Israel's Business Environment

Israel’s Business Environment Noa Asher Economic Consul, Government of Israel Economic Mission to the Midwest noa.a@israeltrade.gov.il, 312.332.2160 Introduction The Government of Israel Economic Mission to the Midwest is a government agency which promotes trade and business relationships between Israel and the US. Our goal is to increase the quality of business relationships, trade investment opportunities and joint R&D projects between Israeli and US companies. Our mission is to initiate and maintain trade relations between Israel and 14 Midwest states. We assist Israeli exporters by locating contacts in local supply chains, arranging meetings with potential investors, and by leveraging our understanding of the Midwestern business climate. We also work with local partners to promote trade between Israel and the Midwest by organizing business missions, and working with state and municipal government to initiate and enhance economic relations. We hope that this brief guide to the Israeli business environment will prove helpful to your future ventures with the State of Israel. Why Do Business in Israel? A Globally open economy The business climate in Israel is rated the 4th most positive towards globalization, making it a preferred choice of leading global players. After the United States, Israel has the largest number of companies listed on the NASDAQ out of any country, and more than 60 Israeli companies are traded on various European exchanges. 1st in R&D investments Israel invests 4.5% of its GDP in R&D, which is the highest ratio of any country in the world (IMD World Competitiveness Yearbook 2008). Highly-educated available workforce Being 2nd in the world for availability of qualified scientists and engineers, Israel provides multinationals with a professional and skilled labor market (2008 IMD Global Competitiveness Yearbook). Four Israelis have won Nobel Prizes within the last 5 years in the fields of Chemistry and Economics. 1|Page Flourishing start-up and VC industries Ranked 1st in the world for number of start-ups per capita and Ranked 3rd in the world for venture capital availability, Israel provides its entrepreneurs with the necessary backing to turn their innovative ideas into profitable businesses (IMD Global Competitiveness Yearbook 2008). Ideal conditions for innovation Israel provides the ideal environment to help stimulate innovation and is ranked 3rd in terms of its quality of scientific research institutions, and 5th in terms of utility patents and government procurement of advanced tech products by the World Economic Forum's Global Competitiveness Report 2008-2009. Profit driving Israeli innovations include a long list of market firsts such as disk-on-key technology, IP telephony, ZIP compression, the ingestible pill-size camera, modern drip-irrigation technology, instant messenger, and many more. How to Do Business in Israel The United States is currently Israel's largest single country trade partner (36.7%), with $36.8 billion in U.S Israel bilateral trade recorded in 2008. In 2008, Israel was the U.S.’s 20th largest export market, despite a population of 7.2 million people, ahead of Russia, Ireland, and Argentina. U.S. Direct Investment in Israel between 2000 and 2007 totaled $57 billion and Israeli Direct Investment in the U.S. totaled between 2000 and 2007 totaled $38 billion. Tips on how to enter the market The best way to enter a business relationship in Israel is to identify the appropriate distribution and sales channels, as they vary by the type of product. For example, industrial equipment, raw materials and commodities manufacturers use non-stocking commissioned agents, while stocking agents represent high volume items. Agents will often insist on exclusivity due to the small size of the country. Most consumer goods are sold through importers and distributors, but increasingly large retail chains and department stores import directly without intermediaries. In most cases, distribution firms serve the entire country. Methods of doing business in Israel Franchising is an increasingly popular method of doing business in Israel since its introduction to the local market in the mid-1980s. Its popularity is particularly high in the fast food restaurant sector with the U.S. share of the Israeli fast food franchising market exceeding 50%. Franchising has also penetrated other industry sectors, exemplified by the penetration of stores such as ACE Hardware, Office Depot, and Toys-R-Us. Direct marketing is also fairly common. Door-to-door sales is not popular in Israel, however satellite and TV shopping channels, direct marketing through mail order catalogs, telemarketing and internet shopping are growing in popularity. 