Doing business in 2016

In association with:

1 Contents

Introduction ...... 3

– Country profile...... 4

Legal overview ...... 5

Conducting business in Israel...... 9

Tax system ...... 11

Labour ...... 18

Audit ...... 21

Trade ...... 22

Finance ...... 23

Infrastructure ...... 25

This Guide has been prepared jointly by HSBC Bank plc, Israel Branch and Grant Thornton for the purposes of providing a high-level general overview of the business environment in Israel for the information of businesses who may be interested in transacting or investing in Israel. Any transaction or investment in Israel, however, should only be undertaken based on professional advice specific to such transaction or investment. 2 Introduction This guide to doing business in Israel will provide foreign investors with an insight into the key aspects of undertaking business and investing in Israel. Israel is a highly developed, western-oriented market currently experiencing strong economic growth, despite political tensions.

Israel’s economic growth has Competitiveness Report), Israel’s • Renowned education system historically been strong, averaging scientific excellence makes providing a highly educated 3.80 per cent from 1996 until 2015. it a preferred hub for leading workforce The economy grew at a moderate multinationals to establish their • World-class capacity for pace in 2015 but is projected to pick Research and Development innovation, strong technical up to around 3.25 per cent in 2016 (R&D) centres. knowledge and entrepreneurship 1 and 2017 . • Strong venture capital industry Foreign investment has played and favourable financial a key role in Israel’s economic The country’s major industrial environment for start ups sectors include high-technology growth. The government actively • Large network of Free products, metal products, electronic encourages foreign investment and Agreements and biomedical equipment and provides a number of incentives under the Encouragement of • Extensive reliefs available pharmaceuticals. Furthermore the Capital Investments Law 1959. under the ‘Encouragement of Israeli diamond industry is one of Moreover, there are no restrictions Capital Investment Law’ the world’s centres for diamond on foreign investments except in cutting and polishing. Israel is the industry sectors of defence and While this guide makes reference internationally recognised as a seat telecommunications. to some of the most common of innovation and creativity, noted for issues investors might face, it must its thriving entrepreneurial spirit and A recently discovered Leviathan gas be noted that certain industries, pioneer technologies. The country field is one of the world’s largest such as the financial services sector, was ranked 3rd most innovative offshore natural gas finds in the are subject to special regulation country in the world according past decade, and together with the and therefore companies wishing to the 2015 - 2016 WEF Global nearby Tamar gas field, they present to invest in this area should seek Competitiveness Report. an opportunity for Israel to become legal advice. a major regional energy player. Complimented by an unusually The information in this publication is high availability of scientists Key advantages for businesses current at January 2016. and engineers (ranked eighth considering foreign investment in the 2015 - 2016 WEF Global in Israel: 1 OECD Economic Forecasts

3 Country profile

Capital City Jerusalem

Area 20,770 sq. km

Population 8.059 million

Language Hebrew, Arabic

Currency Israeli new shekel (ILS)

International dialling code + 972

National Holidays 2016 24 March – Purim (Celebrated one day later in Jerusalem and all other ancient walled cities) 24 April – Passover begins 30 April – Last day of Passover 12 May – Independence Day 13 June – Pentecost 14 August – Fast of Ninth Av 3 – 4 October – New Year 12 October – Day of Atonement 17 October – Sukkot 25 October – Simchat Torah

Business and Banking hours Sunday to Thursday: 08:30 to 18:30 Friday: 08:30 to 14:00

Stock exchanges The Tel Aviv Stock Exchange (TASE)

Political structure Parliamentary Democracy

Doing Business rank 2016 53

Ease of Doing Business

Topics 2016 rank 2015 rank Change in rank

Starting a business 56 51 -5

Licenses and Permits 96 91 -5

Getting Electricity 91 83 -8

Registering property 127 128 1

Financing 42 36 -6

Protecting Investors 8 8 No change

Paying 103 95 -8

Trading Across Borders 58 56 -2

Enforcing Contracts 77 77 No change

Resolving Insolvency 29 27 -2

Source: World Bank Group (Doing Business)

4 Legal overview Political and legal system the and to new elections to Knesset”, “The Government”, Israel is a parliamentary democracy the Knesset. “The Army”, “The President of the consisting of legislative, executive State”, “The State Comptroller”, and judicial authorities. The system The judicial branch is independent “Human Dignity and Liberty” and is based on the principle of the from the government. Judges are “Freedom of Occupation” which separation of powers, in which the appointed by the president for life, have a special standing requiring a executive authority is subject to with retirement at 70 according to special majority to be changed. A the confidence of the legislative the election of a special committee. “regular law” cannot contradict a authority and the independence of The members of the special Basic Law and the High Court of the judiciary is guaranteed by law. committee are three judges of Justice has the power to cancel the Supreme Court, two Knesset such contradicting laws. The President is the head of members, the minister of justice and state but the position is largely an another minister and two delegates Data protection apolitical and ceremonial role. The of the Israeli Bar Association. The Privacy is recognised as a president is elected by a simple court system comprises special constitutional right in Israel as part majority of the Knesset (Israel’s courts (dealing with family matters of the Rights of Human Dignities unicameral parliament) members for or economic issues), magistrates’ and Liberty. Furthermore, the only one period of seven years. After court, district courts and the Privacy Protection Act (PPA) each election to the Knesset, the Supreme Court (that acts as the contains specific provisions president nominates the head of the Supreme Court of appeal and as regarding data protection. biggest political party to establish a the Supreme Court of justice). government (or the party that has Furthermore, jurisdiction in matters The competent national regulatory the largest power to establish a of personal status is vested in authority is the Israeli Law, government) and such person shall judicial institutions of the respective Information and Technology become the Prime Minister. religious communities. Authority (ILITA).

