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Israel Information · Joined: 19 Oct 2006 Posts: 18 Home Country: israel

DOING BUSINESS IN ISRAEL

GETTING STARTED

Registration Requirements:

Procedure 1. Obtain company registration documents certified by an attorney
Time to complete: 3 days
Cost to complete: NIS 1,540 + 16.5% VAT (recommended minimum fee by the Israel Bar)

Comment: Obtain the following documents from the attorney: a certified application by the attorney to register a company; a certified affidavit by the attorney regarding First Directors competence to serve as such; attorney's certification of First Shareholders' signatures on Articles of Association; attorney's certification of First Shareholders' affidavits that there are no legal restrictions on the Company.

Procedure 2. File with the registrar of companies, Ministry of Justice
Time to complete: 1 day
Cost to complete: NIS 2,200 + 2 for each page in the Articles of Association

Comment: File Articles of Association, application certified by an attorney to register a company, a affidavit certified by an attorney regarding First Directors competence to serve as such, attorney's certification of signature of First Shareholders on Articles of Association Registry publishes company deeds online for free and there is no additional time spent.

Procedure 3. Register for taxes at Ministry of Finance, Income Tax Department
Time to complete: 15 days
Cost to complete: no charge

Comment: File company deed and ID certificate of registration. It takes up to 28 days to obtain final confirmation of the registration.

Procedure 4. Register for VAT at Ministry of Finance, Customs and VAT Department
Time to complete: 1 day
Cost to complete: no charge

Comment: The regional VAT office (Department of Finance) is a separate building from the regional income tax office, but also under the Department of Finance. Certificate of registration, identities of directors, and lease agreement must be filed. The VAT authority generally asks for a bank account in order to be able to send Vat returns to a company (or the other way around if it owes money to VAT). It takes a few minutes to open an account, assuming the company provided all needed documents, a company resolution to open the account and the rights of signature. There are no fees for opening the account, but there are bank commissions, which very according to the bank chosen & the scope of activity in the account.

Procedure 5. Register with the National Insurance Institute
Time to complete: 14 days
Cost to complete: no charge

Comment: Covers all gainfully employed, includes social security, unemployment insurance, severance pay funds, training funds, health insurance and pensions.

LEGAL & BUSINESS PROFILE

Convenient Tax Environment

Foreigners enjoy special concessions under the Israeli income tax, since they apply primarily to Israelis. A foreign resident or foreign company may hold a bank account in Israel with freely transferable currency, either foreign or Israeli. Foreign currency can be converted into New Israeli Shekels (NIS) for investing in Israeli assets, with the investment capable of being reconverted into foreign currency and transferred abroad (including capital and interest).

Stable and continuing concessions for non-residents have existed since the foundation of Israel. The rights of foreign investors to repatriate their investments and most of the other concessions have never been detrimentally changed.

Law of Inheritance

Israeli inheritance law is generally governed by the Succession Law 1965. It is the intent of this law that matters of succession be governed, as far as possible, by the deceased’s last will and testament. There is no limitation upon the right to bequeath and the law does not mandate a specific portion to family members, other than maintenance benefits to a surviving spouse and dependents. Israeli courts have jurisdiction over people who, at the time of death, were domiciled or left assets in Israel. A person can inherit either under a will or by law.

Banking

Israel maintains a modern banking system. Most banks provide private banking services and keep special centers for tourists and foreign investors. The five large Israeli banks have branches and subsidiaries in Europe and the United States and representative offices in various other countries.

Taxation

The subject of taxation in Israel is very complex. The following describes a few aspects of taxation which are relevant to foreign investors.

Tax System

Companies in Israel are generally subject to company tax on their profits at the rate of 36 percent on taxable income. Distributed profits after company tax are subject to dividend withholding tax at rates of up to 25 percent in the case of individual and non-resident shareholders. Interest and royalties are also generally liable to withholding tax of 25 percent unless reduced by a tax treaty. Lower tax rates and other benefits are applicable under Israel’s investment incentive legislation.

Personal taxation

Individuals are taxable on earned income at rates of up to 50%. The tax is imposed under the principle of personal global taxation which determines tax liability for an Israeli resident whether the income is accrued or received in Israel or abroad. Passive income is taxed at rates of 15% on interest and 25% on capital gains. Special rates apply to income derived from foreign securities or investments overseas which may be taxed at higher rates of 35% and up to 50%.

