Legal Aspects of Doing Business in Israel
By Zeev Weiss, Attorney at Law
In order to do business in Israel it is essential to understand Israeli law and its requirements, especially the legal aspects of doing business in Israel. Israeli law takes its roots from British sources and English case law. During the existence of the State of Israel Israeli statutes have been enacted and American and German statutes have been imported into the Israeli legal system.
It is important to realize that Israel is a country ruled by law and a foreign company can rely on the stability of its legal system. Israel has a long tradition of encouraging foreign investors and even during the difficult times foreign investors were able to repatriate their investment and profits.
This article will deal with several legal aspects that will be dealt hereunder:
1. Forms of doing business in Israel
The principal forms of business organizations in Israel are:
- Sole Proprietorship;
- Israeli Partnership (general and limited);
- Foreign Partnership (general and limited);
- Israeli company (public and private);
- Foreign Company in Israel;
- "Amutot" (non-profit organizations);
- Cooperative societies.
The most common form to be used by foreign corporations are the Israeli company (subsidiary) and the branch (foreign company registering directly in Israel).
2. Local Subsidiary or Branch
In general, business can be conducted in Israel by a foreign company either through a branch or through a local subsidiary. The branch status comes into existence when the foreign company is being registered in accordance with the requirements of the Company's Ordinance. The local subsidiary will be incorporated as an Israeli company, wholly or partially owned by the foreign company. (It should be noted that unlike some countries, a foreign entity and/or foreign individuals may fully own a local subsidiary).
The status of a liaison office, frequently used in other countries, is not recognized by Israeli law which requires every entity, doing business in Israel to register either as a branch or as a subsidiary. There is no way of registering a liaison office in Israel. However in the preliminary phase, when the foreign company is only collecting information and is not involved in doing business, it might choose not to register. Tax treaties, to which Israel is a party, acknowledge the existence of such a presence and exempts such operation from Israeli tax.
2.1 Repatriation of Profits
Net profits (after payment of corporation taxes) remitted by an Israeli branch to its foreign head office are not subject to any withholding taxes.
Dividends paid by an Israeli subsidiary to its foreign parent company are subject to deduction of tax at source. Generally, the withholding tax rate on dividends is 25%, unless reduced under a pertinent tax treaty.
2.2 Corporation Tax Base and Tax Rate
A branch is subject to Israeli corporation taxes only in respect to profits arising in Israel. A subsidiary, on the other hand, is also subject to taxation on profits arising outside of Israel. Consequently, the tax base may be broader for a subsidiary than for a branch of a foreign company.
Generally, there is no difference between the applicable tax rates imposed upon the taxable profits of a branch and subsidiary.
2.3 Exposure of the Foreign Company to Law Suits
A branch, is not recognized as a legal entity in itself but as the legal extension of the foreign company which is registered in Israel. Consequently, the foreign company may be exposed to law suits for any misconduct of the branch, and may be sued in Israeli courts. A judgment against the foreign company in the Israeli courts can be enforced in most countries.
A subsidiary, on the other hand, is a separate legal entity and thus, in principle, the foreign parent company is not responsible for the misconduct of the Israeli subsidiary and can not be sued in Israel.
2.4 Minimum Capital Investment
No minimum capital investment is required in Israel for incorporating a local private company.
2.5 Incorporation Procedure
The procedure of incorporating a company in Israel is rather simple and a corporation enjoys the advantage of limited liability.
When registering a branch of a foreign company in Israel the foreign company is required to file its Articles of Association, the names of its directors, and other information required by the Companies Registrar. All documents should be translated to Hebrew, Arabic or English.
3. Investment Incentives and Benefits
In order to attract investment capital to Israel and to stimulate economic growth, Israel enacted laws and regulations with a view to encouraging such activities.
The incentives and benefits available can be briefly summarized under the following topics:
3.1 Financial Incentives
Cash Grants - are made available only to 'approved enterprises" located in development areas, and can be utilized for investments in fixed assets and capital equipment, at up to 24% of the projects approved investment.
Government Guarantees - Government guaranteed loans are available from banks, financial institution, etc., for all "approved enterprises" independent of geographical location in Israel. Together with or independent of the cash grants they can total up to 66.7% of the projects approved investment amount.
3.2 Income Tax Benefits
Lower tax rates are available to companies that are owned and controlled to an extent of at least 25% by foreign residents who have invested foreign currency in its capital. A companies Tax rate of 25% is levied on those companies with the minimum 25% foreign equity requirement. The tax rate is gradually lowered as foreign equity increases so that at foreign equity positions of at least 90% the company tax rate is only 10%. These tax benefits are available for a period of ten (10) consecutive years beginning from the first year taxable income is derived, but this period must fall within fourteen years of initial approval of the enterprise or twelve years from its initial operation, whichever comes first.
Tax holidays are available to "approved enterprises" that waive their cash grants and/or Government guarantees.
The tax holiday can be for a period of between 2-10 years depending on geographic location and what benefits have been waived. The "approved enterprise" is entitled to a reduced tax rate for the period not waived, so that a combination of both will always total ten years.
3.3 Other Incentives and Benefits
- Accelerated Depreciation.
- Exemptions from Import Taxes (for exported goods).
- Deferred VAT Payments (for exporters).
- Various Export Financing Guarantees and Insurance.
- Employment Incentive Payments.
- R&D grants, financing and tax incentives.
- Capital Intensive Companies Benefits - Foreign investment in paid- up capital of at least U.S $ 30 millions, enables certain tax benefits for a period of 30 years.
4. FREE TRADE AGREEMENTS
Israel is the only country to have free trade agreements with the U.S.A, the E.U. and EFTA.
Each of these agreements has its own "rules of origin" which determine the conditions under which a product or service falls within the agreement.
U.S.A. - Israel - In 1985 the countries signed an agreement creating a Free Trade Area. The agreement stipulates that to be eligible to free entry to the U.S a product originating from Israel must contain at least 35% of locally (Israeli) added value.
E.U. - Israel - In 1975 Israel signed an agreement with the European union. Since then, duties on Israel's industrial products have been entirely eliminated, while tariffs on its agricultural products have been greatly reduced. If the product was not entirely manufactured in Israel it must undergo "sufficient processing" in Israel to enter into E.U. under the free trade agreement.
EFTA - Israel - An agreement similar in content to the agreement with the E.U.
5. Foreign Currency Control
Foreign currency transaction were regulated by the Currency Control Law, 1978. Recently most foreign currency restrictions were abolished.
6. Contracts Law
The sources of the Israeli codes of contract law are: international treaties, continental codes, English law, Jewish law, Israeli case law.
Foreign companies should be aware that the principle of good faith is applied to our law. The parties to precontractual negotiations and the parties to contract are bound to act in customary manner and in good faith in the course of negotiations and in the fulfillment of obligations or rights arising from the contract. There is an obligation of good faith upon a party to the negotiations, even if this party did not, in the end, become a party to the contract and even if the negotiations did not create a contract.
There is no need for consideration according to Israeli Contract law. The law recognizes a contract for the benefit of a third party. The remedy of enforcement and are compensation the principal remedies afforded in the case of breach.
A contract may be made orally, in writing or in some other form.
Israel is a party to the New-York Convention to enforce foreign arbirations. It is allowed and it is often the practice that agreements between an Israeli company and a foreign company will determine that a foreign law and foreign jurisdiction/arbitration will be applied in the case of dispute.