The Knesset is the country’s Civil court orders and judgments are Personal data is defined as legislative body. It is comprised usually enforced by the Authority ‘details concerning an individual’s of 120 members, elected for a of Enforcement and Collection. The personality, personal status, intimate maximum of four-year terms in a Israeli law enables the enforcement relations, health condition, financial general, national and confidential of foreign judgments. condition, vocational qualifications, election process. The Knesset opinions and religious belief’. Before has the power to enact and repeal The Israeli legal system encourages the processing of any personal all laws. settlements of disputes through data, consent must be obtained mediation and arbitration and from the data subject; this may be The executive branch is the recognises the parties’ agreement implied. The collection of personal government which is formed of the to appeal on an arbitrator ruling data must be accompanied by a cabinet of ministers and led by the to another arbitrator or, in certain notice that indicates whether the Prime Minister. All ministers must cases, to the district courts. There information is supplied voluntarily be Israeli citizens and residents of are several institutes of arbitration or subject to a legal obligation, the Israel but they do not have to be that offer the opportunity to resolve purposes for which it is collected Knesset members. The government disputes in a professional, quick and and any prospective transferees. is charged with administering relatively low cost way. Furthermore, data can only be used internal and foreign affairs. The for the purpose of which it was government (as the Knesset) serves The Israeli legal system is collected and data subjects retain for a maximum period of four years. historically based in common law the right to access their data and The resignation of the government but is a dynamic and progressive have it corrected should it be wrong. (or a no confidence vote of the system. Israel does not currently Data processors must keep the data majority of Knesset members or have a formal Constitution; it has secure and confidential. a decision of the Prime Minister enacted several Basic Laws which that there is a majority against his outline government arrangements There are further rules for the government) leads to dissolution of and human rights, such as “The processing of sensitive personal

5 data. Stricter data confidentiality and laundering as any action in property that exceed ILS10,000 must be security requirements are applicable sourced from offences related kept for at least seven years from to sensitive personal data. to, among others: drugs, arms, the date on which the transaction prostitution, gambling, bribery, was reported. The PPA restricts data transfers to murder, auto theft, forgery and third parties. violations of intellectual property Those convicted to criminal offences rights such as patents and of money laundering may be liable While there are no requirements to copyright of which the ultimate to up to 10 years imprisonment. obtain authorisation to process data, aim is to cover up or disguise the under the PPA, all ‘databases’ must source, the identity of its owners, The FATF, a task force leading the be registered with the Database its location etc. international fight against money Registrar, if they contain: laundering and terrorist financing, The law also imposes certain unanimously decided on 19 • Data concerning at least 10,000 identification and reporting February 2016 to allow Israel to join data subjects obligations on financial institutions, as an observer to the organisation, • Sensitive information including banks, stock exchange starting in June 2016. members and money changers. • Data which has been collected Customers, both individuals and Intellectual Property Rights from third parties corporations, opening bank accounts As part of the constitutional right of • Data used for direct marketing require formal identification. property, Israel provides protection • Data in a public sector database to intellectual property rights for Further reporting obligations exist copyright, patents, designs and A breach of the data protection with regard to any cash transactions trademarks. The Israel Patent law also constitutes a criminal above ILS50,000, all transactions Office, affiliated with the Israeli offence and is punishable by one with high-risk countries exceeding Ministry of Justice, is responsible year imprisonment. The ILITA is ILS5,000, cross border currency for issues related to intellectual also authorised to impose fines on transactions exceeding ILS80,000 property rights. any companies in breach of its data and international wire transfers protection obligations. exceeding ILS1,000,000. A new Israel is a member of the Berne regulation that requires lawyers and Convention on the Protection of Money laundering accountants identify their customers Literary and Artistic Works, the Israel’s anti-money laundering and keep their records will apply Universal Copyright Convention, provisions can be found in the from September 2015. the Madrid Protocol and the Paris Prohibition on Money Laundering Convention for the Protection of Law, Prohibition on Terror Financing Financial institutions are obliged to Industrial Property and is also a Law and the Combating Criminal record and report any transactions signatory to the TRIPS Agreement. Organisations Law. that are deemed to be unusual or suspicious to the IMPA. The The Israeli law also relates to the The Israel Money Laundering institutions are also required protection of “Trade Secrets” under and Terror Financing Prohibition to report any transactions that the Commercial Tort Law which Authority (IMPA) functions as the are suspected to be related to relates also to unfair trade conduct country’s financial intelligence unit terrorist property. such as “passing off”. This law (FIU); the authority is part of the authorises the court to give orders Ministry of Justice. All records of identification must to prevent such torts, including be kept for a minimum of seven nominating a receiver that will The Prohibition on Money years. Records regarding reported search and possess any assets that Laundering Law considers money transactions, as well as transactions are relevant to such torts.

6 COPYRIGHT

Copyright protects original literary, dramatic, musical and artistic works.

Protection Copyright subsists automatically from the moment the work is created. Therefore, there is no need granted to register copyrights. Copyright protects works first published in Israel or created by an Israeli national or resident, whether published or not. The owner of the copyright has exclusive right to copy and to broadcast the copyrighted work and to publish the previously unpublished work. This is alongside the right to make a work available to the public and public performance of the work.

Infringement Infringement of the copyright comprises an individual who performs any of the acts exclusive to the rights owner without the owner’s permission. Furthermore, the sale, lease, possession or importation of infringing materials will also constitute a direct infringement. Criminal liability is imposed for making, importing or possessing infringing copies for sale, lease or distribution. Remedies available for the copyright holder include injunctions, damages or an account of profits, destruction of goods and costs.

Duration Copyright lasts for 70 years after the death of the author. Copyright in records, tapes or other mechanically reproduced sounds lasts for 50 years from the creation of the master copy. Copyright for photographs lasts for 50 years from the creation of the first negative. Copyrights in anonymous and pseudonymous works lasts for 70 years from the date of publication.

PATENTS

Patents are available for inventions that are new, useful and can be applied in industry and involving an inventive step. Patents are not granted for varieties of plants or animals or therapeutic treatments of the human body. The Israeli Patent law also relates to international patents application according to the WIPO Treaty.

Protection Patents can be granted through registration at the Israel Patents Office, subject to an examination. granted Patents grant the right holder the exclusive right to use the patented product.

Infringement The use of a patent without its owner’s permission constitutes an infringement. The patent holder can bring an action for infringement. Remedies available include: injunctions (including seize and possession orders), damages or an account of profits, destruction of goods and costs.

Duration Patent protection lasts for 20 years from the date of filing. Extensions for up to five years may be granted for patents protecting medical preparations, materials or medical devices.

7 TRADE MARKS

A trade mark consists of any letter, number, work, device or other signs or combination therefor, whether two or three-dimensional, which is used or intended to be used to distinguish goods or services of one trader from another. The mark must be distinctive, either inherently or through use.

Protection Trade marks are protected through registration at the Israel Trade Marks Office, subject to granted examination and the discretion of the registrar. Furthermore, well-known trade marks may also have some protection, irrespective of registration. A valid registration accords the owner the exclusive right to use the trade mark only in respect of the goods or services for which it was registered.

Infringement Infringement consists of a use of the mark, or a confusingly similar mark, for the same of closely related goods or services. In the case of an infringement, the remedies available are the same as that for patents. Furthermore, criminal proceedings can also be brought against an infringer.

Duration Trade mark registration is valid for 10 years from the date of application, after which the mark becomes renewable for successive 10 year periods according to the owner’s special request.