Generally, Israeli residents will be taxed on their full worldwide income (“personal” or “residency” basis of tax).
Non Israeli residents are subject to Israeli tax on Israeli source income.

Value Added Tax

Value Added Tax (VAT) is generally imposed on transactions conducted in Israel, as well as on transactions relating to assets or activities in Israel and imports. The standard rate of VAT in Israel is currently 18 percent, but exports are generally zero-rated. Special provisions apply to financial institutions and not-for-profit bodies.

Estate Tax and Gift Tax

Israel has no inheritance or gift tax. However, on the subsequent sale by the recipient of an asset which is assessable for capital gains tax, the asset cost (net of depreciation where applicable) and acquisition date of the testator or donor are taken into account in the computation of tax due.

Double Taxation Relief

The United States and Israel have a bilateral income tax treaty which is generally effective for fiscal years beginning in 1995.

The commercial relationship with the United States is of paramount importance to Israel. It is therefore appropriate that it have an income tax treaty with its most important trading partner. The tax treaty greatly improves the tax position of U.S. individuals wishing to invest in Israel, and this fact should increase the amount of U.S. investment in Israel.

Israel is a party to 37 double taxation treaties. The foreign investor who takes advantage of double taxation treaties can often withdraw profits earned in Israel under favorable tax treatment. Where a taxpayer is taxable both in Israel and abroad in respect of the same income, double taxation relief may be available either in accordance with a bilateral tax treaty (convention) or, in certain cases, unilaterally. In general, double taxation relief may take the form of a credit for overseas taxes (the credit method). Many of Israel’s tax treaties allow investors to take a full foreign tax credit even if the rate has been reduced in Israel as an investment incentive under the Encouragement of Capital Investments Law. This is known as “tax sparing” relief.

Alternatively, double tax relief may take the form of an exemption in the source country where income or gains arise, or in the taxpayer’s country of fiscal residency (the “exemption method” of double tax relief). In all cases, reference should be made to individual treaties (where applicable) and to local legislation to ascertain the exact details of the double taxation relief afforded and the conditions attaching thereto.

Doing Business in Israel with Agencies and Distributors

I. Agency vs Distribution
A foreign entity wishing to penetrate the Israeli market may resort to the help of intermediaries experienced in a particular market niche. In selecting an appropriate system of distribution in Israel, a foreign company must take into account the country’s size, market conditions, financing requirements, brand recognition and different legal regulations etc. The decision whether to do business through an agent or a distributor depends on the amount of control the foreign entity wishes to exercise over the distribution business and the economic risk it is willing to assume. The agent is obliged to follow the directives of his principal, while a distributor is subject to less control and may shield the foreign entity from customer’s claims since it acts in its own name and for its own account.
Israel has no specific laws dealing with “commercial agents” and distributors and differs in this respect from many European countries which have developed specific statutory regulations on commercial agents and distributors. However, aspects such as the form of contract, rights and duties of the principal and agent, termination and compensation, frequently show similarities to European countries. In business practice, the terms “commercial agent” or “sales representative” are not confined to agency in the legal sense, but are used to describe a variety of commercial representatives, e.g., a legal or commercial agent, an employee or a distributor. We will refer to the Israeli agency law below which deals with legal agents, although similar principles can be applied to commercial agency.
We can now turn to compare the legal and operational aspects of operating through agents and distributors.

A. Agency Law
Israel’s Agency law is contained in the Agency Act 1965 and legal agency is defined as the granting of power to an agent to undertake, on behalf of the principal, a legal act with respect to a third party. A foreign entity could decide to vest an Israeli representative or employee with authority to act in its name with binding force, thus making the representative an agent. The granting of such authority is recommended only if the foreign entity either trusts the agent to make the right decisions or can exercise significant control over the agent’s actions. This would be the case where the agent is an employee or a wholly-owned subsidiary of the foreign entity.
The acts performed by the agent bind the principal and it would therefore be wise for the principal (the foreign entity) to agree on the extent of the agent’s authority and his power to bind the principal. According to the Agency Law 1965, a principal shall not be bound by the agent’s acts which are outside the scope of his powers. A third party unaware of the lack of authority may either regard the agent as a party to the act or withdraw from the transaction and claim damages from the agent.
The Agency Act 1965 lists the basic obligations of the agent to include loyalty, promotion of the principal’s interests and a prohibition to represent different principals regarding the same issue (unless so agreed by the parties). The principal is obliged under the Agency Act 1965 to indemnify the agent for reasonable expenditure and liabilities incurred as a result of the agency.

