Doing business in Israel 2015
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Doing business in Israel 2015
PREFACE
Crowe Horwath (Israel), an independent member of Crowe Horwath International
in Israel, has prepared this profile of Doing Business in Israel 2015. This profile is
designed to provide information on a number of subjects important to those
contemplating investing or doing business in Israel.
This guide is one of a series publication issue by Crowe Horwath (Israel) to clients
and professional staff, and may be obtained from by contact Crowe Horwath (Israel).
Doing Business in Israel 2015 has been designed for the information of readers.
Whilst every effort has been made to ensure accuracy, information contained in this
booklet may not be comprehensive and recipients should not act or rely upon it
without seeking professional advice.
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CONTENTS
1. Introduction
1.1 Geography 5
1.2 Population 5
1.3 Political System 5
1.4 Languages 5
1.5 Currency 6
1.6 Economy 6
2. Business Entities and Accounting
2.1 Companies 9
2.2 Branches 10
2.3 Partnerships 10
2.4 Audit and Accounting Requirements 11
3. Finance
3.1 Exchange Control 13
3.2 Sources of Finance 13
3.3 The Law to prevent Money Laundering 14
4. Investment Incentives
4.1 General 18
4.2 Law For Encouragement Of Capital Investment 19
4.3 Tourism Project 24
4.4 Tax benefits for building for rents 27
4.5 Research and Development Support 28
5. Employment Regulations and Social
Security Contributions
5.1 Work Permits 32
5.2 Trade Unions and Worker Councils 32
5.3 Labor Related Costs 32
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6. Taxation
6.1 News and Updates 36
6.2 Income Tax 36
6.3 Capital Gains Tax 44
6.4 Benefits and Exemptions 45
6.5 Employee Stocks/Options Plan 47
6.6 losses 48
6.7 Administration 48
6.8 International Taxation 50
6.9 Value Added Tax (VAT) 54
6.10 Other Taxes 55
6.11 Real Estate Taxes 56
7. Appendices
Withholding Taxes on Dividend Payments 59
Withholding Taxes on Interest Payments 60
Withholding Taxes on Royalty Payments 61
VAT: Zero Rating and Exemptions 62
Crow e Horw ath (Israel) – Firm Profile 64
Crow e Horw ath (Israel) – International 68
Division
Executive Summary 70
Approach to Audit 72
Our Tax Approach 77
Our Team Approach 79
Firm Code 84
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Article 1: INTRODUCTION
1. Introduction
1.1 Geography 5
1.2 Population 5
1.3 Political System 5
1.4 Languages 5
1.5 Currency 6
1.6 Economy 6
Israel-European Union Free Trade Agreement 7
Israel-USA Free Trade Agreement 7
Israel-OECD Membership 7
Labor force 7
Inflation 7
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1.1. Geography
Israel, lying on the eastern seaboard of the Mediterranean Sea, bordered by Lebanon on
the North, Syria and Jordan on the East and Egypt on the South. Israel also borders the
areas controlled by the Palestinian Authority. Excluding the Gaza Strip and the West
Bank, but including the Golan Heights, Israel has an area of approximately 22,000
square kilometers (8,500 square miles) of which two thirds is desert (the Negev).
The major urban centers are Jerusalem with a population of approximately 815,000
people, the metropolitan area of Tel Aviv with 414,600 and Haifa with 272,200 people.
The greater part of the country is either hilly or arid. The climate is characterized by two
sharply contrasting seasons – a dry hot summer from April to October followed by a wet
winter from November to March. The average annual rainfall varies from barely 40 mm.
(1.6 in.) in Eilat in the south to over 800 mm. (32 in.) in the Upper Galilee in the north.
The coastal area has a Mediterranean type climate. Average temperature range from
50C (410F) in Jerusalem in the winter to over 400C (1040F) in Eilat in midsummer.
1.2. Population
Since the state's independence in 1948, Jewish immigrants from all over the world have
been settling in Israel. Israel’s population has increased from 870,000 people in 1948, to
about 7.1 million today. This figure consists of approximately 75% Jews with the
remaining 25% comprising Moslems, Druze, Christians and others.
1.3. P oliti cal S ys t e m
Israel is a secular democracy, where General Elections are held every four years to elect
120 “Knesset” (the Israeli Parliament) members. Every Israeli citizen as of age 18 is
eligible to vote, and be elected as of age 21. The elections are based on a system of
proportional representation of party lists.
The Israeli "head of government" is the Prime Minister who is the leader of the party that
holds the most seats in the “Knesset”.
1.4. Languages
The formal languages are Hebrew and Arabic. Hebrew is the main language throughout
Israel.
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1.5. Currency
The monetary unit used throughout Israel is the New Israeli Shekel ("NIS"), divided into
100 Agorot. The average exchange rate in 2014 was USD 1 = NIS 3.55
1.6. Economy
A mixture of private enterprises and Government controlled enterprises characterizes
the Israeli economy.
Private enterprises are the largest industrial manufactures, though the public sector has,
for reasons related to the history of the country, invested heavily in some of the largest
enterprises in the country. State-owned corporations provide public utilities, such as
electricity, water supplies, and railways. However, concurrent with international trends
and local priorities the government is now committed to and is implementing a program
of divestment and privatization. In the recent years the Government sold most of its
interests in banks, the national telecommunications system ("Bezeq") and the national
airline corporation ("El-Al"). Several government-controlled companies are quoted on the
Tel Aviv Stock Exchange.
Israel natural resources are limited to a few minerals such as Potash, Phosphates,
Bromine and Salts, found in the Dead Sea and in the surrounding area. Most of raw
materials required for industry are imported.
The most important industries are Hi-Tech industries, tourism, Bio-Tec industries, and
production of precision instruments, chemicals, pharmaceuticals, textiles.
