Enter the Israeli Market

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Entering Israel's Market 

Israel is a relatively young nation, created in 1948, but has quickly made its mark in the global economy. Israel is ranked as the 26th freest economy in the world, making it an attractive target for Foreign Direct Investment, and No. 2 among 14 nations grouped in the Middle East and North African region. The GDP of US$408 billion placed Israel 31st in the world in 2021.

These impressive figures add to the attraction of a highly motivated and well-educated workforce. Hi-tech, blue chip, medical and healthcare companies feature prominently in the economy.

Companies considering establishing a presence via a subsidiary in Israel face challenges complying with employment, tax, and company registration laws as they can vary between municipalities and regions. Plus, hiring staff from abroad poses more complications – and risks.

There are speedier and more cost-effective alternatives to launching a subsidiary, with Bradford Jacobs opening the door to a hassle-free route into Israel.

Work alongside our Professional Employer Organization (PEO) recruitment specialists, then utilize our Employer of Record (EOR) in-country experts to handle every aspect of compliance. Employers can depend on our in-depth knowledge of Israel and how to navigate its challenging legislative issues. Here we have set out some basic summaries of what you need to make the transition into the Israeli market, whichever sector you operate in.

Starting a Business in Israel

Israel is in an ideal position for trading opportunities, with its strategic location on the eastern coast of the Mediterranean and southwest corner of Asia with close proximity to African markets.

The structure for opening a company as a subsidiary in Israel is well-structured but demands a clear understanding of the requirements. The World Bank ranked Israel 35th globally for ‘ease of doing business’ out of 190 nations in its most recent global assessment: 28th for ease of starting a business and 26th for economic freedom. But other areas can be more problematic – Israel ranks 83rd for ease of accessing a new electricity supply and 75th when it comes to registering a property.

Foreign companies pressing ahead with plans to open a subsidiary must comply with Israel’s Companies Law (1999) and follow procedures, including:

  • Select a company name and decide on the business structure, typically a limited liability company (Ltd) operating under the Companies Law (1999). Register the name in Hebrew and English; if it matches with an Israeli company, the name of the home country should be added after the company name with the ‘Ltd’ suffix
  • Submit application form to set up a foreign company subsidiary to the Registrar for Companies
  • Provide Copy of the Articles of Association
  • Provide declaration of initial shareholder(s) and initial director(s)
  • Pay registration fee of ILS 2,645 (€734, US$834)
  • Notarize Hebrew translations of the Incorporation Certificate, Articles of Association and Status Certificate proving the parent company operates in its home country

Further procedures are involved before being able to operate with staff, such as:

  • Complying with the provisions of the Income Tax Ordinance, for both nationals and non-residents covering wages, dividends, assets
  • Registering with the National Insurance Institute for remitting social security contributions
  • Filing annual tax returns on a calendar year basis
  • Remitting withheld taxes by the 15th of the following month’s deadline
  • Creating employment contracts
  • Creating pay slips, which under Israeli accountancy rules must be divided into various sections
  • Salaries must be paid by the ninth of the following month
  • Calculating monthly salary and tax contributions and completing the monthly Form 102, verifying calculations before then submitting the year-end Form 126 to the authorities

Expanding Business into Israel

Opening a business in any overseas territory brings issues. Moving staff across the world means lengthy processes to obtain visas and work permits. When employees are in place, who will handle payroll? How will your company deal with regulations on taxation, entitlements and benefits, termination, and severance?

Drawing up an expansion blueprint is not enough. Your business plan will have to answer all these questions.

Israel welcomes foreign investment, but the employment market is complicated by its mix of legislation and collective agreements affecting employee benefits and entitlements. There are other questions too: where will you find distributors, manufacturers, and offices?

There is a simple alternative. By partnering a Professional Employer Organization (PEO) and Employer of Record (EOR) such as Bradford Jacobs, companies can plot a time-efficient and cost-effective path to locating and employing staff in Israel.