DESIGNS

A design is any shape, configuration, pattern or ornament applied to any article, which appeals to and is judged solely by the eye. A design does not constitute any mode of construction or mechanical device. A design must be new, distinctive, not dictated solely by its functionality and originate in Israel.

Protection Protection for designs is afforded through registration at the Israel Patents and Designs Office, granted subject to examination. A design right provides the owner the exclusive right to use the design. Non-registered designs may be protected under the Unjust Enrichment Law or the tort of passing-off.

Infringement It is an infringement to apply the design to any article in the class for which the design is registered or offer articles for sale knowing that an imitation of the design has been applied to said articles. In case of infringement, the remedies available are the same as that for patents.

Duration Protection lasts for five years and is renewable for two further five year periods, for a total of 15 years.

8 Conducting business in Israel Business entities Once the registration process Any foreign company or individual is completed, the Registrar of wanting to do business in Israel will Companies will issue a certificate need to decide under which form of incorporation and a nine digit they want to operate. The most company number. An Israeli lawyer common forms of business are is normally required to verify the companies and partnerships. As a company’s documents. general rule, there are no limits on the nationality of the shareholders of Limited Liability Company an Israeli company. A limited liability company is the most common form of business Companies in Israel. The responsibility of Companies can be limited by shareholders is limited to the share capital. Companies can be amount of their contribution, subject unlimited; in that case, members of to special cases in which the law the company do not have a ceiling recognises the personal liability of for their liability. Companies must directors and shareholders. This be registered with the Registrar type of company cannot offer shares of Companies at the Ministry to the public. Moreover, any transfer of Justice. of their shares is subject to the conditions specified in the articles of Public Formation association, or, if there are no such All companies in Israel must register rules, according to the orders of the companies with the Registrar of Companies and “Company’s Law”. the Tax Authorities. The Registrar of trading in the Companies accepts documents in A limited liability company needs a English. The following documents minimum of one shareholder and Tel-Aviv Stock are necessary for the registration of can have up to 50. Generally, annual a company: financial statements complying Exchange with the accepted accounting • An application form to register principles and audited by qualified must publish the company (Form No.1 of the auditors must be presented at the Company Registrar) shareholders’ annual meeting. annual financial • A copy and Hebrew translation Public Companies of the company’s articles of statements Public companies have no maximum association The translation number of shareholders. Unlike needs to be certified by and quarterly limited liability companies, they a notary can offer shares or debentures to unaudited • List of directors and their the public. When the shares are passport numbers listed on the stock exchange they financial • The fee for registering the must comply with the rules of the company exchange as well as with the laws statements of the Securities Authority. The articles of association must and are also state: the company’s name, Public companies trading in the objectives, the composition of its Tel-Aviv Stock Exchange must subject to capital stock and the number of publish annual financial statements shares per shareholder. In addition, and quarterly unaudited financial other reporting they must define the rules for the statements and are also subject to company management. other reporting obligations. obligations.

9 Public companies must have at qualifications as a prerequisite to be Branches least two directors that do not a partner. A foreign company (any corporation, have a business relationship with excluding partnerships, incorporated the company, an audit committee Each one of the partners pays tax on outside Israel) that establishes a (formed by at least three directors) their share of profits; however the place of business in Israel must and an internal auditor. Offers of activities of each one of the partners register as a foreign company securities to the public (as defined is binding for the rest. no later than a month after its in the Securities Law) must be operations start. A branch in Israel is made through public prospectus. This form of business is normally treated as a subsidiary of the foreign Additionally, public listed companies suitable for small undertakings. company which means that the must comply with the security foreign entity is responsible for the regulations which relate to corporate Limited partnership acts or the omissions of the branch. governance, internal control, external Limited partnerships are formed auditors and financial disclosure. by at least one general partner Branches can conduct any type of and a limited partner. The general business falling within the remit of Partnerships partner has unlimited liability for the foreign company and there are In Israel, partnerships are governed the obligations of the partnership; no restrictions on the repatriation by the Partnership Ordinance, 1975. nevertheless, the liability of the of funds. A foreign company needs As a general rule, partnerships limited partner is limited to the to have a registered office in Israel can only have a maximum of amount of its capital contribution. and must appoint an agent resident 20 partners; however, certain The liability of the limited partner in Israel. professional partnerships (as must be specified in the written lawyers and accountants) can Branches are normally taxed as a have more partners. Partnerships agreement between the parties. can either be general or limited; if Limited partners are not allowed local company with the exception a partnership wants to carry out to take part in the management of that surplus distribution is not business it needs to be registered the partnership. subject to withholding with the Registrar of Partnerships. tax. Foreign companies must Foreign partnerships wanting submit their financial reports to the General partnership to operate in Israel must be Registrar of Companies according In a general partnership each of the registered with the Registrar of to the classification of the company partners has full, joint and several Partnerships and provide details of (private or traded company). liability. Foreign investors can the partners and designate an Israeli Branches are not separate legal become partners unless the law for resident willing to accept notices entities and therefore they must not a specific profession requires local on their behalf. submit financial reports.

