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There are a number of different reasons to do business in Israel. Listed below are some of the countries’ achievements and main reasons to invest:

 
  • Israel is a major hub for most of the international hi-tech companies and holds R&D facilities for the industry leaders including Microsoft, Google, HP, Apple (the only one outside the US) and many more.
  • The Israeli divisions of these companies are known as innovative, hard working and determined yet cautious, direct and sometimes brutally honest.
  • Israel is also the homeland for the world's biggest generic pharmaceutical company, Teva, and serves as one of the world's biggest hub for diamonds trading and polishing.
  • It is the only country in the Middle East who is a member of the OECD, accepted in 2010 thanks to successful monetary and fiscal policies led by the central bank of Israel and the government who set a goal to encourage entrepreneurship and innovation.
  • Corporation tax has reduced over the last 10 years to 26.5% from 36% in 2003.
  • These approaches meant Israel weathered the last world recession with flying colours (showing growth in its GDP for the last 5 years).
  • Due to the strong ties between the U.S and Israel, it is the biggest US export market in the Middle East. Despite this fact, Israel's biggest export and import market is the EU (33% of all exports and 34% of all imports) amounting to around € 5 billion and € 9 billion respectively.
  • When we analyse the Asian markets and compare to the EU and the US, we see that these markets are not very far behind: 19% of all exports (€3 billion) and 22% of all imports (€6 billion) go to Asian markets. It is safe to say that Israel is a fertile land for any international business person looking to expand their business.
 

MAIN TYPES OF ISRAELI BUSINESS ENTITIES

Limited Company
The most common way of doing business in Israel is through a private limited company.
 
Private limited companies are owned by shareholders (individuals or other legal entities) and run by directors. They must be registered at the Registrar of Companies and meet the regulatory requirements detailed below:
 
  • Have a name and address for the company
  • Register with Registrar of Companies
  • Have at least 1 director (an individual)
  • Have at least 1 shareholder
  • Have articles of association (agreed rules about running the company)
  • Set up your company for Corporation Tax
  • Register for VAT (if applicable)
 
Partnerships
Partnerships are a very common way to incorporate in Israel. The main difference between partnerships and corporations relies in the special bond between the establishing partners and the partnership itself. That means that a death or bankruptcy of one of the partners will dissolve the partnership. In a partnership the establishing partners are liable to the partnership's debts and are taxed personally on its profits based on each partner's share.
 
Limited Liability Partnerships
Limited Liability Partnerships are combined from 2 types of partners: General partner and Limited partner. The general partners are taxed by the same principals as in a regular partnership, whereas the limited partners cannot take operative decisions in the partnership and their status is very similar to shareholders of a limited company.
 
The partnership has to be registered at the registrar of partnerships.
 
Most of the limited partnerships in Israel are for oil and gas explorations.
 
Exempted Trader
The very basic form of starting a business. As derives from its name this type of incorporation is exempted from VAT, but its limited to only 78,000 NIS (around $22,000) per year and to 100,000 NIS in 2014. The trader has to file a profit and loss report at the end of the year and will be taxed according to their profit. Some professions, such as lawyers, CPAs, engineers and insurance agents cannot incorporate as an exempted trader.
 
Has to be registered at the VAT and income tax authorities.
 
Sole Traders
Another way for an individual to manage his business. Has to be registered with the VAT and income tax offices. Unlike the exempted trader, has to charge VAT but can offset the VAT he pays with what he charges. Has to report his turnover once or twice a month, depending on the annual turnover.
 

AUDIT AND REGULATORY ENVIRONMENT

Companies Act1999
Israeli law requires companies to keep adequate accounting records and to prepare accounts for each financial year. They have to be filed to the different tax authorities and the registrar of companies and must have their accounts audited.
 
The companies' law is under constant supervision by the Israeli parliament and judicial authority and is amended frequently. Most of the amendments are related to public companies. The amendments are meant to ease the process of managing companies and to increase transparency in public companies.
 
Banking Supervision Department
The Bank of Israel operates a department within it with the purpose to act as the regulatory authority of the banking industry in Israel. The functions of the Banking Supervision Department:
 
  • Supervising the stability of the banking corporations––avoiding excess risks to their stability and protecting depositors' money;
  • Ensuring that the banking corporations are managed properly;
  • Maintaining fairness in bank/customer relations
 
Money Laundering Act
The Money Laundering Law came into force in 2000 after 7 years of preparation.
 