Israel has entered into several trade agreements in order to strengthen its position in the
international markets. The most significant agreements are the Free Trade Area, with
the European Union, Free Trade Area with the United States and Free Trade Area with
the European Free Trade Association States (EFTA). The agreements with the
European Union, the United States and the EFTA countries place Israel in the unique
position of being a Free Trade Area partner with the world’s main economic regions.
Thus, Israel is able to bridge countries that do not have mutual agreements, provided
that the products meet the rules of each agreement. In addition, Israel has signed Free
Trade Area agreements with Canada and Turkey.
Israel-European Union Free Trade Agreement
In 1975 Israel and the EC signed an agreement providing an establishment for a Free
Trade Area for industrial and some agricultural products. According to the agreement,
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and subject to rules of origin, Israel’s industrial exports to the EC are exempt from
customs duties and other import restrictions. For its part, Israel has likewise eliminated
all duties on industrial imports from the EC.
Israel-USA Free Trade Agreement
In 1985 the Governments of Israel and the U.S.A. signed a Free Trade Agreement. This
agreement was fully implemented on January 1, 1995. The agreement, subject to rules
of origin (which are different from those of the European agreement), eliminates all
import duties and trade restrictions between the two countries.
Israel-OECD Membership
As from may 2010, the Organization for Economic Co-operation and Development
(OECD) accepted Israel as full member in the organization.
Labor force
The labor force is approximately 3.6 million people, with women comprising 47% of
employees. Following the economic slow-down and the waves of immigration since
1989, unemployment was at a high of approximately 10% of the labor force in December
2002, and decreasing gradually towards 6%.
Inflation
The rate of inflation has been in the range of 1% to 3% for the last few years. In 2014 the
inflation rate was 0.5%.
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Article 2: BUSINESS ENTITIES AND
ACCOUNTING
2. Business Entities and Accounting
2.1 Companies 9
2.1.1 Private Companies 9
2.1.2 Public Companies 10
2.2 Branches 10
2.3 Partnerships 10
2.4 Audit and Accounting Requirements 11
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2.1. Companies
The most common form of business entity in Israel is a limited company with shared
capital. The Companies Law governs the activities of the companies.
A company can be either limited by shared capital or by guarantee, or unlimited, in which
case its members do not have any ceiling to their liability.
There are no requirements as to nationality or residency of shareholders and directors of
companies.
In order for a company to be considered incorporated, it should be registered with the
Company Registrar at the Ministry of Justice. Apart from other requirements, an
incorporated company should have Articles of Association. The Company Registrar
usually accepts the English language.
2.1.1. Private Companies
A private company may have between 1 to 50 shareholders.
A private company must file an annual report with the Registrar of Companies,
which includes information regarding shareholders and directors but not
financial statements.
Annual financial statements, prepared according to generally accepted
accounting principles and audited by professionally qualified auditors, should
be presented at the shareholders’ annual meeting.
Shares and other securities should not be offered for sale to the public.
There may be restrictions, upon shareholders agreement, on the transfer of a
private company’s shares.
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2.1.2. Public Companies
A public company must have at least 7 shareholders, with no maximum
limitations.
There should not be any restrictions on the transfer of a public company’s
shares.
If a public company’s shares are traded on the Tel Aviv Stock Exchange
(TASE), the company is required to:
Publish annual audited financial statements and quarterly unaudited (but
reviewed by a CPA) financial statements.
Appoint at least two directors who do not have any business or other
relationships with the company, known as “Public Directors”.
Appoint an audit committee, comprised of at least three directors, two of
whom are “Public Directors”.
Appoint an internal auditor.
File annual and quarterly reports to the Registrar of Companies, TASE
and the Security Authority.
Any offer to the public must be through a published prospectus
Make an immediate announcement of any major event
2.2. Branches
Foreign companies wishing to conduct business in Israel must be registered with the
Registrar of Companies and provide the Memorandum and Articles of Association, list of
directors and other required information. All documents can be in either Hebrew or
English.
2.3. Partnerships
The Partnership Ordinance governs the activities of partnerships. If a partnership is
established for the purpose of conducting business in Israel, it can be either registered
with the Registrar of Partnerships at the Ministry of Justice or remain non registered.
Registration requires, among others, furnishing the Registrar of Partnerships with the
partnership’s name, activities, address, partners etc.
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A partnership cannot comprise more than 20 partners.
A partnership may be general or limited.
A partnership does not have to file annual reports of any kind. Profit or loss
should be added to the partners’ financial reports or income statement.
2.4. Audit and Accounting Requirements
All companies are obligated under the Israeli Companies law to prepare audited annual
financial statements, drawn up in accordance with Generally Accepted Accounting
Principles (GAAP) and file them with the Companies Registrar. The financial statements
have to be audited by a certified public accountant.
As from 2007, the Israeli Accounting Standards Board (IsASB) has adopted the
International Financial Reporting Standards ("IFRS") for public companies. Public
companies, traded in the Tel-Aviv Stock Exchange are required to publish their financial
statements drawn up under IFRS. Small and Medium enterprises (“SMEs”) have the
option to use Israeli GAAP or apply IFRS. During July 2009, the IFRS for SMEs has
been introduced by the International Accounting Standard Board.
Commencing 2011, IFRS for SME's has been adopted as an alternative basis of
accounting for non-public companies, targeting 2015 as the year for a final decision for
this basis of accounting. As of January 2015, no decision to that effect has yet been
taken by the IsASB.
All businesses need to maintain proper books of accounts for taxation purposes and to
retain the accounting records and associated documents for not less than 7 years. All
companies must have their accounts audited by a certified accountant - statutory full
scope audited financial statements).