Israel Business Facts

  • Capital city – Jerusalem is recognized by Israel, but Tel Aviv is more internationally acknowledged
  • Population – around 9 million
  • Four geographical regions – Coastal plain of the Mediterranean; north and central hill regions; Great Rift Valley (Jordan Valley) and the Negev
  • Official languages – Hebrew and Arabic
  • Economy and world ranking – Ranked 26th for economic freedom, GDP US$408 billion - world ranking 2021, 31st.
  • Leading sectors by revenue – High-end technology; manufacturing; diamonds and metals; agriculture; tourism and transportation
  • Main exports – Hi-tech and electrical equipment; cut diamonds, pearls, and precious metals; chemicals and pharmaceuticals; electrical, medical, and optical appliances; sound and TV equipment and computers
  • Main imports – Machinery, equipment, and computers; electrical machinery; cars and vehicle parts; diamonds, gems, and metals; mineral fuel and oil
  • Main trading partners – US, UK, China, Honk Kong, EU, and India
  • Government – Republic based on multi-party parliamentary democracy
  • Currency – Israeli Shekel (ILS)

Advantages and Challenges of the Israel Market

Advantages of the Israeli Market include:

  • Growth Factors: Israel is recognized as a highly innovative nation, especially in manufacturing and hi-tech sectors. Research and development has also driven economic growth
  • Location: Excellent geographic position at eastern end of the Mediterranean, in the southwest corner of Asia with close proximity to North African markets
  • Business Access: The Israeli Investment Promotions Agency, part of the Ministry of Economy and Industry, provides an entry point for investors
  • Incentives: The Foreign Direct Investment (FDI) system offers tax breaks and other financial incentives
  • Trade: As an Associate member of the European Union, Israel has a free trade agreement with the economic bloc of 27 nations
  • Workforce: Highly educated and skilled, motivated workers

Challenges of the Israeli Market include:

  • Expenditure: High living standards come with a high cost of living
  • Consumers: A small population creates a relatively restricted internal market for goods and services
  • Social: The mixed Jewish, Muslim, and Christian population can make integration difficult for incoming staff
  • Employment: The tendency to promote ‘in house’ can make it hard for incoming foreigners to progress through the company hierarchy
  • Security: In an historically volatile region, safety is a potential issue for some companies planning expansion into Israel as their ‘steppingstone’ to the region

Limited Company / Subsidiary or Branch in Israel

International companies targeting Israel for expansion will generally choose a private limited liability subsidiary. Subsidiaries can have a totally different name from the parent company, pursue different business activities and form their own contracts. Branches, in comparison, are an extension of the parent company and are not a separate legal entity. Subsidiaries and branches have differences in how they are registered and operate. Key points are:

Main characteristics of a subsidiary:

  • A subsidiary in Israel is an independent legal entity set up under the Israeli Companies Law (1999) and operates under regulations imposed by the Israel Companies Ordinance and Registrar for Companies
  • A subsidiary can embark on additional business activities to those of the parent company
  • A subsidiary must register with the Israeli Income Tax Ordinance for tax and VAT and produce its own audited accounts and financial records
  • The parent company of a limited company/subsidiary will generally have no responsibility for its debts or liabilities, even if the parent company is the only registered shareholder
  • Regarded legally as a local company, the subsidiary should enjoy the same rights as local companies to any tax incentives

Main characteristics of a branch:

  • A branch is completely dependent on the parent company, operates as a foreign-based extension and must carry out the same activities
  • The parent company carries responsibility for any debts or liabilities of the branch
  • A branch is taxed only on the profits generated in Israel
  • Under Israel’s Companies Law (1999) the branch must appoint an Israeli national as its agent to receive official notices and legal documents
  • As a non-resident entity it is not eligible for any tax incentives

Legal Structures for Israel Market Entry

Companies planning to expand into Israel with a subsidiary must comply with the Israeli Companies Act (1999) and be incorporated as recognized by the Israel Companies Ordinance. This applies to all entities set up in the country, such as:

  • Private Limited Liability Company: At least one director and one shareholder, with liability of shareholders limited to their contribution in share capital.
  • Public Company: May offer shares and debentures to the public after publishing prospectus in line with Israel Companies Ordinance and Securities Law regulations. It must publish audited annual accounts.
  • Foreign Company: Must register as a foreign company with the Companies Registrar within one month of starting operations; if ‘limited’ it must display country of origin in its title and all documentation
  • Branch: These are not separate legal entities but operate as extensions of the foreign parent company.
  • Partnership: Comprises of individuals who have registered as a partnership with the Partnership Ordinance, usually with personal liability. Foreign partnerships are permitted.
  • Cooperatives and Non-Profit Organizations also operate

The legal structure for a private limited liability company:

The legal structure for a subsidiary allows it to operate independently from the parent company, under its own name and able to follow its own commercial and business activities. The subsidiary has a minimum of one shareholder to an unlimited number, who generally have no liability beyond their share contributions. The shareholders elect directors, company secretaries and managers who can then oversee day-to-day operations.