The American government and several international organisations played an important role in bringing this law into force. One of the main purposes of the law is to make is more difficult for terrorist organisations to finance themselves.
 
The law relates to 2 entities; The Israeli banking industry and incoming and outgoing traffic to Israel. The law determines that everyone who enters or leaves Israel with more than 100,000 NIS in cash has to declare it.
 
Privacy Protection Act
The Privacy Protection Act 1981 organises the right for privacy in Israel and monitors the activity of all information banks containing personal and delicate data. The act requires every organization, processing personal data, to register with the Registrar of information bank.
 
OECD Anti Bribery Convention
Although Israel doesn't have a specific act to prevent bribery, once it became a member of the OECD, Israeli government has adopted the OECD Anti Bribery Convention (please refer to http://www.oecd.org/daf/anti-bribery/oecdantibriberyconvention.htm for more information).
 

INDUSTRY INCENTIVES

The Israeli government offers several incentives to encourage industrial activity and increase exporting of Israeli products worldwide. Some of these tools come in form of acts, laws and regulation. All from part of the annual state budget.
 
Depending on the size and nature of the business, you may qualify for Israeli Government Grants and subsidies.
 
Grants ,subsidies and Loans
Grants and subsidies
 
The main tool to use is the "The Act for Encouraging Capital Investments".
 
The act provides incentives in 3 different ways:
  1. Grants to an approved industrial facility.
  2. The right to an increased depreciation rate (200%-400% of regular depreciation rate).
  3. Lower income tax rate (6%-12%!)
 
Another popular tool to receive grants is through the Office of the Chief Scientist (OCS), empowered by the Law for the Encouragement of Industrial Research & Development – 1984 (R&D Law), oversees all Government sponsored support of R&D in the Israeli industry. This broad spectrum of support; stimulates the development of innovative state of the art technologies, enhances the competitive power of the industry in the high-tech global market and creates employment opportunities and assists in redressing Israel 's balance of payments. In addition to its domestic activities, the OCS is involved in a myriad of multinational industrial R&D agreements.
 
 
In addition, the Ministry of Economy operates the Agency for Assistance to small and medium businesses which helps in different ways, for example, establishing the right business plan through business guiding and advising and with grants to specific sectors and loans in preferred rates. The agency assists to businesses whose revenues are less than 100 million NIS and employs less than 100 people.
 
Israel operates several funds from which you can apply for a grant or a loan in order to work in an international market. For example, the BIRD foundation (please refer to http://www.birdf.com/for more information) and the foundation for assistance in international tenders and projects.
 
For additional incentives and benefits please refer to: http://www.investinisrael.gov.il/NR/exeres/2A82DCE7-9B2D-4581-83B7-8C518D8323D1.htm
 

PRINCIPAL TAXES

Corporation Tax
Corporation Tax is levied on the taxable profits of companies that are incorporated in Israel or nonresident companies that trade in Israel via some form of permanent establishment (such as a branch) Corporation Tax in 2014 is 26.5%.
 
Until the summer of 2011 The Israeli government planned to reduce the corporation tax to 18% by 2016, but due to the nationwide protest of the middle class in the summer of 2011 the government froze its plans and the tax rate stayed at 25%. Similar to the UK, Israel resident companies pay Corporation Tax on their worldwide income (which can be subject to double tax relief) whilst non-resident companies will only pay tax on income arising in Israel.
 
Corporation Tax rates are set on a fiscal year basis that runs from 1 January to 31 December each year.
 
Taxable profits are accounts profits as adjusted for tax legislation.
 
Most businesses have to pay their corporation tax in advance throughout the year.
 
The tax authority sets a rate for each business based on the projected or past income or the usual profit margins in the industry the business operates, and the corporation tax has to be paid in advance along with the monthly or bi monthly turnover report being submitted to the taxes authority.
 
Any company making a taxable loss can carry the loss back 12 months to recover tax previously paid and any losses that are not carried back can be carried forward to set against future income from the same source.
 