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Article 3: FINANCE
3. Finance
3.1 Exchange Control 13
3.2 Sources of Finance 13
3.2.1 Banking 13
3.2.2 Stock Exchanges and Trading Facilities 13
3.2.3 Venture Capital Companies 14
3.3 The Law to prevent Money Laundering 14
3.3.1 No assistance to money launderers 15
3.3.2 No Tipping Off 15
3.3.3 Voluntary Disclosure 15
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3.1. Exchange Controls
There are no exchange controls in Israel on inward or outward investment. Foreign
currencies can be bought and sold freely and there are no restrictions on the
maintenance of foreign currency bank accounts in Israel.
There are no limitations on the repatriation of profits from Israel.
3.2. Sources of Finance
3.2.1. Banking
The Israel’s central bank, the “Bank of Israel”, acts as banker to the Government. It is
responsible, inter-alia, for setting base interest rates through its Monetary Policy
Committee.
Overdrafts with fluctuating interest rates are the most commonly used facility for
financing working capital or for funding seasonally affected business. Technically,
overdrafts are repayable on demand.
Banks also offer short, medium or long-term loans. The repayment terms are negotiable
and the rate of interest may be fixed or variable. To obtain bank finance, the business
will normally be required to provide adequate security. Security will typically be in the
form of a fixed or floating charge over the business assets, as well as, in certain
circumstances, personal guarantees from the owners.
In addition to these traditional services banks offer various other financing arrangements
through subsidiaries or affiliates. These include installment credit, leasing, factoring and
invoice discounting and ‘mezzanines’ finance.
3.2.2. Stock Exchanges and Trading Facilities
The Tel Aviv Stock Exchange (TASE) provides a market for shares and other securities
issued by public companies and government bonds.
Trading in securities and raising capital from the public are regulated by the Securities
Law, under which the Security Authority was established to protect the interest of
investors.
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To become and remain listed, a company has to satisfy and abide by the extensive rules
established by the TASE and the Security Authority, which is independent from the Tel
Aviv Stock Exchange (TASE).
3.2.3. Venture Capital Companies
For businesses that are not large enough to consider Stock Exchange entry but which
require equity or mezzanine finance, Venture Capital Companies can provide equity for
start-ups, for development or for management buy-outs.
Venture capital companies may also be a source of finance for a business that does not
have sufficient security to borrow from a bank. However, they may require a higher
return than a traditional bank.
3.3. The Law to prevent Money Laundering
Israel has joined the fight against the Money Laundering by enacting the Money
Laundering Law. This Law enables Israel to take an active role in the international fight
against money laundering.
On the 22 October 2014, the Israeli government confirms the conclusions of the "Loker
Committee" that was established in order to reduce the use of cash in the Israeli
economy.
The main purpose was to fight the undeclared capital ("Black Capital"), and the
laundering of money in order to enable "Real Tax" collection.
The benefits driven from reduction the use in case, are as follows:
1. Expanding the tax basis.
2. Reducing the competitive advantage of business which violates the law,
compared to those who follow the law.
3. Truth Tax collection.
4. Implement advanced method of payments.
5. Reduce criminal activities and laundering of money.
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The conclusions of the committee were as follows:
1. Limiting the cash transactions between individuals carrying on a business to
10,000 NIS (Instead of 20,000 NIS)
2. Limiting the cash transactions between individuals to 15,000 NIS (instead of
unlimited amount).
3. Limiting the possibility to pay off checks that were transferable more than once,
(up to 10,000 NIS). It was also recommended to prohibit transferring check
without beneficiary's name.
4. Starting using debit cards that are credited immediately and debit cards that can
be loaded.
3.3.1. No assistance to money launderers
Anti Money Laundering Law imposes certain identification and reporting obligations on
financial institutions, including banks, stock exchange members and money changers.
These institutions are required to positively identify anyone, either a person or a
corporation, requesting services such as opening of an account, change of ownership of
an account, or execution of certain transactions.
3.3.2. No Tipping Off
To prevent money laundering the aforementioned institutions are also required to report
certain transactions to the authorities. These transactions fall into two categories:
Transactions which exceeds defined amounts.
Unusual transactions – transactions which appear to be unusual in light of the
information the institution possesses - for example, a transaction whose aim
seems to be avoidance of the "size defined" reporting requirements or an
account whose holder seems to be operating on behalf of someone else, etc.
3.3.3. Voluntary Disclosure
The Israeli Tax Authority (hereby - “ITA”) released on 7 September 2014 a new
Voluntary Disclosure Program (hereby - "The Program") for unreported income and
assets, (which replaces the former 2005 and 2011 programs) and applies to all types of
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unreported assets and income, whether offshore or domestic, passive income or income
derived from a trade or business.
The program consist two temporary programs in the following courses:
1. A procedure allowing anonymous applications (Hereby - "the Anonymous
course”).
2. An expedited procedure for taxpayers with funds not exceeding 2,000,000 NIS
provided that the estimated taxable income does not exceed 500,000 NIS.
(Hereby - "The Expedited course”).
This program is not available to taxpayers who are already subject to investigation by
the ITA, even a confidential enquiry, when they apply for the program. Is also not
available for funds derived from criminal activities.
Israeli taxpayers can apply for the general voluntary disclosure procedure until 31
December 2016. The Anonymous and the Expedited courses are available until 6
September 2015.
Taxpayers who wish to regularize their tax situation and apply for the program must file a
request through their representative (lawyer, accountant or tax advisor).
The application should contain all relevant information on all unreported assets (offshore
or domestic) and their related income and gains, including passive income (capital gains,
interest, dividends, etc.) or active income (derived from a trade or business) gained in
the 10-year period preceding the application for the program.
Unreported assets and their related income and gains will be assessed by the tax
inspector who will calculate the principal amount of tax, late-payment interest and
penalties.
The main benefit of the program is the full relief from criminal liabilities relating to tax
avoidance for taxpayers.