10 Tax system Taxation in Israel includes income Expenses can be deducted if However, on short-term tax, , value-added they have wholly and exclusively bonds (issued for 13 months or less) tax and land appreciation tax. The been incurred in the production is taxable. primary legislation for is of . Nevertheless, the Income Tax Ordinance. some items will require adjustment Furthermore, an exemption applies for tax purposes. for foreign residents who receive Tax compliance is regulated by gains on the disposal of all types the Israel Tax Authority under Depreciation may be claimed with of Israeli securities not listed to the Ministry of Finance. The Tax respect to any fixed assets use in trade that were purchased on or Authority is responsible for both the production of taxable income; after 1 January 2009, providing the seller was not a related party. direct and systems, this is based on the type of asset and the prescribed rates. This exemption does not apply tax monitoring and public to real estate companies or service improvement. Capital gains mineral companies. Capital gains are divided into real Corporate Income Tax and inflationary parts. The It should be noted that non-Israeli Scope on real capital gains is the standard corporations that have Israeli Corporate income tax is levied corporate income tax rate; the residents as controlling shareholders on resident and non-resident inflationary part is exempt from tax or beneficiaries entitled to 25 per companies operating in Israel. (as accrued from 1 January 1994 cent or more of the non-Israeli Israel resident companies are and at a rate of 10 per cent, before corporate revenues or profits, subject to corporate income tax 31 December 1993). whether directly or indirectly, are on their worldwide income, while not entitled to the non-resident companies are liable Israeli resident corporations are or reduced tax rates that apply to to tax only on income accrued or subject to tax on their worldwide non-residents under the Income derived in Israel. capital gains. Capital losses can be Tax Ordinance. offset against capital gains. A company is considered resident Losses if it is incorporated in Israel or if its Non-residents are subject to capital Losses can be offset against income business is controlled and managed gains tax on: derived from any source in any in Israel. year. Any outstanding losses can • Assets located in Israel be carried forward for an unlimited The standard rate of company tax • Assets located abroad that are amount of years. Losses cannot be is 25 per cent for 2016. Reduced primarily a direct or indirect right carried back. However, a Supreme rates may apply to Israeli companies to an asset in Israel Court case recently allowed carry back of losses in special cases. classified as an ‘approved’, a • Shares or rights to receive shares ‘benefited enterprise’ or ‘preferred in an Israeli company (priority) company’. Furthermore, Withholding tax • Shares or rights to shares and paid to a company or qualified companies may be eligible rights to non-resident entities that person that holds less than 10 per for reduced rates and represent a right or indirect right to cent shares of the Israeli payer are grants from the investment centre. property in Israel subject to a 25 per cent withholding tax. This rate increases to 30 per A credit for foreign taxes is available Exemptions are available for cent if the company or person for federal and state taxes but not foreign residents not engaged in holds more than 10 per cent of municipal taxes. business in Israel on the disposal the shares. If the shares of the of the following: securities trade company distributing the dividend Taxable income on the Tel-Aviv Stock Exchange are traded on the stock exchange Taxable income is based on income and securities of Israeli companies then the withholding tax rate will be declared in the financial statements, traded on a recognised foreign 25 per cent. Resident companies as prepared in accordance with stock exchange. In general, interest are exempt from company tax generally accepted accounting paid to non-residents on Israeli on dividends that were paid out principles (GAAP). governmental bonds is exempt. of regular income and accrued or

11 derived from sources within Israel. Alongside the above exemptions, An international transaction is A reduced withholding tax rate of any dividends paid by Israel holding at arm’s length if, through the 15 or 20 per cent is available for companies to foreign resident application of the selected method, dividends paid out of the income shareholders are subject to a the result falls within a defined of a company that is entitled to reduced rate of dividend withholding interquartile range. benefits of the Capital Investment tax of five per cent. Encouragement Law. Taxpayers are obliged to maintain There are a number of conditions appropriate documentation and Interest payments paid to individuals that must be satisfied by the Israeli attach a statement are subject to a 25 or 15 per cent holding company and the foreign to their annual tax returns. withholding tax rate depending, inter investee before these exemptions Furthermore, at the request of the tax authorities, the tax payer must alia, on the type of loan. Interest can be availed, such as: payments paid to companies are be able to provide a detailed transfer subject to 25 per cent withholding pricing study within 60 days. • The company was incorporated tax rate (the standard corporate tax in Israel and it is controlled and rate). A zero per cent withholding tax The regulations shall not apply to a managed from Israel rate is applicable to non-residents one-time international transaction who receive interest from bonds • It is not a public company or a that was approved by the tax that are publicly traded on the Israeli financial institution (as defined assessing officer as a one-time stock exchange. under the VAT law) transaction and the transaction • At least 75 per cent of the shall be reported as if the price or Notwithstanding, if a company pays company’s investments are the conditions were determined, interest to one of the following, then qualified investments, and the as applicable, between parties not it shall withhold tax at the maximum amount of investments is not less having a special relationship. marginal rate: than ILS50 million Advance pricing agreements can be obtained from the Israeli • To a controlling shareholder Transfer pricing tax authorities. (holding 10 per cent or more in Israel’s transfer pricing rules are the company) based on the OECD guidelines Controlled foreign company • To an individual who works in the and are applicable to transactions Israeli residents are taxed on company that pays the interest, or between an Israeli resident and its “deemed dividends” from to a person who provides services related non-resident where a special or sells products to that company “controlled foreign companies” if a relationship exists (ownership of company or an individual holds 10 50 per cent or more of corporate per cent or more of the shares of the A 25 per cent withholding tax rate is control would be deemed as a levied on royalty payments made to foreign company. A foreign company special relationship). is deemed a controlled foreign non-residents. company if: To determine whether an All the rates above may be reduced international transaction is at arm’s • Most of the foreign company’s by an applicable . length, the taxpayer is obliged to income or profit is derived from apply one of the following methods, passive income items Participation exemption in order of preference: Israeli holding companies that invest • The tax rate abroad on the passive in foreign corporates are entitled to income derived by the foreign exemptions from tax on: • CUP (Comparable Uncontrolled company is 15 per cent or less Price) or CUT (Comparable • The shares of the foreign • Dividends received from qualified Uncontrolled Transaction) company are not publicly traded, foreign subsidiaries • Comparable profitability or less than 30 per cent of its • Capital gains derived from –– Cost Plus or Resale Price shares have been issued to the sales of shares in such –– CPM (Comparable Profits the public subsidiaries Method) or TNMM (The • One of the following conditions • Interest, dividends and capital Transactional Net Margin is satisfied: gains derived from securities Method) –– Israeli residents own, directly or traded on the Tel-Aviv Stock –– Profit Split indirectly, more than 50 per cent Exchange • Other methods of the foreign company

12 –– An Israeli resident owns more than 40 per cent of Priority enterprise Rate (%) the foreign company, and together with a relative, they collectively own more than 50 per cent of the Geographic Central National priority company location Israel region –– An Israeli resident has significant rights with respect Corporate tax rate 16 9 to management decisions rate 20 20 Deemed dividends are taxed according to the same Investment grant – 20 (of approved principles and rates as regular dividends. Relief, deduction investment) and credits are granted upon actual distribution of the “deemed dividend”. Priority enterprises are also entitled to accelerated depreciation on buildings (400 per cent) and equipment Foreign Occupational Companies (200 per cent). A controlling shareholder (holds 10 per cent or more) in a Foreign Occupational Company which has profits derived Special priority enterprises are large companies that meet from Special Occupation is taxed on “deemed dividends” according to the relative proportion of those profits. the following criteria:

A “Foreign Occupational Company” is a foreign • Total annual income in Israel meets or exceeds corporation which, inter alia: ILS1.5 billion • Combined balance sheet meets or exceeds ILS20 billion • Is being held by no more than five persons (for this • Business plan includes one of the following: purpose, related individuals would be considered as –– Investment in productive equipment of at least one person) ILS800 million in central Israel or ILS400 million in an • At least 75 per cent of its shares are controlled, directly NPR over a three year period or indirectly, by Israeli residents –– Investment in R&D of at least ILS150 million in central • The controlling shareholders (or their relatives) are Israel or ILS100 million in an NPR engaging in a “Special Occupation” for the benefit of –– Employment of at least 500 employees in central the company Israel or 250 employees in an NPR • 50 per cent of the company’s income is from the –– Committee administrators verify, in writing, that upon “Special Occupation” review of the business plan submitted to them, they are convinced that the priority enterprise will offer a “Special Occupation” includes, inter alia, the following significant contribution to the Israeli economy and professions and occupations: doctors, professors, national objectives, with particular consideration of the brokers, lawyers, journalists, accountants, appraisers location of the enterprise and the anticipated wage and economists. levels of its employees