Dividends
Dividends between companies are exempted from dividend tax, whereas dividend for a major shareholder (over 10%) is 30% and non major shareholder is 25%.
 
Dividend to a foreign entity will be taxed at source at only 5%. And a dividend accepted in Israel from a foreign entity will be taxed at 25%-30%, depending on the holding rate, but will deduct the payment made at the origin country.
 
Indirect Tax (Sales Tax)
Value Added Tax (VAT) is a tax that is ultimately levied on consumer expenditure as businesses registered for VAT must charge VAT on their sales but can recover VAT that they have suffered themselves (such that the end consumer suffers the net cost). All Israel established businesses are required to register VAT, but if one decides to be registered as an exempted trader (for a business whose turnover is less than 78,000 NIS) he will not have to charge VAT nor recover VAT suffered.
 
Non Israeli businesses that trade in Israel may also need to register but must do so immediately and cannot wait until they exceed the threshold.
 
The current standard rate of VAT in Israel is 18%, which applies to most goods and services. There are a number of categories of items that are either zero rated or exempt from VAT; in either case no VAT is charged. A seller making entirely zero rated sales may recover the VAT on their purchases whilst someone making exempt sales will not necessarily be entitled to recover all VAT suffered.
 
Sales outside Israel are not charged with VAT but almost every import into Israel has to charge VAT.
 
Income Tax

The marginal Income tax charged is as follows:

Taxable income (NIS) 2013 2014
0-63,360 10% 11%
63,361-108,120 14% 15%
108,121-168,000 21% 22%
168,001-240,000 31% 32.4%
240,001-501,960 34% 36%
Over 501,691 48% 50%

Israel and residents of Israel working abroad (subjected to tax treaties among Israel and the foreign country). Sole traders are also subjected to the income tax table above. In addition, each resident of Israel is eligible to at least 2.25 credit points against his taxable income. One can earn more credit points if one meets certain criteria’s such as number of children under 18, holds an academic degree, new immigrants, age, place of residence in Israel, etc.

 
Individuals pay Income Tax on their earnings from all sources of income. Taxable sources of income are primarily from employment, self employed income, income from partnerships, dividend income, bank interest and other investment income. Individuals that are Israel resident pay tax on their worldwide earnings although their domicile status may affect the taxation of non-Israel earnings.
 
Generally individuals that are non Israel resident pay tax on their Israel source income only. Note that for higher-income individuals, personal allowances are reduced or eliminated. Income tax is dealt with on a fiscal year basis that runs from 1January to 31December each year.
 
Tax is collected at source from employment income and bank interest whilst other forms of income need to be reported annually on a tax return. Tax returns need to be filed by 31 December following the end of the tax year which is also the payment date.
 
Capital Gains Tax
 
The rate that CGT is charged at is 25% and is parallel to corporation tax, except for majority shareholder that is charged at 30%.
For individuals gains and losses made from the sale of capital assets (for example property and shares) are not dealt with as Income Tax but are dealt with separately under the Capital Gains Tax (CGT) rules. CGT is taxed at source when for any investment made in stock market, and deduct capital losses against his gains when files the tax returns.
 
Other forms of investments, such as savings plans and certain types of long term deposits are subjected to a reduced rate of 15%-20% taxed at source.
 

NATIONAL INSURANCE

National Insurance is a mandatory payment for both employed and unemployed individuals and paid also by the employer.
 
The payment is gradual and is linked to the average wages in Israel.
 
Employers will pay 3.45%-6.5% of the employee's salary and the employee has to pay 3.5%-12%.
 
Sole traders will pay 9.82%-16.23% of their income.
 
Summary
In the last 20 years the authorities in Israel set itself a goal to create a system of rules, regulations and practices that will make doing business in Israel as easy, smooth ,comfortable and competitive to any other country. Nowadays we can see that this goal was reached. The obvious indicators are the number of businesses that is growing continuously, just as the number of international corporations who sees the Israeli market as a good investment opportunity, the constant growth in Israel's GDP and the acceptance to the OECD.
 
Although this goal was reached, the authorities still working tirelessly to promote the Israeli industry and make it more competitive with an international network of commercial attaches spread around the globe with one sole purpose: to welcome anyone who wants to do business with an Israeli company and make as smooth and easy as it can be.

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