2|Page Joint Ventures: The Israeli government encourages joint ventures and licensing in which a five year agreement with an automatic renewable clause is generally sought. Local industries generally prefer to purchase goods through an agent who will be able to provide after-sales service. Government entities and government-owned industries will often require an agent in the market. One of the first issues a potential agent will raise with an overseas manufacturer is the possibility of exclusivity, and the vast majority of agencies have exclusive representation rights. Selling to the Government Israel is a signatory to the WTO government procurement code. Under the 1993 Public Procurement Law, all Government of Israel (GOI) entities and government-owned companies are required to procure goods or services by issuing a tender. In 1995, the Knesset (the Israeli Parliament) approved the Preference for Israeli Products regulations and the Mandatory Commercial Cooperation regulations. The "Preference for Israeli Products" regulations stipulate that a 15% preference may be given to Israeli manufacturers for certain items exempted by the WTO and for products with at least 35% Israeli content and with a value not exceeding 355,000 SDR (approximately $500,000). Israeli manufacturers in "National Priority Zones" receive an additional 5-15% advantage Foreign ownership and partnerships of Israeli companies Overseas firms can operate in Israel as foreign companies, as foreign partnerships or by establishing a branch office. There are no restrictions on foreign ownership of Israeli companies or securities. Firms interested in establishing an office in Israel are required to register with the Registrar of Companies at the Ministry of Justice. The Israel Standards Institution (SII) The (SII) is the only statutory body in Israel that develops and establishes standards. The Standards Law of 1953 mandates SII’s responsibility for the preparation, publication of technical specifications and standards for products and services, which are produced locally or imported. International Trade Agreements Israel has an extensive network of international trade and economic cooperation and agreements with countries throughout North America, Europe and Asia including: free trade area agreements, R&D programs, protection of investments agreements, and treaties for the avoidance of double taxation. Following a thorough unilateral trade liberalization program, implemented in the early 1990's to expose domestic industry to foreign competition, Israeli trade policy is aimed at continuing the expansion of its network of bilateral trade agreements. Free Trade Agreements (FTA) 3|Page  Israel enjoys FTAs with North America and most of Western Europe that cover close to 80% of Israel's foreign trade. Israel has signed an association agreement with the European Union. The FTA provides for import-duties exemptions for most Israeli-made products arriving in the EU. Complementing its EU agreement, Israel has also concluded FTAs with the EFTA countries, as well as with Turkey. Across the Atlantic, Israel has signed separate FTAs with all 3 NAFTA member countries - U.S.A ,.Canada and Mexico. Israel recently signed an historical free trade agreement with MERCOSUR, the Latin American regional trade union (comprising of Brazil ,Argentina, Uruguay and Paraguay( Israel has signed an Agreement on Trade and Economic Cooperation with the Kingdom of Jordan which includes significant tariff reductions in bi-lateral trade      The U.S Israel Free Trade Agreement The U.S Israel FTA, signed in 1985, was the first FTA signed by the U.S. Under the United StatesIsrael Free Trade Area Agreement (FTA), signed in 1985, the United States and Israel agreed to implement phased tariff reductions culminating in the complete elimination of duties on all products by January 1, 1995. Most tariffs between the United States and Israel have been eliminated as agreed, although tariff and nontariff barriers continue to affect a certain portion of U.S. agricultural exports. The FTA gives American companies exporting to Israel an advantage over competitors by virtue of the elimination of all tariffs on American exports to Israel. In addition, as one of only three countries (Jordan and Mexico are the others) with free trade agreements with both the United States and the European Community, Israel can act as a bridge for international trade between America and Europe. Q.I.Z. (Qualifying Industrial Zones) In 1996, the U.S Congress authorized the designation of qualifying industrial zones (QIZs) between Israel and Jordan, and Israel and Egypt. The QIZs allow Egypt and Jordan to export products to the United States duty-free if the products contain inputs from Israel (8% in the Israeli-Jordanians QIZ agreement, 11.7% in the Israeli-Egyptian QIZ agreement). The purpose of this trade initiative has been to support prosperity and stability in the Middle East by encouraging regional economic integration. In order for a QIZ article to gain duty-free entry, QIZ factories must add at least 35 percent to the value of the article. This 35 percent minimum content figure can include value added in 4|Page Israel, Egypt/Jordan, or the United States. QIZs must encompass portions of Egypt/Jordan and Israel, though the areas do not have to be contiguous. The immediate savings for an investor in the QIZ is the amount of the U.S. tariff on any specified good. Generally speaking, U.S. tariffs on clothing and textile goods are relatively high, which makes production of these goods in QIZs especially attractive. International R &D Programs Similar to its trade agreement program, Israel has developed an extensive network of international R&D accords that foster industrial and