Groups Special priority Rate (%) Generally, the filing of a consolidated tax return is not enterprise permitted in Israel. Nevertheless, consolidated returns may be permitted for an Israeli holding company and its Geographic Central National priority Israeli industrial subsidiaries if all subsidiaries are engaged location Israel region in the same line of production. This is provided certain Corporate tax rate 8 5 requirements are fulfilled. Dividend tax rate 20 20 Tax incentives Special priority enterprises are also entitled to accelerated The law for the Encouragement of Capital Investments offers industrial companies (as defined in the law) a depreciation on buildings (400 per cent) and equipment number of taxation benefits. An extended benefit or relief (200 per cent). is usually granted to companies located in a National Priority Region (“NPR”) as opposed to “other” locations Personal Income Tax – (PIT) (“Central Israel”). Individuals liable to Personal Income Tax Individuals that are considered as tax resident in Israel Priority enterprises are companies that 25 per cent are subject to income tax on their worldwide income and of their annual sales turnover to large territories capital gains. Non-resident individuals are subject to tax (who contain more than 14 million people). only on income derived from or accrued in Israel.

13 An individual is resident in Israel if their “centre of vital (*) The tax rates of 10 per cent, 14 per cent, 21 per cent and 31 per cent are levied only on taxable income resulting from “personal exertion” or taxable income of ” is in Israel. This takes into account, inter alia, individuals that are at least 60 years old in the reported tax year. whether his/her permanent home, primary place of employment and assets and investment are in Israel. Capital gains tax (assets) Furthermore, under the law, Israeli residency will be Capital gains derived from assets, except for securities, deemed to apply, if: are subject to capital gains tax.

• The individual is present in Israel for at least 183 days in For individuals, the maximum real capital gains tax a tax year derived from assets is 25 per cent, unless the asset was • The individual is present in Israel for at least 30 days in purchased prior to 1 January 2011. In such a case, the the current tax year, and for a cumulative total of 425 capital gains tax rate will be divided on the basis of the days in the current and two preceding tax years linear method:

A deemed residency can be refuted according to the • Real capital gains derived prior 1 January 2003 will be “centre of vital interests” tests. taxed according to the individual’s marginal tax rate • Real capital gains derived between 1 January 2003 till If an Israeli resident spends two consecutive years abroad 31 December 2011 will be taxed at 20 per cent and is for more than 183 days in the year and moves their centre implemented on a linear basis of vital interests abroad for the two subsequent years, they will be deemed a foreign resident; this is applied from • Real capital gains deriving after 1 January 2012 will the date of departure. be taxed at 25 per cent and is implemented on a linear basis

Taxable income The real gain is the excess of the total capital gain over the The tax base for personal income tax comprises all income inflationary surplus. derived from employment income, self-employment income, investment income and capital gains, subject to The inflationary capital gain will be exempt from tax, exemptions and deductions. except for tax at a rate of 10 per cent which is imposed on the inflationary capital gain arising from the purchase date Employees may deduct business-related expenses in limited circumstances; a tax return must always be filed if until 31 December 1993. this is the case. Expatriate non-residents working in Israel are granted a number of specific tax benefits. Under certain circumstances, the capital gain may be reduced or exempt from tax. Israeli resident individuals are entitled to personal tax credits which are deducted from the computed income Capital gains tax (securities) tax liability. Credits are granted based on the situation of A capital gains tax at the rate of 25 per cent applies the individual, eg whether they are married and how many to gains resulting from the sale of traded or un-traded dependents they have. Each credit is worth ILS216 (in the securities, unless specified otherwise. year 2016) per month. A tax rate of 15 per cent (or 20 per cent for a “significant Rates shareholder”) is applicable to an individual in respect of the nominal capital gain that derived from the sale of Taxable Rate (%) Tax due Cumulative bonds or commercial securities that are not fully linked income (ILS) (*) (ILS) tax due (ILS) to the consumer price index or to a foreign currency Up to 62,640 10 6,264 6,264 exchange rate. Next 44,399 14 6,216 12,480 A tax rate of 30 per cent is applicable to an individual on Next 59,279 21 12,449 24,928 the sale of securities in which he/she is classified as a Next 71,279 31 22,096 47,025 “significant shareholder”2 at the time of sale or any time during the preceding 12-month period. Next 259,019 34 88,066 135,091

Next 314,099 48 150,768 285,859 In case the sale of securities is classified as business income for the seller, then the tax rate which will be Above 810,721 50 – – imposed is the individual’s marginal tax rate.

14 For un-listed securities that were Typically, employment income is purchased prior to 1 January 2012 withheld by employers and remitted the taxation will be as specified to the tax authorities by the 15th day above in respect of taxation on in of each month. respect of assets. Unless exempted, individuals must The part of the real capital gain that file an annual personal income tax resulted from the sale of shares of a return by 30 April of the following company that is taxed in Israel might year; extensions can be granted in be taxed at a lower rate, under specific cases. certain conditions: Married couples can elect to file • The part of the real gain which a joint return or opt for separate reflects the available profit for . distribution that accrued up to 31 December 2002 is liable to a New immigrants and 10 per cent tax rate returning residents In order to attract new immigrants • The part that reflects the available and returning residents to Israel, profit for distribution that accrued the government enacted a tax after 31 December 2002 is liable reform that constitutes extended In order to for the tax rate imposed on the tax relief, benefits and other dividend (25 per cent / 30 per cent) incentives for new immigrants and attract new returning residents. Stock options immigrants Tax benefits are available in the The reform was approved allocation of stock options to by the Israeli Parliament on and returning employees. September 2008, but its actions were constituted retroactive residents Two major tracks exist: for all immigrants and returning residents residing in Israel since to Israel, • The ordinary income track – 1 January 2007. subject to ordinary marginal tax the government rates, minimum holding period is • “New Immigrant” – Individuals one year who acquire the status of an enacted a tax • The capital gain track – subject Israeli resident for the first time to capital gain tax rates (25 per • “Veteran Returning Resident” – reform that cent) minimum holding period is Individuals who returned to Israel two years not sooner than 10 years after constitutes having ceased to be a resident Under the ordinary income track of Israel. Those individuals will extended the employer can deduct expenses have the same tax reliefs as related to the stock options, “New Immigrant” tax relief, whereas under the capital gain track • “Returning Resident” – these deductions are not allowed. Individuals who returned to Israel benefits and after they lived outside Israel on Social security and medical a permanent basis during at least other incentives Individual are subject to social six consecutive years after having security tax on their employment ceased to be an Israeli resident for new income (employer social security contribution also exists) and on their Main tax benefits: immigrants self-employed income. • 10 years tax exemption for new immigrants and Veteran and returning Administration Returning Residents on all income The tax year is the calendar year. and capital gains derived outside residents.