The legal structure for a branch:

A branch is not a separate legal entity from the owning foreign parent company and carries on the same business under the same name as the parent company as its permanent representative in Israel. The parent company has total responsibility for any debts or liabilities of the branch. The branch must provide Articles of Association of the parent company, and a ‘good standing’ certificate from an authorized authority in its home country. The branch must register with the Companies Registrar as a foreign company and appoint an Israeli resident as its local agent.

Opening a Business Bank Account in Israel

Recent years have seen the tightening up of banking regulations in Israel, with regard to controlling money laundering and tax evasion. The law requires foreign businesses to operate all financial dealings through a commercial bank account, after registering as a foreign company and before opening a tax file. Although the procedures can be complex, banking in Israel provides an up-to-the-minute and highly developed system and wide-ranging services for all companies. However, checking available services is still a pre-requisite as is comparing fees and languages spoken.

For a foreign company, the process can be time consuming depending on its size, the type of business registered, and which sector the company operates in. Here is where Bradford Jacob can help you – one of our many Professional Employer Organization (PEO) and Employer of Record (EOR) services to help establish companies in Israel, and globally. We have to be up to date with all changes as they happen. 

For instance, 2021-22 will see banking system reforms in Israel including ‘Open Banking Implementation’ and the ‘First Digital Bank (FDB)’ to open to the public, hopefully, by end 2021.

Ready to open that account? Paperwork may differ between main banks and branches. Requirements include:

  • Registration Certificate
  • Proof of company’s signatories - verified by an accountant or attorney
  • Notarized copies of directors’ passports or IDs
  • Authorized registration documents and Articles of Incorporation
  • Reason for company’s directors choice of bank regarding corporate account and mandate of signatories allowed to sign on that account
  • Anti-money laundering documentation certified by an Israeli attorney

Currently, banks require a face-to-face meeting when presenting documents as legislated under banking law; this is part of their ‘Know Your Customer’ policy.

Company Formation in Israel

To incorporate a company as a limited liability subsidiary in Israel, the parent company must comply with the Israel Companies Act (1999), the Registrar of Companies and the Israeli Companies Ordinance. Procedures include:

  • Registering the name with the Registrar of Companies, in Hebrew and English. If an Israeli company has the same name, add the home country of the foreign owner as a suffix.
  • Appointing a minimum of one shareholder and a company director, not necessarily Israelis and making their details publicly available.

Required documentation includes:

  • Parent company’s validated Certificate of Incorporation
  • The new company’s Status Certificate, Articles of Association and Incorporation Certificate proving they operate in their home country, in notarized Hebrew translations
  • Power of Attorney for an Israeli citizen to receive legal documents on the company’s behalf
  • Directors’ list with passport numbers (foreigners) and ID numbers for locals
  • Proof of payment for all registration fees

Now established as a legal entity in Israel, the company registers new foreign and Israeli employees with the Income Tax Ordinance and Social Security authority to be able to remit contributions to the National Insurance Institute.

Finding an office in Israel

Israel has very desirable qualities for companies planning international expansion; it is drivable from one end to the other, has widespread use of English with a highly educated population and a booming ‘Start-up’ environment. In fact, more per capita than Silicon Valley – one for every 1400 people. This accounts for its nickname of ‘Start-Up Nation’ and second only to the US. In fact, the end of 2020 saw investment funding for this sector raise US$9.5billion.

Location, location, location - a widely used mantra which can mean the difference between success and failure when it comes to choosing where to establish your office. So, look for creativity, a positive attitude among the young in the area, a culture for innovation, and available opportunities. This is an important step for businesses who need a ‘bricks and mortar’ facility or even if ‘office sharing’ or ‘co-working’.