technological cooperation with many countries The Office of the Chief Scientist (OCS) of the Ministry of Industry, Trade and Labor is responsible for implementing the government's policy of encouraging and supporting industrial research and development in Israel through the Law for the Encouragement of Industrial R&D. The OCS provides a variety of support programs that operate on an annual budget of about US $300 million. This is spent on about 1,000 projects undertaken by over 500 companies. These programs have helped make Israel a major center of hi-tech entrepreneurship. International Support The bi-national R&D fund with the U.S, BIRD, is one of the OCS’s most successful bi-national fund projects. Jointly founded in 1977 by the U.S and Israeli governments, BIRD provides both matchmaking services between U.S. and Israeli companies, as well as funding covering up to 50 percent of project development and product commercialization costs. BIRD supports approximately 20 projects annually with a total investment of around $11 million per year. To date, BIRD has invested over $245 million in 740 projects, which have produced sales of over $8 billion. Since the establishment of the Foundation 30 years ago, the accumulated repayments have totaled $82 million. Other Programs In addition, numerous international R&D agreements with such countries as Austria, Belgium, Ireland, Germany, Holland, France, Hong Kong and China, among others, provide access to sources of national funding – Israeli companies participating in the program are entitled to receive R&D grants from the OCS. The Global Enterprise R&D Cooperation Framework encourages cooperation in industrial R&D between Israel and multi-national companies (MNCs). This program is designed to share with the partnering companies the high risks and enormous costs inherent in hi-tech development. Joint R&D projects between MNCs and Israeli companies could be entitled to financial assistance of 50% of the Israeli company’s R&D approved costs. 5|Page Domestic Support Besides the main OCS programs above, other domestic support programs include:  The Technological Incubators which provide a framework and support (including grants of up to 85% of approved expenses) for nascent companies to develop innovative technologies. The Heznek-Seed Fund through which the government matches an investor’s investment in the share capital of a seed company, later giving the investors an option to purchase the government shares. Grants are up to 50% of the approved work program. The Tnufa Program is designed to encourage and support an individual entrepreneur in his/her initial efforts to build a prototype, register a patent, design a business plan etc. Grants are up to 85% of the approved expenses for a maximum of $50,000 for each project. The Magneton and Noffar programs are designed to support applied academic research in all areas and especially in biotechnology and nanotechnology in order to promote the transfer of the technology to the industry. Grants are up to 66% and 90% of the approved expenses respectively. The Magnet Program supports the formation of consortia comprised of individual firms and academic institutions in order to jointly develop generic, pre-competitive technologies by offering grants of up to 66% of the approved budget.     Israeli Tax Structure Corporate Tax All companies registered in Israel are subject to corporate taxes. According to the tax reform program enacted in 2005, the Corporate Tax rate is scheduled to decrease according to the following schedule: 2008 – 27%, 2009 – 26%, 2010 - 25%. Value Added Tax (VAT) VAT is an indirect tax based on consumption or import of goods and services in or to Israel. The VAT rate today is 15.5%. Export income and sales of fresh fruits and vegetables are exempt from VAT. Companies are required to register as dealers for VAT purposes no later than the commencement of operation. VAT Exemptions for Exporters Most export transactions, including export of goods, rendering of services to foreign entity or resident or sale of intangible assets to a foreign company which is situated abroad are zero6|Page rated transactions provided certain conditions are met. Because of variations in how this provision is applied, exporters should make sure to check with their accountants for further clarification. VAT Refunds for Exporters All business companies in Israel, including exporters, are required to pay VAT on imports. However exporters are generally entitled to a VAT refund within 30 days after filing the relevant return. Taxes on Dividends Subject to any foreign tax treaty, the standard dividend withholding tax is 20% for shareholders who hold under 10% of the company and 25% for 10%-or-more "material shareholders." Dividends payable to Israeli companies are tax-exempt. Income Taxes Self employed individuals pay income tax on taxable income at rates ranging from 10% to 49%, plus national insurance up to 16.23% on the first NIS 35, 760 of monthly income. However, 52% of these national insurance payments are deductible for income tax purposes in the year they are paid, resulting in an effective combined maximum 57.3%, decreasing to 49% beyond NIS 35, 760. Taxes of up to 50% are levied on most domestic Israeli expenses, unless the recipient holds confirmation from the Israeli Tax Authority allowing a lower rate. Capital Gains Taxes Subject to any tax treaty, capital gains on foreign residents are taxable on Israeli source "real" (inflation adjusted) capital gains at varying rates: Individuals--20%-49% Companies--25%-31% Sales Tax Sales tax is imposed upon sellers of real estate. The value of sale is the basis for the tax. Whenever parties to a sale agreed that sales tax will be imposed on the buyer, there is a need to adapt the value of the sale and add the tax to the overall price. Sales taxes vary between 0-2.5% of the value of the sale. Import Duty and Purchase Tax Duties and purchase tax are imposed upon imports mainly at a percentage of the value of the goods. 