15 of Israel The general tax rates for trusts are non-residents and the provision of • New Immigrant and Veteran the maximum marginal individual certain services to non-residents, Returning Resident can apply for income tax rates. However, if a international transportation, the an “Adaptation Period” of one special tax rate has been determined sale of goods and services to the year from the time an individual for a certain item of income it will free-trade zone (Eilat) and the sale arrives in Israel during which the apply for trusts as well. of fresh fruit and vegetables. A individual, at his own request, will number of goods and services are not be considered Israeli resident Trusts are subject to tax according also exempted from VAT; however, to the residency of its grantor or for tax purpose no input VAT can be recovered its beneficiary. on these. • Foreign companies controlled by New Immigrants and Veteran A trust whose grantor is an Israeli Resident Israeli companies or Returning Residents will not be resident is subject to income tax on individuals must register for VAT classified as Israeli Companies, the trust’s worldwide income and purposes if engaging in the supply or as a Controlled Foreign capital gains. or importation of goods or services Corporation, or as a Controlled subject to VAT. Foreign companies Foreign Occupational Company, If the trust’s grantor is not an must appoint a local representative as if the New Immigrant or the Israeli resident but the beneficiary for VAT purposes within 30 days of Senior Veteran Resident would is, then the trust will be subject to commencing activities liable to VAT. have been foreign resident tax on the trust income and capital gains derived from or accrued in • New Immigrants and Veteran VAT reports must be submitted on Israel. Regarding income derived Returning Residents are a monthly or a bi-monthly basis, from or accrued outside of Israel, exempt from reporting their depending on the annual turnover when the grantor and the Israeli tax-exempt income and foreign projection (monthly if the annual beneficiary have a close family assets for a period of 10 years turnover is more than ILS1.5 million). since their return relationship (and the grantor is alive), there is an option of choosing • A Returning Resident (not rates of 25 per cent or Property betterment tax meeting the terms of Veteran 30 per cent (without repetition) that The property betterment tax is Returning Resident) is exempt will apply on the trust’s income or applied to gains from the sale of real from tax on interests, dividends, upon distribution to a beneficiary estate located in Israel and to the , royalties and rental (respectively). When the grantor sale of rights in a “real estate union” income, which are derived from and the Israeli beneficiary are not (as defined in the law) and also to assets he/she obtained when he/ related the income derived from other transactions in the rights of a she was a foreign resident for or accrued outside of Israel will “real estate union”, as determined a period of five years since his/ be subject to the general tax rates by law. her return. A returning resident is mentioned above. further exempt from capital gains Similar to the principles of the capital tax for a period of 10 years on the If the trust’s grantor and beneficiary gains tax, betterment tax is applied disposal of assets located abroad are not residents of Israel and have as follows: which he/she obtained when he/ never been Israeli residents, then she was a foreign resident. the trust will be subject to tax only • The betterment (the real gain) on income and capital gains derived generated from the purchase date Trust taxation from or accrued in Israel according up to 7 November 2001 will be The Israeli law recognises trusts to the tax rates applicable to charged at the marginal individual which have been set up to manage non-Israeli resident individual. tax rate for individuals the assets of a grantor on behalf of • From 8 November 2001 to the beneficiaries thereunder and Other taxes 31 December 2011: at marginal for any other purpose. However, Value Added Tax (VAT) individual tax rates up to the general view is that a trust will VAT is levied in Israel on the supply 20 per cent not be deemed to be a separate of goods and services, as well as legal entity. imports. The standard rate of VAT • After 1 January 2012: at is 17 per cent but certain categories marginal individual tax rates up Generally, the trustee shall be the of goods and services are subject to to 25 per cent person assessed and charged for a zero per cent rate. These include • Corporations are subject to tax in respect of the trust income. , intangible goods sold to corporate tax (currently 25 per

16 cent) on the sale of a real estate 0 per cent to 10 per cent subject the tax levied on buildings, both in Israel. to certain criteria and conditions. commercial and residential by the In addition, discounts on purchase local municipality. The Arnona is The inflationary betterment will tax are granted to, among others, calculated on the basis of the size be exempt from tax, except new immigrants. of the property, the area in which for tax at a rate of 10 per cent it is situated and the purpose for that would be imposed on the The property purchase tax is a which the property is used. This is “inflationary” component arising deductible expense for purposes of charged per property regardless of from the purchase date until the property betterment tax. the income of the occupants. 31 December 1993. VAT might be applied to the Certain exemptions or reliefs purchase of real property, with may apply upon the disposal of a limited exceptions. 2 A “significant shareholder” or a “controlling “Residential Apartment” under shareholder” is defined as someone certain criteria and circumstances. Misalliance taxes who holds, directly or indirectly, alone or “together with others”, 10 per cent or more There are no wealth, inheritance, in at least one of the “means of control” in a Property purchase tax estate or gift taxes in Israel. company. Purchase tax is applicable to the However, the grant of a gift might acquisition of real estate located be subject to capital gains tax, “Means of control” include control through in Israel and of rights in a “real unless the gift is granted to a family shares, rights to shares or other rights, or by any other manner including by means of estate union” and also to other relative or to a person to whom it voting agreements or trusts. transactions in the rights of a “real was proved that the gift was granted estate union”, as determined by the in good faith. It should be noted that The term “together with others” means law. As a general rule, the property a grant of a gift to a non-resident together with a relative, or together with purchase tax rate is six per cent will trigger a tax event upon the someone who is not a relative with whom there is, either directly or indirectly, regular of the “value of the property”, as transition of the gift. cooperation based on an agreement defined in the law. The property regarding the material company.calculated purchase tax rates that apply to the Municipal charges on the basis of the size of the property, the purchase of a ‘residential apartment’ Living accommodation is subject to area in which it is situated and the purpose for which the property is used. This is charged used or designated to be used as a council tax (“Arnona”) collected per property regardless of the income of a residential apartment varies from at the municipal level. Arnona is the occupants.