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Article 4: INVESTMENT INCENTIVES
4. Investment Incentives
4.1 General 18
4.2 Law For Encouragement of Capital Investment 19
4.2.1 Overview 19
4.2.2 Applicable of the Law 20
4.2.3 Location 21
4.2.4 The Grant Scheme 21
4.2.5 The tax benefits scheme 22
4.2.5.1 Preferred Corporation 22
4.2.5.2 Preferred Enterprise 23
4.2.5.3 Preferred Income 23
4.2.5.4 Tax benefits 23
4.2.5.5 Dividends from preferred enterprise 24
4.3 Tourism Project 24
4.3.1 The Grant Scheme 24
4.3.1.1 Accelerated Depreciation 25
4.3.1.2 Corporate Income Tax rates 25
4.3.1.3 Dividends 26
4.3.2 Tax benefit Scheme 26
4.4 Tax benefits for building for rents 27
4.4.1 Accelerated Depreciation 27
4.4.2 Tax Rates 27
4.5 Research and Development Support 28
4.5.1 Overview 28
4.5.2 The development of a novel product 28
4.5.3 R&D Support for a start-up company 28
4.5.4 R&D Support for Companies in Special Geographical 28
Areas
4.5.5 Royalty 29
4.5.6 "Engels" Law- for Investment in Research and 29
Development Companies
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4.1. General
The state of Israel supports its investment initiatives by developing and granting a wide
range of incentives and benefits in order to achieve a favorable balance of trade,
improve revenues, maximize productivity in designated industrial sectors, ensure healthy
competition in the relevant markets and facilitate overall growth.
To attain these goals, Israel offers substantial benefits and concessions through a
number of laws and regulations, as summarized below. Special emphasis is laid on high-
tech companies and R&D activities, as considerable importance is attached to these
fields.
Furthermore, numerous programs have been formed, starting from grass roots, to
support the high-tech industry. Israeli companies may also be eligible for benefits from
international funds created as a result of cooperation agreements established between
the Israeli and foreign governments, including Canada, the United States, the European
Union, etc.
Additionally, to promote weak economic regions within Israel, differential benefits are
granted (A, B and Central Israel) - being substantially higher in the designated priority
regions (A, B) than in the center of the country.
Enterprises are however eligible for benefits anywhere they are erected, provided they
comply with the relevant criteria (see below).
Additionally, Israel grants foreign investors and major investments increased tax
benefits.
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4.2. Law For Encouragement of Capital
Investments
(See "Doing business in Israel - 2010" to learn more about the Law prior the amendment No 68)
4.2.1. Overview
The Law for Encouragement of Capital Investments (on this chapter will be referred by
"the Law") was originally introduced in 1959, in order to boost the Israeli economy by
attracting local and foreign investors to contribute capital investments to the Israeli
industry.
The Law's main goal is to amplify the attractiveness of the Israeli economy in the
international competition over local and foreign capital for investment and development.
Likewise, through the set of incentives prescribed by it, the Law promotes a more
geographically balanced distribution of the population across the country and
strengthening of the peripheral regions.
Traditionally, the law includes two main schemes of government incentives: the grant
scheme which allows up to 24% government's grant on qualified investments for
establishing or expending industrial enterprise at preferred areas; and the tax incentive
scheme.
At the end of 2010, the Knesset (the Israeli parliament) had decided on the 68
amendment of the Law, which concludes an extensive reform of the Law, which would
be applied on income attributed starting January 1, 2011 (hereinafter will referred as "68
Amendment"). As studies have indicated inefficiency in the allocation of resources
according to the Law's provisions, and based on the conclusions of the professional
public committee appointed by the ministry of finance, government announced extensive
amendments in the Law. Outline below are some of the main changes:
Updating the Law's objectives in line with the changes that have taken place in
the Israeli economy characteristics, placing emphasis on encouraging
investments, generating added value in innovation and heightened
competitiveness of Israeli industry;
Allowing the Israel Investment Center flexibility to establish other support
schemes besides the existing schemes, for a range of investments, focusing on
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investments in human capital, and in line with industry characteristics at any
given time;
Prioritizing the peripheral regions through the grants scheme;
Simplifying the tax benefits scheme, establishing flat tax rates on all income of
"preferred companies" and giving preference to the peripheral regions by
lowering the reduced tax rate for companies in those regions;
Eliminating the distortions created through the concentration of resource
allocation in the tax benefits scheme, by preventing the grant of greater tax
benefits to foreign investors, and by excluding companies based on the
exploitation of natural resources, including petroleum and natural gas, and
other companies for which there is no room for granting incentives through tax
breaks, such as state-owned companies.
Customizing a dedicated tax track aimed at promoting the operation of huge
companies in Israel.
4.2.2. Applicable of the Law
The Law applies to industrial enterprises which qualify as "International Competitive
Enterprise".
The definition of industrial enterprise includes enterprises who own Productive activities
as textiles, food, electronics, chemicals, pharmaceuticals, computer software,
biotechnology, nanotechnologies, etc.
The High-Tech industry, being a major growth engine of the Israeli economy, had been
promoted to the Law. In accordance, the definition of productive activity had also been
applied to developing of software programs and Research and Develop industrial
centers located in Israel. Industrial R&D for a foreign resident will be recognized as
industrial enterprise once approved by the Head of Industrial R&D Administration.
The Amendment No 68 excluded companies based on the exploitation of natural
resources as petroleum and natural gas from obtaining incentives under the Law. State-
owned companies had also been excluded from obtaining benefits under the Law.
Industrial enterprise could be approved either by the investment center or by the
Israeli Tax Authority.
In order to meet the International Competitive Enterprise rule, 25% of the enterprise's
revenues should be driven from exporting to large international markets.
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4.2.3. Location
The government grants scheme is affected by the location of the company's activities.
Several regions in Israel have been declared National Priority Regions (Priority Area A),
among them:
The Galilee
Jordan Valley
The Negev
Jerusalem (for hi-tech enterprises)
Areas which do not include in the Priority Area A are considered under the Law "Other
Areas"1.