7|Page Israeli importers with the USA, EU, EFTA, Canada, Mexico, Turkey and the MERCOSUR countries benefit from bilateral duty free agreements. (See below). Reductions in purchase tax on imports are also available to companies producing in Israel for export. Treaties for the Avoidance of Double Taxation Currently, Israel has tax treaties with 44 countries including the U.S. The treaties function to prevent double taxation by guaranteeing that the investor’s state of residence will provide 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. Protection of Investments Agreements These international agreements are designed to promote and legally protect the flow of capital for the productive sector with regard to direct foreign investment (FDI) on the basis of reciprocity. Israel has concluded agreements with over 30 countries including Argentina, China, Germany, India, Kazakhstan, Poland, Romania, South Korea, Turkey, South Africa, and more. Corporate Law When the State of Israel was established, it inherited the Mandatory Companies Ordinance, 1929, which was an almost exact replica of the English Companies Act, 1929. Many amendments have since been enacted by the Knesset. In 1983 a "New Version" was introduced, in Hebrew, to consolidate the law with its amendments, taking into consideration other pieces of legislation bearing on the matter. In 1975 the Knesset enacted the Government Companies Law, which regulates the establishment and functioning of government companies. These control a significant part of the country's means of production. Another development in corporate law was the enactment of the Amutot (Non-Profit Associations) Law, 1980, which replaced the Ottoman Law of Association, of 1909. Antitrust law in Israel Israel's anti-trust law is governed by the Trade Restrictions Law of 1988 and is enforced by the Trade Restrictions Authority headed by a Commissioner. The Law and the Authority deal primarily with three issues: restrictive contractual arrangements, mergers and prohibition of monopolies. According to the Law, a contractual arrangement would be considered restrictive if at least one party to an agreement restricts itself in a manner that may reduce or prohibit competition in the business between the parties to the agreement or between one of the parties and a third party. The Authority also certifies ventures involving the merging of companies. A merger is defined as including the purchase of the majority of the assets of one company by another company, or the purchase of shares of one company by another company that provides the purchasing company with more than 25 percent of the issued share capital or the voting power or with the power to 8|Page appoint more than 25 percent of the directors or to participate in more than 25 percent of the purchased company's profits. The Authority's involvement in Israel's business environment has increased significantly in the past two years, and the Law is enforced rigorously as its violation would constitute a criminal offense. International Institutions   Israel is a member of the WTO since its establishment in 1995. Israel is one of the signatories of the WTO Government Procurement Agreement (GPA), which offers mutual market access for government purchase to its members. Israel is an observer and active participant in several committees and working parties within the OECD, including the Industry Committee and the Committee on Science and Technology Policy. Israel has recently been chosen as a membership candidate With the OECD. Israel is also a member of the 35 country Euro-Mediterranean Partnership, a framework for political, economic and social relations between European and non-European Mediterranean states .   