Starting a business in Israel is like riding a bicycle: you get used to
The World Bank’s Web site has a comparison of various aspects of
doing business in 183 countries in 2010. Israel scores quite well: No. 5 for
protecting investors; No. 4 for getting credit; No. 11 for trading across
borders; No. 34 for starting a business; No. 29 overall.
So what are the
main factors to plan when starting a business in Israel? You should check this
out with professional advisors in each country, but the items on your agenda
will probably include the following:
• Do you need a company in Israel?
• If so,
should it be a subsidiary or a branch of a non-Israeli company?
• How to
incorporate in Israel and register for tax purposes?
• What monthly and annual
tax filings are needed?
• How much tax will there be on profits?
• How to
• What about any future exit? Do you need a company in
For most businesses, a company is the preferred way of doing
A company generally has limited liability, which means it can
be sued to the extent of its capital and resources, but its shareholders
generally cannot lose more than their investment in the company if they acted in
Other possibilities include being self-employed, forming a
partnership or even a limited partnership under Israeli or foreign
Limited partnerships tend to be used mainly as passive
investmentfund vehicles to enable a group of foreign individual investors to
credit Israeli taxes (or utilize any Israeli losses) for tax purposes in their
If you decide on a company, should it be a subsidiary of a
non- Israeli company? In the past, many Israeli hi-tech companies were formed as
subsidiaries of a United States (or other foreign) parent
This was done mainly to avoid Israeli capital-gains tax upon
any exit at rates of up to 50 percent.
All this has now changed, and
Israel offers passive foreign investors exemption from capital-gains tax in most
cases upon exit (see below).
Furthermore, the use of a US parent
corporation is particularly problematic because the US may tax undistributed
profits under complex provisions in the US Internal Revenue Code (Subpart
To sum up, an Israeli parent company is usually fine from the tax
perspective and can readily be taken public on stock exchanges in the US,
London, Toronto and elsewhere after meeting their normal listing requirements.
And an Israeli company may enjoy tax breaks on its profits (see
It is possible to operate a business operation in Israel as a
branch of a foreign corporation. In this way, it may be possible to avoid
dividend withholding tax (up to 25%) in most cases, but company tax (see below)
will still be payable on Israeli source profits.
In practice, the Israel
Tax Authority (ITA) may request to see the overseas accounting records of the
foreign corporation to check how much income and expenses are allocable to its
Israeli branch for company tax purposes. And a foreign company is not exempt
from the Israeli statutory audit requirement.
US investors occasionally
use US LLCs (limited liability companies) with no other activity to conduct
Israeli operations that do not qualify for Israeli tax breaks.
practice, most Israeli business operations are conducted by an Israeli company.
This is usually easier when dealing with Israeli suppliers, customers and
banks.How do you incorporate in Israel and register for tax purposes?
Israeli lawyer is needed to help incorporate a company in Israel. The Israeli
Companies Law, 1999, largely follows UK and US principles. Companies may be
public or private.
A private company must have at least one shareholder
and one director.
The issued share capital can be as little as one shekel
(26 US cents).
A public company is a company whose shares are traded on a
stock exchange (in Israel or abroad) or have been offered to the public pursuant
to a prospectus under the Securities Law and are held by the public.
usually takes a day or two to incorporate an Israeli company. A foreign company
must be registered at the Israel Companies Registry as a foreign company if it
has a place of business or an office for share transfers in
Separate registrations of a new business in Israel are needed for
the purposes of: (1) income tax; (2) value-added tax (VAT); (3) payroll and
other withholding taxes; (4) National Insurance Institute payments (social
security). Such registrations should be done at the local offices of the
respective authorities upon starting the business.
required to appoint an Israeli tax representative and VAT representative if any
part of their activities is conducted in Israel.
The VAT representative
is deemed to be the tax representative if no other tax representative is
appointed. The tax representative is empowered to pay Israeli tax out of the
foreign resident’s assets.What monthly and annual tax filings are
The Israeli tax year is normally the calendar year. However,
subsidiaries of foreign publicly traded companies may sometimes be allowed to
use a different fiscal year.
Companies are generally required to file
audited annual tax returns and financial statements within five months after the
end of their fiscal year, but extensions may be obtained. Israeli certified
public accountants are usually allowed to spread the filing of the tax returns
of their clientele over a period of up to 13 months after the tax
Companies and other businesses must also file short monthly
returns on account (bimonthly sometimes if the business is small) accompanied by
tax payments. This applies to the following taxes: • Company tax installments,
which are typically computed as a percentage of a company’s monthly sales
• Supplementary company tax installments with respect to
certain nondeductible expenses (odfot).
• Tax withheld from salaries and
remittances to certain suppliers.
• NII payments.
These filings and payments are made by the 15th day after the
month-end at a local post office or bank. If you are a few days late, a
computer-generated penalty is usually issued.
Detailed bookkeeping and
invoice requirements are contained in the income tax and VAT regulations. In
practice, most taxpayers use bookkeeping software packages approved by the ITA.