4.2.4. The Grant Scheme
An industrial enterprise located in "Priority Area A" fulfilling the terms of the Law, may be
eligible for grants to be calculated as percentage of the approved investment. The grants
may be 20% of the actual investments of the enterprise on the follow assets:
Buildings, machinery and other equipments (not including private vehicles)
owned by the enterprise and used according to the approved program (by the
Incentive Center).
Expenses made for land developing.
Expenses made for renovation of the building.
The grant scheme would only be applicable for enterprises located in Priority Area A.
Enterprises from other areas are not qualify for the grant scheme, but can be entitle for
tax benefits under the Law.
Under the amended law, applies for income accrued starting 2011, enterprises
complying with the requirements of the law may benefit simultaneously from both the tax
benefits (lower corporate tax rate as described earlier) as well as applicable non-
refundable grants (only relevant for Area A).
1
Before the Amendment No 68 to the Law, the country's regions were divided for 3 zones: Priority Area A,
Priority Area B and Other Areas. According to the amendment, Area B was cancelled. However, for the
purpose of incentives for Tourism Project (see below) all three areas are relevant.
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4.2.5. The Tax Benefits Scheme
The Law prior to the Amendment No 68 determined differed tax exemption for a
"Beneficiary Enterprise". However, the exemption was concluded only for the growth in
the enterprise's revenue which was attributed to the extension of the plant2. The tax
exemption was concluded based on the location of the enterprise3.
Under the amended Law, all prior tax benefits schemes had been canceled. The
"Beneficiary Enterprise" was replaced with "Preferred Enterprise", as defined below.
Instead of differed tax exemption schemes, reduced flat tax scheme had been
introduced. Enterprises located in Priority Area A would be eligible for reduced
corporate tax of 9% on all preferred income. Corporate tax rate on other regions would
be 16%.
4.2.5.1. "Preferred Corporation"
Preferred Corporation is a legal entity which conducts all the following:
An Israeli company, which was incorporated under the law of Israel, and the
business of which is controlled and managed within Israel. The company may
not be transparent entity for tax purpose, as a “family company”, a “transparent
company” or a Kibbutz. Notwithstanding the above, registered partnerships
may be consider as Preferred Corporation provided all its partners are Israeli
companies which fulfill the above mentioned.
The corporation owns a Preferred Enterprise (as defined below)
The company must maintain admissible books and records and file any reports
required under Israeli Tax Law.
The company and its officers must be free of previous convictions on tax fraud
charges during the 10 years proceeding the benefits periods.
It should be noted that companies own factories and quarries for producing natural
resources (minerals, gas and oil), as well as governmental corporation, will be excluded
from the definition of "Preferred Corporation", and not be eligible for benefits under the
Law.
2
It is possible to be eligible for the tax exemption on all the enterprise's taxable income in case the
enterprise had fulfill the requirements of the Law from the first year income had been accrued (mainly
for R&D centers).
3
Under the Law before the 68 Amendment, Priority Area A was entitled for 10 years exemption. Priority
Area B – 6 years. Other Areas – 2 years.
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4.2.5.2. "Preferred Enterprise"
As mentioned, the tax benefits scheme would apply only on Preferred Income (as
defined below) of a Preferred Enterprise. According to the law, Preferred Enterprise
would be an industrial enterprise fulfilling the following terms:
The enterprise is competitive within the international market; and
The enterprise contributes to the Gross Domestic Product of Israel.
An enterprise will be deemed to have fulfilled this condition if it is one of the following:
Engaged mainly in biotechnology or nanotechnology, and obtained an approval
of the Head of Industrial R&D Administration;
At least 25% of its Preferred Income of the enterprise which was produced from
direct exporting to international markets; or
Engage mainly on the field of renewal energy.
4.2.5.3. "Preferred Income"
The Preferred Income would be determined as the gross income of a Preferred
Enterprise (not including discounts) which was produced or which accrued during the
course of business activities of the enterprise in Israel, as follow:
Income from products manufactured in Israel, including components
manufactured by subcontractors. Income derived from natural resources (Gas,
Mineral, Oil) would not be calculated as part of the Preferred Income.
Income from the sale of semiconductors manufactured by independent
subcontractors, as long as the IP belongs to the Preferred Enterprise.
Income derived from royalties for the use, or the right to use, a patent or know-
how which was developed in the Preferred Enterprise.
Income derived from industrial research and development made for foreign
resident, as long as an approval of the head of the R&D center had been
provided.
4.2.5.4. Tax benefits
Preferred Enterprise would be eligible for tax benefits for each tax year on which it has
fulfilled the 25% export condition.
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Corporate Income Tax of a Preferred Enterprise would be 9% in 2015 if the enterprise is
located on "Priority Area A", and 16% if it is located on other regions.
However, a transitory provision for the years 2011 to 2014 determine the following tax
rate as described in the following table (ordinary tax rate is being shown for
convenience) :
Tax Year Priority Area A Other Areas Ordinary Tax Rate
2011 10% 15% 24%
2012 10% 15% 25%
2013 7% 12.5% 25%
2014 9% 16% 26.5%
2015 9% 16% 26.5%
4.2.5.5. Dividends from Preferred Enterprise
Dividend distributed from the preferred income would be taxed at 20% (Dividend
distributed to Israeli corporation is exempt from taxes.
Dividend distributed from exempt income would be taxed also at corporate tax rate
(26.5% at 2015).
4.3. Tourism Projects
The law for encouragement of capital investments also applies on tourism enterprise.
Nonetheless, the incentives for tourism projects remained as prior to the 68 amendment.
"Tourism Enterprise" is defined as tourism facility which includes at least 11 hotel rooms,
and provides sleeping arrangements service and additional services as catering,
recreation and leisure. Unique Tourist attractions have also been included as Tourist
Enterprise.