Starting a Business in Israel Establishing a business in Israel is a relatively straightforward matter. This guide explains the variety of ways in which a company can be structured, and some other useful information for operating a business in Israel. Business Entities Below are the principal types of business entities in Israel: Company The Israeli Companies Ordinance (ICO) defines a company as a corporation formed and registered in Israel, in accordance with the Israeli law. A company incorporated overseas may establish a branch or local office in Israel as long as it is registered as a foreign company with the Registrar of Companies within a month of its establishment. The Partnership ordinance defines a partnership as an entity that consists of Foreign Company (e.g. a branch) Partnership 9|Page persons who contracted to form a partnership. Personal liability of the partners is not limited unless they are limited partners of limited partnerships. A foreign partnership is also permitted to do business in Israel. Self Employed A self employed person works entirely for himself and is entirely liable for the business. The same rules of registration apply. This type of business entity is found mainly in agriculture, (cooperatives such as a kibbutz, or moshav), transportation and in certain types of marketing operations associated with agricultural products. These entities operate mainly as academic institutions, hospitals, charitable organizations and municipalities. Non profits are subject to a special law dealing mainly with the formation of such organizations and the way they may operate as such. Cooperative Non Profit Organizations Registering a Business All companies in Israel must register with The Registrar of Companies and the Tax Authorities. In order to register a business as a company with the Registrar of Companies the following documents must be submitted: 1. Form No.1 of the Company Registrar – an application form to register a company. 2. Memorandum of Association, which establishes the corporate identity and principal objectives of the company, shareholders' responsibility and shares issued. 3. Articles of Association, which set forth rules of conduct for the company. Should a company not submit its own articles of association, then the standard articles which are listed in the Companies Ordinance will be in force for this company. 4. The fee for registering a company which is currently 2,244 NIS. 10 | P a g e After the registration is complete, the Registrar will issue to the company a certificate of incorporation and a company number (of 9 digits). Important: an Israeli lawyer is required to verify the company documents. Usually a lawyer will handle the process for most requests and represent the company at the Companies Registrar office as well. 3. Taxation Once the company has been registered with the Registrar, it must be registered with the appropriate Tax Authorities. Registration as a company should be made at the Tax Authority upon commencement of operations. The filing number is usually the same one as the one issued by the Registrar of Companies. 5. Business Incentives A. Investment Incentives (1) Approved / Privileged Enterprises Programs Investment incentives are outlined in the Law for the Encouragement of Capital Investment. The incentive programs can be divided into 2 main types: 1) 2) The Grants program The Automatic Tax Benefits programs. Investments approved according to the Grants program are awarded Approved Enterprise status and Privileged Enterprise status if it chooses one of the tax benefits programs. Approved Enterprises in a development (priority) area may receive fixed asset grants of 10%32%. In addition, approved enterprises may benefit from low company tax rates of 10%-25% for a period of seven to fifteen years. Privileged Enterprises owned by an Israeli company may elect a "tax holiday package" without obtaining approval if a minimum qualifying investment has been made in fixed assets in industry and in a hotel in Israel within a three year period. The tax holiday applies to undistributed profits for two to fifteen years depending on the location and foreign ownerships. The combined total benefit period for the tax holiday and low rates can range from seven to fifteen years. Dividend Tax (Dividend withholding tax) is imposed at a reduced rate of 4% or 15%, depending on the package selected. As a result, the combined company and dividend tax rate ranges from 15.4% to 36.25%. 11 | P a g e (2) Tax Exemptions Foreign residents not doing business in Israel may enjoy an exemption from Israeli capital gains tax (taxes paid in the investor's home country) in the following cases: · Investments in Israeli securities made between July 2005 and December 2008 if the investors reside in a country that had a tax treaty with Israel during the 10 years before their investment and report it within 30 days to the Israeli Tax Authority. · Shares in a research-intensive company that were issued to the foreign resident investor on or after January 1, 2003. · · Venture capital funds that obtained an advance tax ruling from the Israeli tax authorities. Securities from Israeli companies traded on a recognized foreign stock exchange. · Exemption under any applicable tax treaty (restricted to fewer than 10% shareholders in the US-Israel tax treaty. Buying Land in Israel 93% of the land in Israel is in the public domain. The Israel Land Administration (ILA) is the government agency responsible for managing this land which comprises 4,820,500 acres (19,508,000 dunams). "Ownership" of real estate in Israel usually means leasing rights from the ILA for 49 or 98 years. The remainder of land in Israel is privately owned – the majority of which is in cities – and this land can be bought and sold outright. Sources: www.infoprod.co.il/country/israel2b.htm www.mmi.gov.il/ www.investinisrael.gov.il http://tcc.export.gov/Trade_Agreements/All_Trade_Agreements/exp_005439.asp http://www.export.gov.il/Eng/ 12 | P a g e