B. Distribution Law
Distributors are independent contractors who buy and sell in their own name and for their own account, but who generally maintain a long-term business relationship with the manufacturer and thus become a part of the manufacturer’s distribution system.
A distributor may represent one or more suppliers under an exclusive distribution agreement. The rights and duties of the distributor depend on the distribution agreement. The distributor is generally required to carry out advertising and other promotional activities. He may be obliged, inter alia, to train sales personnel in accordance with the directives of the supplier (the foreign entity), purchase minimum quantities and maintain sufficient stock of products, obtain insurance, and ensure that products are distributed according to domestic laws. He must respect the supplier’s/manufacturer’s intellectual property rights and may be obliged to ensure that they are not violated by domestic competitors.

II. Termination of Agency and Distribution Agreements
It is normal practice to stipulate the duration of the relationship between the principal and the agent or distributor, as with any other type of agreement. In distribution and agency agreements one may frequently find an “option” allowing the principal/supplier to extend the agreement for an additional period if he is satisfied with the current relationship.
However, it is not unusual for a lawyer working in this field to come across agency/distribution agreements which are effective for an unlimited period and the parties may bring about termination of the agreement by unilateral reasonable notice at any time. The agent/distributor cannot force the principal/supplier to continue the relationship, as it is considered to be a relationship of personal trust and service that cannot be coercive. However, termination without reasonable advance notification generally constitutes a breach of contract subjecting the principal/supplier to liability for damages.
There exists case law concerning reasonable notice for terminating the agreement. In a landmark case before the Supreme Court of Israel, it was held that the reasonableness of the notice is a function of two elements: the period of the time between the commencement of the relationship and the termination, and the period of time between the notice and the actual termination. The purpose of the former is to give the distributor sufficient time to profit from a reasonable gain and to return his investments in the project, effort and costs. The latter serves to give the distributor sufficient time to reorganise his business in view of the pending termination and to seek alternative means of income.
This test has been adopted in many subsequent cases where the courts have applied the principle on a case-by-case basis. For example, in a distribution agreement for an indefinite period which lasted for 18 years, a notice of termination was given by the supplier three months in advance, the Supreme Court held that this amounted to an adequate period of advance notice as no significant investment of the distributor in distributing the products had been required in the previous years and the distributor had not invested at all in broadening its client market. In any event, the Supreme Court noted that that the distributor suffered no significant damage from the termination.
However, in a later case before the Supreme Court, where the products of the supplier being distributed by the distributor consisted of 99 percent of all its distributions, it was held that a notice of termination of nine months in advance was not sufficient.
As can be seen from the case law, the courts tend to consider each case on its merits and in practice the courts adjust the rights of the parties according to the individual circumstances of the case.
However, disputes will not always reach the court. It is often stipulated in agency or distribution agreements that the parties shall refer to arbitration in order to settle the dispute. The law governing arbitration in Israel is the Arbitration Law 1968. The Law enables any individual to be appointed as an arbitrator and it does not impose any qualities or qualifications on the arbitrator. Parties tend to appoint an impartial person as an arbitrator and prefer one who may possess expertise in a particular field. The parties may stipulate in the arbitration agreement the procedure of appointing an arbitrator or an arbitration panel. The Israeli Institute of Commercial Arbitration located in Tel Aviv is a body which specialises in commercial arbitration of multinational companies.

TAXATION OF FOREIGNERS, NEW & RETURNING RESIDENTS

I. The Israeli Tax Reform

The date January 1, 2003 will be remembered as the start of a new “tax era” in Israel. Until the end of 2002 the Israeli tax system was based on the territorial principle, i.e., income liable to tax in Israel was income that was “accrued” or “received” in Israel. The new legislation introduced the principle of personal global taxation. Under this system, Israeli “residents” will pay tax in Israel on worldwide income.