Some important points to be considered are:

  • Demographics of potential employees, ease of travel and good transport links.
  • Do you need to be near your manufacturers or distributors?
  • Work, communication, and storage – so is it fit for purpose?
  • Is it attractive and functional to keep the work force happy?
  • Is it affordable and does it have room for expansion?
  • Are the areas around the office desirable, clean and good for mental health to attract the best workers and provide services and accommodation?
  • What local support or government grants or tax breaks are available?
  • Is it part of a work ‘Hub’ or ‘Cluster’?

In other words, is your office ‘good for doing business?’

So, which areas are considered centers of commerce for sharing knowledge and local support and known for a high concentration of leading-edge Hi-Tech business clusters, such as ‘Silicon Wadi’? Here are some notes on the most popular business areas in Israel:

  • Tel Aviv – financial district and hi-tech industrial hub with many business centers within a 30-minute drive
  • Herzliya – important center north of Tel Aviv for hi-tech companies and venture capitalists e.g., Benchmark Capital, IBM, Microsoft
  • Ramat HaSharaon, Kfar Saba, Raanana – areas for new Start-ups and companies attracted by affordable rents such as M-Systems and Capriza
  • Jerusalem – seat of government, densely populated capital has a large high-tech industry

For more information, click through here. For a new area of opportunity, click through here.

Finding an Israeli Manufacturer

After registering your business, opening a bank account, and locating an office, the next big step is having your product manufactured and put into the marketplace. Partnering manufacturers in Israel is an important issue. Once a product has been developed, it is futile if you can't adequately produce it. Checking the options before making the move is critical to success. International go-getting businesses and entrepreneurs must do research and network when investigating manufacturing partnerships. Such as:

  • Do they hold relevant quality certificates?
  • References from current clients
  • Can they keep up with demand? Or do they outsource?
  • Can they source materials?
  • Their financial stability
  • How will local customs impact production?
  • How will language impact on communication?
  • What is their minimum order quantity?
  • Possible penalties for poor quality or late deliveries
  • Payment options

Companies may also want to consider:

  • Market research to avoid manufacturing a product in a saturated market
  • Licensing to a company that can handle manufacturing, marketing, and distribution
  • Can the manufacturer build and test a prototype?
  • Protecting your intellectual property

Reach out to local businesses and check out local directories, our check out this list of sites we have prepared for you:

Finding an Israeli Distributor

Setting up a business, locating and manufacturing brings you to the next step – to find a front-line distributor to move goods around the country and further afield. One great benefit in Israel is that you can drive from one end to the other in about 4-5 hours, and internationally it has established trading partners in the US, UK, Europe, India, China, and Hong Kong, so finding the perfect match is crucial to successfully utilizing these advantages. As long-term partners, distributors can help with local knowledge, cultural and business customs and will have a vested interest in helping achieve long-term goals. English is considered an important language in the business world and is widely spoken, so this should not be an issue. However, legal documents may need to be in Hebrew and Arabic.

One way to establish contacts could be to join a trade mission from your home country who will target relevant companies and be ‘in the know’ regarding events, conferences and trade fairs and could organize one-to-one meetings with local businesspeople. Social media such as LinkedIn is a booming source of information. Joining business-to-business organizations and accessing local directories and magazines are all good resources for contacts and to become familiar with the locale. 

Bradford Jacobs, as well as being global PEO and EOR specialists, can also help with these issues. It is always good to have the experts on hand for advice. Some websites you can also check, include:

Contact Bradford Jacobs

Bradford Jacobs opens the door for companies planning to explore exciting new markets such as Israel, ideally located for further expansion into North Africa, southwest Asia, and eastern Mediterranean nations. Our Professional Employer Organization (PEO) specialist teams have in-depth global knowledge of how to recruit in new territories. Our Employer of Record (EOR) services will guarantee your company complies with laws relating to employment, registration, taxation, and payroll in Israel.

Bradford Jacobs provide ongoing consultation on human resources based on our understanding of individual cultures and customs of every country being targeted for business expansion. Work with Bradford Jacobs to expand into Israel and put the brightest and most talented staff in place. Contact us today to get started on your global expansion!