4.3.1. Grant Scheme
Tourist Enterprise which is located in Priority Area A will be eligible for non refundable
grant of up to 20% from its approved investments. Tourist Enterprise which is located in
the Negev Area will be entitled for 30% grants.
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Tourist Enterprise which is located in Priority Area B will be eligible for non refundable
grant of up to 10% from approved investments.
In addition to the grants, Tourism Enterprise would be eligible for the following tax
benefits.
4.3.1.1. Accelerated depreciation
Approved tourist enterprise may charge, at its request, accelerated depreciation on its
assets (including buildings) used for the purpose of producing the approved income, as
followed:
machinery and equipments – 200% of the ordinary percentages that could be
charged;
Buildings – 400% of the ordinary percentages that could be charged.
When proven that machinery and equipments had been used on double or more shifts or
been used in extreme conditions, Approved Enterprises may charge 250% of the
ordinary percentages that could be charged.
Grants received for expenses made for land development would not be taxed, but, for
the purpose of depreciation, the sum of the grant would be discharged from the cost of
the building.
4.3.1.2. Corporate income tax rates
Approved tourist enterprise located in Priority Area A would be exempt from tax
(deferred) for the first two years starting the first year the enterprise realized taxable
income. For the next 5 year the enterprise would be tax on the ordinary corporate tax
rate (26.5% on 2015).
Had the enterprise's shareholders are foreign residents the corporate tax rate would be
as followed:
When more than 49% but less than 74% of the enterprise's shareholders are
foreign residents – the corporate tax rate would not exceed 20%.
When more than 74% but less than 90% of the enterprise's shareholders are
foreign residents – the corporate tax rate would not exceed 15%.
When more than 90% of the enterprise's shareholders are foreign residents –
the corporate tax rate would not exceed 10%.
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The two years tax exemption (deferred) would only be available for enterprise located in
Priority Area A.
4.3.1.3. Dividends
Tourism Enterprise which distributes dividend from its exempted income would be
charged on corporate tax regarding the exempted income.
Dividend distributed from the approved income would be limited to 15% tax rate as long
as the scheme approved before January 1, 2014 (unless relevant double tax convention
is in force).
4.3.2. Tax Benefit Scheme
Tourism Enterprise would be eligible for extensive tax benefits if it prefers the tax benefit
scheme instead of the grant scheme. Tourist Enterprise not located on Priority Area A
could only be eligible for the tax benefit scheme and not be eligible for the grant scheme.
The tax benefits under this scheme are as followed:
Tourist Enterprise located in Priority Area A would be exempt from tax
(deferred) for 10 years starting the "Chosen Year". The enterprise may elect to
be charged with flat reduced tax of 11.5% instead of the deferred exemption
("Ireland Scheme").
Tourist Enterprise located in Priority Area B would be exempt from tax
(deferred) for 6 years starting the "Chosen Year".
Tourist Enterprise located in Other Areas would be exempt from tax (deferred)
for 2 years starting the "Chosen Year".
Tourism Enterprise which distributes dividend from its exempted income would be
charged on corporate tax regarding the exempted income.
Dividend distributed from the approved income from January 1, 2014 , would be limited
to 20% tax rate as long as the scheme was approved starting from January 1, 2014.
(Unless relevant double tax convention is in force).
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4.4. Tax benefits for building for rents
In order to encourage building apartments for rent the law for encouragement of capital
investments determine several tax incentives for "building for rent".
"Building for rent" includes at least 16 apartments used for living, and at least 70% of the
approved building is being rented for living.
4.4.1. Accelerated Depreciation
The deductible depreciation rate allowed is 20% as long as the building uses as a
"building for rent". (10 times the ordinary percentages charged for apartments).
4.4.2. Tax rates
The rate of the taxable income from rent or disposal of approved apartments would be
as follow:
The owner of the approved building is an Israeli Company – 11%.
The owner of the approved building is an Israeli Company whose shareholders
are mainly foreign residents – 18% or less4.
The owner of the approved building is an Israeli individual – 20%.
4
For the tax rate regarding Israeli approved company whose shareholders are foreign residents see in chapter 4.3
regarding Tourism project.
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4.5. Research and Development Support
4.5.1. Overview
The Office of the Chief Scientist (OCS) of the Ministry of Industry and Trade is
responsible for implementing government policy regarding the support and
encouragement of industrial research and development in Israel.
The variety of support programs provided by the OCS, have played a major role in
enabling Israel to become one of the most important centers for high-tech
entrepreneurship outside of the United-States.
4.5.2. The development of a novel product
A single or multi-year program that will provide know-how, processes or methods for the
manufacture of a new product or the major improvement in an existing one or a new
process or a major improvement in an existing process. The product must have a
sizeable potential for export sales.
The support is in the form of a conditional grant amounting to 30-50% of the approved
R&D budget.
4.5.3. Support by Grants for R&D of Start-Up
Company
A start-up company is defined as one whose R&D program is its first and only activity
and where the R&D staff is the sole source of financing.
The support is in the form of a conditional grant of 66% of the approved R&D budget up
to a maximum of $250,000 per year for up to two years. Any approved R&D expenditure
above $250,000 may receive a conditional grant of 50%. The R&D support includes
beta-site testing as well as patent registration
4.5.4. R&D Support for companies in special
geographical areas
Any approved R&D program-taking place in “Development Area A” is entitled to a
conditional grant of 60% of the approved budget.
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In any area delineated as “Front Line” the conditional grant amounts to 70-75% of the
approved budget with the higher figure for companies that also manufacture in that area.
4.5.5. Royalty
Any income derive from an R&D program that has enjoyed government support is liable
for the payment of royalties to the OCS. The royalty payments are based upon a
percentage of sales up to the repayment of the grant.
