Damalion Israel desk

Doing Business in Israel

One of the world’s strongest and most developed market economies is Israel. Israel has a competent and well-educated labour population, and a concentration of venture capital enables it to be a global leader in high-tech industries.  This creates favorable environment for foreign investors in a wide variety of opportunities.

Israel has a diverse economy that primarily focuses on technological products.

A population of 9.2 Million people, the GDP stands at whooping 402 Billion USD; making it economical hub. Israel ranks 43rd in terms of economic freedom in the 2022 Index with a score of 68.0. In the Middle East and North Africa area, Israel is rated second out of 14 nations, and its overall rating is higher than both the average for the region and the whole globe.

Among world leader in many industries

Israeli businesses are world leaders in the manufacture of plastics, high-tech, and chemical goods (Israel is known for its expertise in generic medications) (aeronautics, electronics, telecommunications, software, biotechnologies, etc.). Industry as a whole account for 18.6% of GDP and employs 17% of the labour force (World Bank, 2020). One percent of the working population is employed in the agriculture industry, which generates 1.2% of GDP (World Bank, 2020). Fruits and vegetables, grains, wine, and cattle farming are the primary crops of the Israel.

Doing business in and with Israel is frequently a component of the worldwide strategy of many successful organizations due to the high investment returns and lucrative commercial prospects offered. The score for Israel’s business friendliness in 2020 was 76.7. When compared to other countries throughout the study period, the conducting of business in Israel was 35 percent easier. These are just few instances, which make Israel a lucrative and business friendly nation. The technological advancement coupled with generic industries has attracted foreign investors and entrepreneurs to invest in Israel and make dividends.  

Considerations for doing business in Israel are:

• Technology and innovation permeate every aspect of Israeli industry. Israelis appreciate authority figures and well-known professionals in their fields because they value intelligence and innovation.
• Out of 140 nations rated in the 2019 Global Competitiveness Report, Israel is the 20th most competitive country in the world.
• Low Population but highly skilled Population having high intrigue and intellectual abilities
• Few natural resources but robust economy based on newer technologies and advancements

Apart from these considerations, there are abundant advantages as well of doing business in Israel as well.

• Growing Economy
• Low Inflations rates and High employment rates
• Strong technological knowledge, expertise and entrepreneurship
• There is trend of setting up of Startup companies
• Uniform laws and regulations for domestic as well as foreign investor that makes favorable environment for investment purposes
• Tax exemptions on capital gains, sale of holdings, derivatives and mutual funds
• Good climate and Investor Protections
• Creative Skills for agricultural development and growth
• Advanced and skilled education
• Highly Skilled force that focuses on practical ideas; Israel is the originator of various companies
• 100% of foreign ownership of foreign companies

LEGAL SYSTEM

Israel lacks a written constitution. However, several fundamental laws are seen to be the foundation of its legal system and jurisprudence. The republic is a democratic republic with a parliamentary form of government that is governed by a prime minister and involves a large number of political parties that represent a broad spectrum of political ideologies. The Knesset, often known as the assembly, is Israel’s legislative body. It has one chamber and 120 members who are chosen every four years.

The prime minister of the nation is in charge of creating the cabinet, which serves as the government’s principal decision-making and executive body. The Knesset has historically chosen the president, who serves as the head of state, for a five-year term. The president mostly performs ceremonial duties, although he or she also has the power to designate several important national leaders, such as the state comptroller, the governor of the Bank of Israel and Judges of the Supreme Court.

Israel follows common law. The Israeli business environment is based on contracts, and as Israeli contract law is applicable to all commercial engagements, including those that are still in the early stages of negotiation, it should be taken into account before beginning or developing any business relationships in Israel.

For doing business in Israel, there are several business entities which can be formed under the Israeli Companies Ordinance. The registration process includes:

• Defining objectives of the entity
• Collecting the data and finalizing the share capital for the entity
• Submitting the details in shape of Memorandum of Association
• Registration of taxes
• Opening Bank Accounts
• Record Keeping.