II. The Test of “Residence”

The new tax legislation provides that an individual shall be treated as an Israeli resident for tax purposes, if his “centre of life” is in Israel. When determining this issue, the tax authorities examine two tests: quantitative and qualitative.
Under the quantitative test, the legislation states that an individual’s “centre of life” is in Israel if he is either present in Israel for 183 days or more in a given tax year, or 30 days or more in a tax year and a total of 425 days or more during that and the two previous tax years.
However, this quantitative test shall not be regarded as conclusive. The Israeli tax authorities also apply a number of auxiliary qualitative criteria in order to fully examine the individual’s family, economic and social ties to Israel. This framework includes, inter alia, an evaluation of the following:

*Location of the individual’s permanent home;
*Location of the individual’s actual home and that of members of his family;
*Location of the individual’s fixed or permanent business or work;
*Location of the individual’s economic interests;
*Location of the individual’s activity in organisations, associations and institutions.

The practical application of these tests by the Israeli tax authorities and courts will be followed closely by tax practitioners. The legislation is relatively new and due to lack of precedents, practitioners will rely on case law from the previous tax system which principally adopts the “centre of life” rules.
We can now turn to examine how foreign, new and returning residents are taxed under the new tax system.

III. Taxation of Foreign Residents

The new income tax legislation states that a foreign resident will be liable to tax on income “accrued” or “received” in Israel.
However, foreign residents are subject to numerous tax exemptions.
For instance, they are able to receive tax free interest on foreign currency deposits at Israeli banks if, inter alia, the following are fulfilled:

*The foreign resident does not have any partners in the bank account who are not foreign residents;
*The foreign resident has declared by the start of the tax year or within 14 days of the opening of the bank account, whichever is later, that he is a foreign resident;
*The deposit in the bank account was not used for granting of a loan or as a guarantee for a loan that was given by the bank to the foreign resident’s relative or company that is controlled by the foreign resident, if they are residents of Israel.

Foreign residents also enjoy tax-free income derived from investments in the Israeli stock market and certain mutual funds, subject to exceptions.

IV. Taxation of “New Residents” (Immigrants) and Returning Residents

A “new resident” is a person who acquires the status of an Israeli resident for the first time. A “returning resident” is a person who ceased to be an Israeli resident and lived on a permanent basis outside Israel during at least three consecutive years and subsequently returned to Israel.
New residents and returning residents are eligible for the following tax benefits.

A. Business Income
A new resident is exempt from income tax for four years from the date of arrival, in respect of the income from a business he possessed outside Israel for at least five years prior to arrival.

B. Non-Business Income
A new resident is also entitled to a tax exemption on passive income (e.g., interest, dividends, royalties, rental fees and pensions) for five years from the date of arrival, provided the income is derived from assets which he possessed prior to arrival. This exemption also applies to a returning resident in respect of assets acquired outside Israel during the period of residence abroad, after ceasing to be an Israeli resident.

Furthermore, new residents will benefit from tax concessions on pensions received from abroad up to the tax level they would have been obliged to pay abroad.

C. Capital Income
New residents are exempt from capital gains tax on the sale of an asset located outside Israel which was in their possession prior to arrival, provided the asset was sold within 10 years from date of arrival. The exemption also applies to returning residents in respect of assets acquired outside Israel during the residence abroad.

V. “Emigration”/“Departure Tax”

The tax reforms have introduced new rules for taxing individuals (as well as companies) who cease to be Israeli residents after January 1, 2003.
The legislation provides that an asset which was owned by an Israeli resident will be deemed to have been sold on the day of departure. The individual may choose to defer the payment of the capital gains tax to the date of actual sale. In such an event, the taxable gain will be the real gain at the date of actual sale proportionate to the period from the date the asset was purchased to the date the residency ceased.

VI. Double Taxation Relief

Israel is a party to more than 35 tax treaties. The new tax reforms have not affected the existing treaties.
Where a taxpayer is taxable both in Israel and abroad in respect of the same income, double taxation relief may be available either in accordance with a bilateral tax treaty (convention) or, in certain cases, unilaterally.
In general, double taxation relief may take the form of a credit for overseas taxes (the credit method). Many of Israel’s tax treaties allow investors to take a full foreign tax credit even if the rate has been reduced in Israel as an investment incentive under the Encouragement of Capital Investments Law. This is known as “tax sparing” relief.


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