17 Labour In Israel, employment relations are • The existence of personal an employee non-competition regulated by a number of laws: commitment by both parties commitment and will consider the • The payment method reasonableness of its extent (time • Constitutional rights (as and territory) with respect to the • The manner in which taxes determined by the Basic Laws) consideration that was paid to are deducted • Statutory rights including the employee. protective labour laws Employment contract Minimum wage • Collective agreements and While a written employment The following minimum wages extension orders of collective contract is not strictly necessary, apply in Israel: agreements that actually have a the Law of Notice to Employees status of law (Employment Terms) states that • Daily wage for workers employed • Individual labour contracts the employer must provide the employee with a written notice five days a week: ILS186.00 (from April 2015) The main laws regulating the as specifically determined in the employment relationship are: regulations of the employee’s • Daily wage for workers employed terms of employment within six days a week: ILS214.62 (from • Minimum Wage Law 1987 30 days after the start of the April 2015) • Annual Leave Law 1951 employment relationship. The • Hourly wage: ILS25 notice should at least include the • Monthly wage: ILS4,650 • Hours of Work and Rest Law 1951 following information: • Severance Pay Law 1963 The Minimum Wage Law, 1987 • Advance Notice or Dismissal or • Identity of the employer states that all employees should Resignation Law 2002 and employee receive no less than the legal • Equal Opportunities Law 1998 • Compensation arrangements minimum wage, which is updated • Wage Protection Law 1958 • Date of commencement of on a regular basis. • Notice to Employee and employment Candidate for Employment • Working hours As part of legal steps to reduce economic gaps, it was enacted Law, 2002 • Job description on the beginning of 2015 that the • Name of the employee’s In order to increase the minimum wage will increase as supervisor effectiveness of the labour laws, follows: July 2016 - ILS4,825, The Enhancement of Enforcement • Applicability of a collective January 2017 - ILS5,000. of Labour Law 2011 determines agreement (if any) monetary, administrative and • Applicable labour union Working time and leave criminal sanction for violating the Working hours labour laws Employment terms can only The Hours of Work and Rest Law, improve working conditions and are 1951 provides that the working The Labour Courts (established in not able to reduce rights according week shall not be longer than 1969) have the sole jurisdiction over to the protective labor laws. Detailed 43 hours divided across either five all employment disputes including employment contracts are more or six days of work. Each working disputes between employers or customary regarding senior staff. day shall not exceed eight or nine trade unions and labour unions. The hours of work. Employees working following principal elements are Stock option benefits are customary overtime are entitled to overtime considered when evaluating if an employee compensation in some pay. For the first two hours of employment relationship exists are: industries and are subject to specific overtime the remuneration should tax regulation. be 125 per cent of the regular wage • Whether the employer has control (150 per cent for any additional and authority over the employee Labour law protects the fiduciary working hour or work during the • The level of integration obligation of the employee and part weekly day of rest). between the work performed of it is the employee obligation of by the employee and the secrecy. In some circumstances, Working during the Jewish employer’s business the labour court will enforce day of rest without a permit is

18 forbidden and can constitute a of maternity leave but decides to criminal offence. return to work before the end of her maternity leave entitlement. The Annual leave first six weeks of maternity leave Annual leave is regulated by the cannot be waived. Annual Leave Law, 1951. The annual leave entitlement depends on the Sick leave years of service. The minimum Full time employees can be absent holiday entitlement (for those due to sickness for 1.5 days working a five day working week) per month as long as the total is 12 days after a year of service, up accumulated days do not exceed to 28 days a year. In addition to the 90 days for any individual period of statutory annual leave, employees employment. Employees do not are entitled to some extra paid normally receive any salary for the holidays; the additional allowance first day of illness. They are entitled depends on the employee’s religion to 50 per cent of their salary for (Jewish employees are entitled to the second and third day, and they nine days per year). receive 100 per cent of the salary from the fourth day onward. Maternity leave The statutory maternity leave in Dismissal Israel is 26 weeks. Employees Notice periods are entitled to receive maternity The Prior Advanced Notice for payments from the Israeli National Dismissal Resignation Law, 2001 Insurance Institute for the first 14 requires both employees and weeks. The extra 12 weeks of leave employers to provide written are only available for employees notice before the termination of the Men can take that have worked for the same employment relationship. employer for at least 12 months. up to seven Nevertheless, this 12 week period When the employee is paid on a is not remunerated. Women monthly basis and has worked for weeks of working full time are entitled the same employer for a period to work one hour less per day of at least 12 months, the notice maternity leave without a reduction in pay for four period is: months after their maternity leave. if the mother Additionally, the employer cannot • One day for each month terminate a woman’s employment during the first six months of is entitled to if she has already been working for employment a period of six months, from the time he knows of her pregnancy • An additional two and a half days 14 weeks of until 60 days after her return to for each additional month of the work place. Similar rules apply employment maternity leave in cases of fertility treatments. In special cases, the employee can When full time employees have but decides ask in advance for a special permit worked for the same employer for from the Ministry of Economics to more than 12 months, the notice to return to change the above limits. period is 30 days. The notice period may be increased by the terms of work before Paternity leave the contract of employment. Men are entitled to at least 21 days the end of her of paternity leave instead of the Employees are entitled to their maternity leave. Men can take up to normal salary and benefits during maternity leave seven weeks of maternity leave if the notice period. If the employer the mother is entitled to 14 weeks decides that the employee should entitlement