The types of companies are:

OSEK PATUR

A small company for small businesses. This type of company is suitable for businesses having a maximum yearly revenue of 99,000 shekels (revalued annually). Since this kind of business does not need to declare its VAT, the state may not receive the VAT back. However, this business is unable to claim the VAT it paid on costs or investments.

LIMITED LIABILITY COMPANY

The other important form is Limited Liability Company which can function either as Private Limited Company or Public Limited Company.

PRIVATE LIABILITY COMPANY

Private Limited Company is one of few companies that can be formed in Israel.  

The company is registered on the Stock Exchange. The minimum requirement for shareholders is that there ought to be 1-50 shareholders and one director. There is no compulsion to sell debentures or shares to the public. The company is required to file annual reports and financial reports. Regarding the minimum statutory capital of this Israeli business, there are no regulations. Its constitution does not call for capital contributions. It costs 2,554 NIS, or 500 euros, to register. There is unlimited personal responsibility for the acts of the company.

PUBLIC LIMITED COMPANY

The second one of such company is Public Limited Company. The primary requirement for formation of Public Limited Company is at least seven shareholders and directors. It can offer stocks and debentures for sale to the public. The annual report is to be published annually with the Registrar. In Public Limited Company, the liability of shareholders is very limited. The minimum share capital depends upon the category of the company products.

FOREIGN COMPANY

Another company which Israel offers to foreign investor is to establish local branch or office or to operate through a subsidiary. That office must be registered with Company’s registrar as well. Such companies are not required to publish any annual reports.

These companies can be formed:

• by creating a business subsidiary in Israel.
• by setting up a branch there.

A subsidiary is a separate legal entity and its shareholder is the foreign company.

The liability of the foreign company is limited to the amount of its investment in the subsidiary, subject to piercing the corporate veil considerations. As a separate legal entity, a subsidiary can take any legal action in its own name.

A foreign company can maintain a place of business in Israel if it is registered as a “foreign company” under the Israeli Companies Law 1999.

PARTNERSHIP

Another option is formation of company. According to the Partnership Ordinance, a partnership is an organization made up of individuals who have entered into a partnership agreement. Unless they are limited partners in limited partnerships, the partners’ personal responsibility is unrestricted. Israel also permits foreign partnerships to conduct business there.

COOPERATIVE

This form of corporate entity is mostly found in the agriculture industry, in the transportation industry, and in some organizations that are involved in the marketing of agricultural goods.

NON-PROFIT ORGANIZATIONS

These organizations primarily function as educational institutions, medical facilities, nonprofits, and local governments. NPOs are governed by a separate statute that primarily addresses the establishment of such organizations and how they may function as such.

Israel also offers different schemes, plans, programs and structures for foreign investments. One of such unique idea is technical incubators, franchising and self-employed.

TECHNICAL INCUBRATORS

Technical incubators are assistance firms that allow aspiring company owners, both seasoned Israelis and recent immigrants, the chance to develop their cutting-edge technological ideas and establish new enterprises in order to market them.

The Office of the Chief Scientist (OCS) of the Ministry of Industry and Trade provides leadership and assistance for the incubator program, which was established in 1991 and is implemented throughout the whole nation.

More than 200 initiatives in electronics and communication, software, medical devices, novel materials, and biotechnology have been developed since the project’s inception into the 27 technical incubators that are currently operating in Israel.

FRANCHISING

The Israel Small and Medium Enterprises Authority (ISMEA) and MATI, the Jerusalem Business Development Center, collaborated to create the non-profit organization (NPO) known as the Israel Franchise Promotion Center (IFPC).

Potential franchisees can choose from a wide range of services provided by the IFPC, such as chain location, negotiating support, economic feasibility analysis, access to exclusive business databases, finance support, and expert business mentoring.