4.5.6. "Engels" Law - for Investment in Research
and Development Companies
Investments in Israelis Research and Development companies (hereby:"R&D
companies"), that are in the first stages of research and development activity (the –
"seed stage") represent a very high risk investment for the investors. These companies
which represent a significant part of Israeli industry, have difficulties finding investors,
and have difficulties finding alternative funding solution.
In order to increase the funding of these companies, Israeli equity investors in these
companies are entitled to expense their investment.
The Engel Law establishes that Israeli individuals that purchase stocks of qualified
companies will be eligible to expense the investment.
The law is in effect for eligible investments made beginning in 2011 until 2015 and the
maximum amount of the benefit is 5 million NIS for an individual investor in qualified
Company.
The law establishes that the eligible investments must meet three criteria in clause 20A:
1. Eligible investment
2. Period of benefit
3. Target company
Eligible investment
An eligible investment is an individual investment in a target company, in any tax
year, in which the stock of a target company has been allocated in that year.
The expensing of the eligible investment will be allowed only for the investment of
the individual in an eligible company and not for funds that were transferred by a
corporation. These criteria is based on 2 conditions:
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1. the payment for the investment was transferred to the company
2. The stock purchase by the investor in the target company, relates to the
same year of which the investment took place.
Period of benefit
The benefit period is a period of three tax years beginning in the tax year in which
the fund for the eligible investments, were paid.
The exact date during the tax year in which the funds were transferred, is not
relevant.
The benefit period relates to a specific investor with regards to a specific eligible
investment in the company. In case there are number of investors, each one of
them will have a personal investments period.
Target Company
The criteria for recognition as a Target Company are:
1. An Israeli company.
2. The Target Company has received approval by the Israeli Office of the Chief
Scientist of the Ministry of Industry and Trade for it's in Research and
Development activities.
3. The Target Company shares are not registered for trade on Stock Exchange.
4. At least 75% of the investment in the Target Company is utilized to fund its
research and development activities.
5. At least 75% of the research and development expenses of the Target
Company during the benefit period were spent in Israel.
6. In the first year of investment and in the succeeding year, the revenues of the
Target Company were not in excess of 50% of its research and development
costs.
7. The research and development cost incurred by the target Company were
spent for the promotion or development of its subsidiary.
8. The research and development costs of the Target Company comprise at
least 70% of its company's costs.
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Article 5: EMPLOYMENT REGULATIONS
AND SOCI AL SECURITY
CONTRIBUTIONS
5. Employment Regulations and Social
Security Contributions
5.1 Work Permits 32
5.2 Trade Unions and Worker Councils 32
5.3 Labor Related Costs 32
5.3.1 National Insurance (Social Security) 32
5.3.2 Paid Vacation 32
5.3.3 Severance Pay and Pension Funds 33
5.3.4 Sick Leave 33
5.3.5 Education Fund 33
5.3.6 Reserve Military Duty 33
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5.1. Work Permits
In order for non-resident to work in Israel, a work permit or a status other than tourist is
required.
Under the “Law of Return”, immigrants are entitled to permanent residence status or an
A-1 visa, which entitles the immigrant to a temporary resident status.
It is a prerequisite for other non-residents who wish to work in Israel to apply for a work
permit (usually B-1 visa). In order to obtain a work permit, Israeli employers must apply
to the Ministry of Labor, and where applicable, also to the Investment Center.
5.2. Trade Unions and Worker Councils
There is no legal requirement for employers to recognize any trade union unless a
majority of the work force votes in favor of such recognition. Agreements between
employers and trade unions over pay and conditions are not binding by law and unions
may not take industrial action without first securing a majority vote in a secret ballot of
their members. There is no legal requirement for employees to be represented on the
board of directors of companies.
5.3. Labor Related Costs
The Israeli employees' labor and social security costs include the following:
5.3.1. National Insurance (Social Security)
Employees pay up to 12% and employers 6.75% for a total of 18.75% of employees’
salaries monthly. Cover includes unemployment insurance, maternity benefits, work
injury, child allowances, old age pensions, medical care costs and reserve military duty
compensation.
5.3.2. Paid Vacation
Employees are entitled to yearly paid vacations of from 2 to 4 weeks depending on
length of employment. They are also entitled to a recreational allowance based on length
of service.
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5.3.3. Severance Pay and Pension Funds
Employees are entitled to severance pay on dismissal or reaching retirement age (67 for
men and 64 for women) but not on voluntary resignation. However some employers are
required to pay severance pay on resignation under terms of specific labor agreements.
Severance pay amounts to one month’s salary for every year of employment based on
the last month’s salary received. Many employers provide for this by monthly payments
to a provident fund.
In addition, most employers are required by labor agreements to make monthly
payments to pension funds, at the rate of 6% of the average salary published by Social
Insurance Authority, for employees’ pension on retirement.
5.3.4. Sick Leave
Employees are entitled to payment of sick leave as follows:
The 1st day – 0%
The 2nd and 3rd day – 50%
The 4th onwards- 100%
5.3.5. Education Fund
Some employers elect to make payment to recognized funds for the ongoing education
of senior and academic employees by monthly payments, at the rate of 5 - 7.5 % - the
employer and 2.5% the employee, from the employees’ salaries, to a provident fund
5.3.6. Reserve Military Duty
It is customary, though not required by law, that employers pay the difference between
compensation received by employees for periods of reserve duty from the National
Insurance Institute and the regular salary they would otherwise have received.
