 

Cooperative

• This business structure is fairly common in the agricultural and transportation sectors, as well as certain types of marketing companies associated with agricultural products. 
• Inspired by social and ethical concepts of partnership and equality, and are managed using democratic principles in favor of all their members.
• Members retain joint ownership of the means of production, such as in the case of farming or industrial cooperatives, as well as joint purchasing power for consumer cooperatives. 

Non-Profit Organizations

• Typically used by academic and religious institutions, hospitals, charitable organizations, municipalities, and more. 
• Subject to a special law dealing with their formation process and the manner by which they can operate. 

Foreign-owned companies may also operate in Israel in the following ways”

Incorporation of an Israeli corporate subsidiary

• Considered a separate legal entity, with the foreign company being its shareholder. 
• Liability falls on the legal entity. 
• Subsidiary can take any legal action in its own name. 

Registering a branch in Israel

• Not considered a separate legal entity from its foreign company. 
• Foreign companies prefer operating through an Israeli corporate subsidiary structure rather than a local branch. 

Company Registration in Israel

All companies in Israel must be duly registered with The Registrar of Companies by the Ministry of Justice and tax authorities under the Ministry of Finance. 

While Hebrew and Arabic are the official languages in Israel, corporate documents in English are generally accepted by the Israel Registrar. The Registry of Companies however require the Articles of Association be translated into Hebrew as well. 

All companies in Israel are deemed to be registered at the Registrar of Companies. 

The following documents must be submitted to the Registrar of Companies to successfully register a foreign-owned company in Israel:

• List of the company’s directors, including their passport information. 
• Power of attorney bestowing upon an Israeli representative the personality for assuming the role of official representative of the company in Israel. 
• The full name, address, and national identification information of the Israeli representative to receive legal notices and memos on behalf of the company. 
• Articles of Association and its Hebrew translation, signed and certified by a notary. 
• Certificate of Incorporation from its country of residence by an apostille. In case the country of origin does not issue such certificates, a lawyer handling registration must deliver a signed letter declaring that such as certificate is not issue in their country. 
• Official documents indicating a company is registered with the Registrar of Companies in the country of origin. 
• Hebrew translation of a company’s certificate of incorporation certified by a notary. 
• Status approval from the country of origin, referring to documents providing the company is active and in operation in its country of origin, and its Hebrew translation. 
• Proof of payment of registration fee, currently at NIS 2,614. 

After a successful Israel company registration, a foreign-owned company is issued a 9-digit unique identification number. 

Once a company has been registered with the Registrar of Companies, it must also register with the Israel Tax Authority for VAT and Income tax reasons, as well as with the National Insurance. 

Israeli Taxation Regime 

• Taxable Income

An Israeli company is subject to corporate income tax on its worldwide income and capital gains. The basic rate is 23%

• Surtax 

There is no surtax in Israel. 

• Alternative Minimum Tax

There is no alternative minimum tax in Israel. 

• Taxation on Dividends

No tax is payable on dividends distributed by one Israel resident company to another, provided dividends arise from income produced in Israel by a company subject to corporate income taxation. 

The tax rate is 23% on dividends from income produced abroad, or from dividends received from overseas. 

• Capital Gains

Capital gains rate depends on the purchase date and nature of asset. General capital gains tax rate for a corporation is 23%. 

• Withholding Tax

No withholding tax is payable on dividends distributed by an Israeli company to another Israeli company, provided dividends arise from income produced by a company that is subject to corporate taxation. 

• Royalties

Royalty payments made to a company is subject to 20% withholding tax, if a recipient can demonstrate that it maintains books of account and has filed returns, otherwise the tax rate is 30%. 

• Branch Remittance Tax

There is no branch remittance tax. 

• Taxable Transactions

Applicable to most goods, services, and imports. 

The standard VAT rate is 17%

• Stamp Duty

There is no stamp duty. 

• Net Wealth Tax

There is no net wealth tax in Israel. 

Israel Double Tax Treaties

Israel has signed double taxation treaties with more than 60 countries. For instance, the convention list between Israel and Luxembourg was signed on 13 December 2014, featuring the avoidance of double taxation  and the prevention of fiscal evasion with respect to taxes on income and capital. 

Filing of Taxes in Israel

• All companies in Israel are required to file an audited annual tax return and financial statements within five months after their fiscal year. 
• An Israeli tax year is the same as the standard calendar year. 
• Subsidiaries of foreign public limited liabilities companies may use a different fiscal year. 
• Businesses may also file monthly returns accompanied by tax payments. 
• Bi-monthly returns are acceptable for small businesses. 

Types of Taxes to Be Filed in Israel

• Company tax installments representing a percentage of a company’s monthly sales revenue.
• Supplementary company tax installements with respect to certain non-deductible expenses. 
• Tax withheld from salaries and remittances to suppliers, if applicable.
• Value Added Tax
• National Insurance

Prevailing regulations in Israel require invoice specifics and detailed bookkeeping for income tax and value added tax. Accounting records must be available for inspection by Israeli tax officials. 

Grants and Taxes

The Israeli government encourages domestic and overseas investments. They offer generous grants and loans in support of setting up a business in the country. One of the largest benefits available for startup companies is the tax holiday that comes with a grant program. Companies awarded with grants become eligible to a privileged enterprise structure, thus allowing businesses to apply for a tax holiday. 

As an independent business consulting firm with an extensive global service network, Damalion offers a full suite of solutions to streamline the Israel company formation process. We have specialists from legal, accounting, and other sectors that will guide you in the process of registration, bank account opening, taxation, accounting, and management of an Israel company. We have the skills, expertise, and meaningful connections that allow us to simplify the company formation process in Israel, so you can do business as soon as possible. Reach out to a Damalion expert today to learn more. 

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.