The books and returns should be in one of the official languages: Hebrew or
Arabic. In practice, though, English is usually tolerated by most tax
The accounting records should be available for inspection in
Israel by tax officials. Multinational groups wishing to use international
online systems in English may do so if they obtain approval from their tax
office.What about expenses?
Expenses are deductible if they are incurred
wholly and exclusively in the production of income, provided any withholding tax
due is paid. In the case of most domestic Israeli expenses, withholding tax
rates of up to 30% (sometimes more) are prescribed unless the recipient holds
confirmation from the ITA allowing a lower rate. You can check your supplier’s
withholding tax status on the ITA’s Web site.
In the case of remittances
out of Israel, the Israeli banks must withhold tax, generally at a rate of 25%,
unless the remittances relate to imported goods. A withholding-tax exemption or
a reduced withholding rate may be obtained from the payer's tax office in
certain other cases, such as when a treaty applies or when the payments are for
services that are rendered entirely abroad.How much Israeli tax will
there be on profits?
Freelance individuals pay income tax on taxable income at
rates ranging from 10% to 45%, plus NII payments.
NII rates range up to
16.23% on the first NIS 79,750 ($21,000 approximately) of monthly income, but
52% of these payments are deductible for income-tax purposes in the year they
are paid, resulting in an effective combined maximum of around 57.4%, decreasing
to 45% beyond NIS 79,750 per month. In 2011, the maximum income-tax rate is
scheduled to decrease 1% to 44% with further reductions in subsequent
For companies, the regular rate of company tax is scheduled to
decrease from 25% in 2010 to 24% in 2011 with further reductions in subsequent
years. Subject to any tax treaty, the standard rate of dividend withholding tax
is 20% for shareholders who hold less than 10% of the company and 25% for
10%-or-more “material shareholders.”
Consequently, in 2011, distributed
profits will generally be taxable at 39.2%-43%.Incentives in a nutshell
Israel offers generous tax breaks for “privileged enterprises” and “approved
enterprises” in industry, technology and tourism.
First, there is the
“green channel” tax package: zero company tax for retained profits. If and when
profits are distributed as dividends, the company tax rate will range from 10%
(if foreign ownership is 90% or more) to 25% (if foreign ownership is below
49%). The company tax benefit period is seven to 10 years.
there will be a 15% dividend withholding tax.
Second, there are
fixed-asset grants and tax breaks for an “approved enterprise”: the grants range
up to 32%, depending on location, and company tax rates range from 10% to 25%
for seven to 15 years. If profits are distributed, a 15% dividend withholding
tax also applies.
However, a revised system of tax breaks has now been
Under the proposals, the incentive packages would be: (1) a
tax-break package; and (2) a grant and loan package.
Under the tax-break
package, it is proposed that a uniform rate of company tax would apply to all
income of industrial export companies (more than 25% of revenues from
In 2011-2012, the proposed uniform rate of company tax would be
10% in Development Area A and 15% elsewhere in Israel from business activity in
Israel. Starting in 2013, the proposed rates of company tax would decrease to 8%
in Development Area A and 12% elsewhere in Israel.
In addition, certain
“special industrial enterprises” may be granted a further reduced company tax
rate of 5% in Development Area A and 8% elsewhere in Israel. Under the
proposals, it would no longer be necessary to invest in productive fixed assets.
Dividends would remain subject to a 15% withholding tax.
Under the grant
and loan package, it is proposed that the government’s Investment Center Board
would be empowered to generate incentive packages that encourage innovation and
efficiency with highly significant benefit to the economy and investment in
The packages may include professional training, loans to small
and medium enterprises, etc. The board would determine grants in Development
Area A, with at least 25% of revenues from abroad, of up to 24% (including an
administrative grant of 4%).
No tax breaks would be available to
government companies or mining, oil and gas enterprises. Partnerships would only
be eligible if they are owned by Israeli companies and the plant is an
industrial exporter as discussed above.
If enacted, the proposals would
apply to income generated starting in 2011 by competitive industrial companies.
Existing entities may be allowed to transition to the new
Research & development grants are available from the Chief
Scientist’s Office at rates ranging from 20%-50%. In general, royalty payments
are 3%-3.5% of the total annual revenues derived from the sales of a developed
product in which R&D was supported by Chief Scientist’s Office
In addition, the Israeli government has entered into 29
binational industrial R&D support agreements all over the world and
participates actively in five multilateral European programs.What about
any future exit?
With regard to capital gains, subject to any tax treaty,
foreign residents are taxable on Israeli source “real” (inflation adjusted)
capital gains at varying rates (individuals: 20%-45%; companies:
Nevertheless, foreign-resident investors not doing business in
Israel may enjoy an exemption from Israeli capital-gains tax (tax only in the
investor’s home country) when they sell Israeli securities acquired on or after
January 1, 2009. This does not apply to Israeli real-estate related investments.
Different rules apply to pre-2009 investments.
As always, consult
experienced tax advisors in each country at an early stage in specific
cases.Leon Harris is an international tax specialist at Harris
Consulting & Tax Ltd. email@example.com