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Article 6: TAX ATION
6. Taxation
6.1 News and Updates 36
6.2 Income Tax 36
6.2.1 Overview 37
6.2.2 Corporations 37
6.2.2.1 Residence 37
6.2.2.2 Tax Rates 37
6.2.3 Special entities 38
6.2.3.1 Family Company / Transparent 38
Company
6.2.3.2 Land Company 38
6.2.3.3 Partnerships 38
6.2.3.4 Controlled Foreign Occupational 38
Company
6.2.3.5 Controlled foreign corporation (CFC) 39
6.2.4 Dividends Received by a Corporation Domiciled 40
in Israel
6.2.5 Individuals 41
6.2.5.1 Residence 41
6.2.5.2 Tax rates 42
6.2.5.3 Special Tax Rates for Individuals 43
A Rental 43
B Rental derived from Real estate 43
Located outside Israel
C Interest 43
D Dividend 43
E Gambling 44
6.3 Capital Gains Tax 44
6.3.1 General 44
6.3.2 Tax Rates 44
6.4 Benefits And Exemptions 45
6.4.1 Tax incentive for foreign residents 45
6.4.2 Deductions for Expatriate Employees 46
6.4.3 Benefits to New Immigrants and Returning 46
Residents
6.4.3.1 General 46
6.4.3.2 Definitions 46
6.4.3.3 The benefits 47
6.5 Employee Stocks/Options Plan 47
6.6 Losses 48
6.7 Administration 48
6.7.1 Filing Tax Return 48
6.7.2 Collection of Taxes 49
6.7.2.1 Withholding Taxes 49
6.7.2.2 Advance Tax Payments 49
6.7.2.3 Balance of tax 49
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6.8 International Taxation 50
6.8.1 Double Taxation Relief 50
6.8.2 Transfer Pricing 50
6.8.2.1 Transfer Pricing Regulations – Setting 50
an Arm Length Price
6.8.2.2 Reporting Requirements and 51
Documentation
6.8.2.3 Coming Into Effect and Transitional 51
Regulations
6.8.3 Taxation of Trusts 51
6.8.4 Participation Exemption for Israeli Holding 53
Company
6.8.4.1 Overview 53
6.8.4.2 Definitions 53
6.8.4.3 Dividends distributed by the holding 54
company
6.9 Value Added Tax (VAT) 54
6.10 Other Taxes 55
6.10.1 Custom Duties 55
6.10.2 Purchase Tax 55
6.10.3 Stamp Tax 55
6.10.4 Estate Tax 56
6.10.5 Gifts 56
6.11 Real Estate Taxes 56
6.11.1 Acquisition Tax 56
6.11.2 Betterment Levy 57
6.11.3 Land Appreciation Tax 57
6.11.4 Sales Tax 57
6.11.5 Municipal tax 58
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6.1. News and Updates
On November 25, 2013 a new tax reform had been enforced under The Law for Change
in the Tax Burden (Legislative Amendments), 2013-2014. According to the tax reform,
the tax cuts planned which determined significally low tax rates (as low as 18% on
corporate tax and 39% for individuals) was cancelled; instead corporate tax on 2014 will
increase to 26.5% (25% on 2013) and the highest tax bracket's tax rate for individuals
will be rise up to 50% (48% on 2013).
Under the tax reform the taxes on Investment income had stayed the same: The regular
tax rate on dividends, interest, loan discount, capital gains and land appreciation are
25%. The tax rate for dividends paid to major shareholders (holding 10% or more) is
30%. A 30% tax rate will generally apply to sales of shares in real-estate entities by
major shareholders. Those rates are generally applied on foreign investors unless
exempt of tax (see chapter 6.4.1) or a valid treaty in enforced.
In order to boost the Israeli economy and support the exporting industry as well as the
High-tech industry, major tax incentives were introduced as part of the Law of
Encouragement of Capital Investments (see on Chapter 4 of this manual). In addition,
the Israeli Tax Law includes tax incentives for foreign investments in Israel, as tax
exemption on capital gain on the disposal of Israeli corporations' shares. For more
information see Chapter 6.4 of this manual.
As of 2008, and part of the government initiative to attract former Israeli residents and
Jewish people to reside in Israel, major tax exemptions for new residents and for
returning residents had been introduced. For further information see Chapter 6.4.3of this
manual.
6.2. Income Tax
6.2.1. Overview
According to Israeli Tax Ordinance, Israeli residents, either individuals or corporations,
are subject to income tax on their worldwide “taxable income”.
Non residents are subject to tax on any income derived from an Israeli source. Where
there is a double tax convention between Israel and the other countries, its terms may
modify the taxable income.
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Usually, a fiscal year is a full year, starting on January 1 and ending on December 31,
with very few exemptions, especially for subsidiaries of publicly traded foreign
companies.
With a few exemptions, accounting should be conducted in Israeli currency. Starting
2008, Financial Reports are based on the IFRS accounting system (public traded
company implemented the IFTS accounting system since 2005). However, for tax
purpose, the financial report should be based on Israeli GAAP.
The income tax legislation taken as a whole provides for the payment of taxes on
income from defined sources, after deduction of disbursements and expenses incurred
in the production of income. This includes taxes on capital gains and provided special
benefits for investors in approved enterprises. The amount subject to taxation is known
as the “taxable income”.
6.2.2. Corporations
6.2.2.1. Residence
A corporation is considered an Israeli resident if one of these conditions has been
fulfilled:
The corporation was incorporated under Israeli law; or
The corporation is managed and controlled from Israel.
6.2.2.2. Tax Rates
The taxable income of Israeli corporations is subject to a company tax of 26.5%(2015)
Dividend paid to another Israeli company is excluded from the taxable income. Dividend
paid to Israeli individuals or foreign residents (both individuals and companies) is subject
to withholding tax of 25%, or 30% if the shareholder holds 10% of the shares or more.
The withholding tax rates can be reduced in case a valid tax convention is taking place.
A foreign corporation having taxable income accrued in Israel would be subject to
company tax as well. Foreign Corporation which conducts business in Israel through a
permanent establishment would be subject to company tax, only for the income accrued
from its activities in Israel.
There is no branch tax.
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