SELF-EMPLOYED

The individuals can also register and work as self-employed. After the registration, the individual is required to be registered with Income Tax authority, Value Added Tax and National Insurance Institute. The income tax shall be charged form 10% of earnings. Value Added Tax would be charged at rate of 15.5% on all goods and services.

The implication of National Insurance is calculated in accordance with percentage of income.

TAXES REGIME

The Income Tax Ordinance is the main legislation governing income taxes in Israel. Additionally, there are particular tax breaks for recent immigrants to promote Aliyah. Income tax, capital gains tax, value-added tax, and land appreciation tax are all the types of taxes applicable and payable in Israel. For an Israeli resident to be eligible to be taxed, the resident be either:

• The person spends at least 183 days in Israel during the tax year that ends on December 31.
• The person has spent at least 30 days in Israel during the most recent tax year and a total of 425 days over the two tax years before it.

Individual Taxes

Israeli citizens are subject to income tax on their worldwide earnings, but non-citizens are only subject to income tax on earnings with an Israeli source. An individual filing alone will submit one assessment, but a married couple would submit two assessments. For people, a tax year is a calendar year. Unless he is represented by an Israeli licensed accountant, in which case an extension would be given, the original filing deadline is April 30 of the following year. There are different tax rates applicable depending upon the income.

Corporate Taxes

If a corporation manages and controls its operations within the State of Israel or was created in accordance with its laws, then it is assumed that the firm must pay Israeli taxes. The international income of a domestic corporation is taxable. A non-resident firm without a subsidiary is only taxed on income originating in Israel, but a foreign business with an Israeli subsidiary is only taxed on revenue produced from, accumulated, or received in Israel.

The calendar year is considered to be the tax year; however, businesses may ask for a different tax year. Within five months following the conclusion of the fiscal year, businesses must file their yearly tax returns.

The corporation rate was lowered to 23 percent in 2018. Dividends paid by the firm to an individual are taxed at rates ranging from 25 to 33 percent, which results in a range of 42.25 to 48.41 percent for the total amount of dispersed corporate earnings. Technology companies are subject to special corporate rates.

TAX REGISTRATION

After the formation of a company, the first step is the registration with the VAT authorities by sending a copy of the purchase agreement, leasing agreement your property, or cancelled check from a business bank account, as appropriate. In case of non-exemption, the person must register with Bituach Leumi (National Insurance Institute of Israel) after registering with the VAT authorities as a self-employed individual or as a business.

VAT (Value Added Tax)

Value Added tax is applicable on the most of goods and services. It is applicable at the rate of 17%, The VAT is charged on most of the services excepting few services. In Israel, the VAT filling is mandatory.

National Insurance

It is mandatory for the employees to have national insurance or social security. It works on the basis of contributory system by each employee by depending upon fixed rates.

Capital Gains Tax

Capital Gains Tax is typically imposed at a rate of 25%, however; It (CGT) is sometimes assessed at a rate of 30%. Property is subject to municipal taxes, but the Land Appreciation Tax Law also allows for the possibility of capital gains tax. Wealth, inheritance, estate, and gift taxes are all absent from Israel.

Tax Exemptions

Returning residents as well as new immigrants, managing foreign companies are not subject to automatic taxing regime. The law offers tax exemptions on income.

• During the first 18 months – 3 tax credit points.
• During the following year – 2 points.
• During the third year – 1 point.

For 20 years, New Immigrants are free from paying tax on interest earned on foreign currency deposits as long as the money used to make the deposits came from money they had before arriving in Israel and was put in an Israeli financial institution.

BANKING SYSTEM

One of sophisticated system of banking is in Israel with more than 20 banks including 4 foreign banks. The banks have been envisaging policies which are encouraging for foreign investors with easy credits and loans facilities with minimum requirements. The prime focus was upon the digital banking systems. Consequently, the government awarded a license to a new bank to promote the digital banking.

Along with traditional banking regime, the Non-Banking Credit Market also gained significance. Credit is now being made available to both retail customers and the corporate sector by a large number of private and public enterprises, as well as investment funds, pension funds, and insurance firms.

In order to control this growing phenomenon, a new law known as the Supervision of Financial Services Law (Regulated Financial Services), 5776-2016, was passed in 2016. The Financial Services Law is a component of a significant legislative reform that aims to enhance the regulation of financial services by non-institutional companies, create and boost industry competition, safeguard consumer rights, and ensure adherence to anti-money laundering regulations.

There are several investment banking opportunities in Israel as well. The investments in Banking sector in shape of fintech companies have reached more than 25 billion USD dollars.

IMMIGRATION

Immigration to Israel has a long history. Despite having liberal outlook, the immigration policy is regulated by ethnic interests. It has a remarkable immigration system for those having Jewish ethnicity to move to Israel. But for Non-Jewish including seeking employment and asylum, it is quite difficult to immigrate to Israel. The types of visas dealing with immigration are Immigration Visa, A/1 Temporary Resident Visa, A/3 Clergy Visa, B/1 work Visa and infamous US investor Visa.

INTELLECTUAL PROPERTY

The organization in Israel that offers legal protection for industrial intellectual property through the registration of patents, designs, trademarks, and appellations of origin is known as the Israel Patent Office (ILPO).

For the purpose of registration of a trademark. An application must be submitted, for registration and filing fees must be paid. An authority examiner must review the application, it must be published, and there may be an opportunity for an opposition procedure. Use of the mark, or a mark that is confusingly similar to it, for the same or closely related goods or services will be considered an infringement if the registration is valid and the owner is granted the exclusive right to use the trademark in relation to the goods or services for which it was registered.

Whereas for patents, the Israeli Patent Authority issues patents for innovations that are fresh, practical, original, and creative. Any technology-related product or procedure is eligible for a patent. If an innovation has never been revealed in Israel or anyplace else before, whether in paper, verbally, or another way, it will be regarded as novel. Twenty years from the application date is the duration of patent protection.

Along with, original literary, artistic, theatrical, and musical works as well as sound recordings and computer programs are all protected by copyright laws in Israel. Dramatic works, including films, are protected.

LABOUR & EMPLOYMENT LAWS

Israeli labour law, which consists of a system of persuasive legislative rules, regulations, and case law, is applicable to all workers working in Israel, whether they are Israeli or foreign (i.e., non-Israeli employees working in Israel under the terms of a valid work visa). Additionally, there are expansion orders and general and special collective agreements that are applicable to all or specific portions of the labour market.

The minimal rights that an employee is guaranteed by Israeli law cannot be waived, it should be underlined.

Israel has in place liberal and effective employment laws. There are different employment contracts in place for the employees. Main types of contracts are:

• Open-ended, indefinite employment contracts are the most typical kind of agreement since they have no set termination date. Both parties are required to provide notice of dismissal or resignation under the Notice of Discharge and Resignation Law. All employers and workers must abide by the regulations of termination, which may be done for cause, barring discrimination, provided the proper steps are taken.
• Fixed-term Employment Contracts: These are employment agreements with a set duration or are tied to a particular project. The employee is entitled to the remaining salary that would have been paid for the whole term in the event that the employer terminates the contract before the predetermined time period.
• Trial Periods: These are permissible and the probationer must be handled in the same manner as a full-time employee. Depending on the contract or applicable collective agreement, the probationary period may last one to twelve months. The necessary notice period is one day for the first six months of employment, followed by two and a half days for each subsequent month up to a total of 12 months.
• The Collective Agreements Law is the primary piece of legislation governing collective bargaining agreements (CBAs). They provide the basic conditions and rights that employees must have, including as pay, sick time, maternity benefits, paid time off, and notice periods. Collective bargaining agreements may be applicable to certain industries or businesses or may have a broader application.

 There are several employment laws applicable as well which provide for minimum wages, equal pays, reasonable working hours, foreign employee’s laws, Sick leave rules, National Insurance policies, protection of privacy laws and credit laws. They are aimed at protecting the employments and employees.