19 not attend work during the notice Employment of resident and entitled to limited benefits. It is for period, a payment must be made in non-resident employees the employers to arrange medical lieu of notice. Employers that wish to employ care for foreign employees. Israel foreign employees must apply to has special arrangements with Severance pay the Authority of in a number of countries to avoid The Severance Pay Law, 1963 writing. While work permits are double payment of social security provides employees that have normally issued for a year, they can contributions. worked for the same employer for be extended. There are two types of at least 12 months an entitlement applications: for skilled workers and Labour Laws in Israel apply to to severance pay. The severance for non-skilled workers. foreign workers in the same manner payment equals the most basic that they apply to local workers. recent salary multiplied by the Skilled workers can apply for number of years of service. their employment visa. The first Social security application must be made to the Social security in Israel is known as The payment of severance pay can Authority of Immigration; once a ‘National Insurance’. The National be denied if the dismissal is due to recommendation from this body is Insurance Institute provides Israeli some of the circumstances provided obtained, the foreign worker can for in the law, such as: grievous apply to the Ministry of Interior residents with a number of benefits breach of discipline, stealing, and prove that he is in possession financed by the National Insurance embezzlement, disclosure of of adequate health insurance. The contributions of both employers secrets, felony or working in another Ministry of Interior will then issue and employees. place without obtaining previous a visitor’s permit of work and a permission. multiple-entry permit for a period Employers are obliged to contribute of one year. A permit from the a certain percentage of the Since 2008, all employers must Authority of Immigration must be employee salary towards the social contribute to a mandatory accompanied with a visa. While security and mandatory health fund. Since 1 January 2014, the skilled workers can be accompanied insurance. Additionally, employers employer’s payments are six per by their families, dependents must are responsible for withholding cent of the salary for severance pay obtain entry clearance from the local employees’ contributions and and six per cent for the pension Israeli consular office. If any of the remitting them to the National fund, plus 5.5 per cent that is dependents wishes to work in Israel Insurance Institute. deducted from the employee, as it will need to obtain an individual his share. The employee is entitled permit to do so. Labour unions to all such funds at the end of their Work unions in Israel have legal employment, unless there are Conversely, non-skilled workers standing and rights. Employers are special circumstances or a court need to submit their application obliged to recognise them if they order that can deprive such rights. before they arrive in Israel. In certain have the support of the majority of circumstances (especially when at least a third of the work force. In Collective redundancies there is a shortage of workers in such cases, this union can represent As a general rule, redundancies certain industries), the application the employees in that working place are regulated by collective process can be simplified. in negotiations with the employer to agreements. In the case of Employers hiring non-skilled foreign collective redundancies, employees’ workers need to provide a bank improve the working conditions and representatives must be consulted. guarantee to the Ministry of Interior can take industrial actions against While there is no statutory criteria to to ensure the workers will leave the employer (as strike or sanctions). select the employees that must be the country upon termination the The Labour Court protects the dismissed, the procedure adopted contract of employment. right to take such actions providing must be transparent. Some of the they are legitimate and reasonable selection criteria include: seniority, As a general rule, foreign employees and have an active role in the family and economic situation make minimal social security negotiations between the parties to or performance. contributions and consequently are reach a collective agreement.

20 Audit Accounting standards All publicly traded companies in Israel must file financial statements in accordance with International Financial Reporting Standards (IFRS). An exception to this is for banks who must follow an accounting framework that is close to US GAAP. Furthermore, companies that are dually listed in the US, as well as in Israel, may choose to use US GAAP instead of IFRS.

All other companies file statements in accordance with Israeli GAAP. Israel has adopted the International Accounting Standards Board’s (IASB’s) framework and therefore, Israel GAAP is based on the framework’s fundamental concepts, which include: the accruals basis of accounting and going concern and qualitative characteristics of financial statements such as comprehensibility, materiality, relevance, reliability and comparability.

Accounting records All businesses must maintain proper Audit requirements books of accounts for taxation All companies in Israel are subject Companies that purposes. Accounting records and to a statutory audit which must the associated documents must be are dually listed kept for a minimum of seven years. be undertaken by a qualified All accounts must be audited by a accountant. Auditors are supervised in the US, as qualified accountant. by the Israeli Accounting Council and by the Institute of Certified Filing of financial statements Public Accountants. well as in Israel, All companies must file audited financial statements with the Audits are conducted in line may choose to tax authorities. Furthermore, with generally accepted auditing all companies must file audited standards. Under the associated use US GAAP statements with the Registrar legislation, auditors must prepare of Companies. and perform the audit to ascertain instead of IFRS. whether the financial statements, Publicly listed companies with accounting principles used and any securities traded on the Tel Aviv estimates made by the directors Stock Exchange must prepare and are correct. The audit report publish full audited annual financial must be attached to the financial statements and reviewed quarterly statements when submitted to the financial statements. Companies Registrar.

21 Trade Foreign Direct Investment The Israeli government is supportive of foreign investment and has codified this in a number of laws designed to encourage economic growth. Foreign investors can freely repatriate profits and dividends and can choose any business entity to establish operations in the country. Nevertheless, there are a few sectors, including communications must finance 24 per cent of the employees over a defined period to and broadcasting, which impose project with equity financing. eligible companies. restrictions on foreign investment. Furthermore, companies that were Taxation benefits Vocational training support formerly state-owned may be Designed to accelerate Israel’s The Vocational Training Department subject to certain restrictions if the industrial capability, the Law for at the Ministry actively assists government declares an essential the Encouragement of Capital industrial companies in employee interest in that country and issues an Investments offers industrial training in a variety of disciplines and order restricting foreign investment. companies taxation benefits as professions to the end of stimulating outlined in the tax section. local job growth while offering Israel has been an associated foreign companies high-calibre member of the EU since 1995. Support for R&D collaboration manpower. It became a full member of A number of incentives are in the Organisation for Economic place to provide support for R&D Imports Co-operation and Development collaboration. These include bilateral In Israel, a system of administrative (OECD) in 2010. Furthermore, and multilateral industrial R&D requirements and restrictions on Israel is a member of the World support agreements, monetary imports is imposed. Customs Trade Organisation (WTO) and has grants for financial institutions clearance must be obtained to agreements in place interested in establishing financial import goods. Furthermore an with the EU, European Free Trade R&D centres, monetary investment import license must be obtained Association (EFTA) and the USA. in approved R&D projects and from the Ministry of Industry and technological incubator grants. Trade. Special certificates may Government incentives be required for the importation of Government incentives are offered Domestic support certain categories of goods, eg via two primary government In addition to its support of from the Ministry of Health for the agencies within the Ministry of collaborative R&D, with the range importation of drugs. Economy: The Israel Investments of benefits it offers to international Centre and the Office of the Chief partners, the Office of the Chief Israel levies custom duties, VAT Scientist. Scientist further operates a wide and purchase tax on imports. The variety of programmes designed rates of custom duties are usually Conditional grants to encourage local entrepreneurial based on the cost, insurance and There are grants available for activity as an engine for economic freight (CIF) value. Various trade production equipment, facilities growth at large. Programmes agreements with the USA, the and fixed assets as long as they include: The Heznek-Seed Fund, The European Community and EFTA are acquired or constructed in Tnufa Programme, The Magneton reduce duties in comparison with the framework of a programme and Noffar programmes, The imports from other countries. approved by the Investment Magnet Programme and Assistance Centre’s Administration. Grants for Seed Companies Programme. Import restrictions are accorded at 20 per cent of Israel operates import prohibitions the amount of investment in fixed Employment subsidies for reasons of human health, assets, as outlined in the approved The government provides support public morals, environment program. The applying company to the salary costs of new and security.

22 Finance Capital markets • There must be an adequate permit. Permits are granted after a The main exchange in Israel is the spread (both in value and comprehensive examination from Tel-Aviv Stock Exchange (TASE). It distribution) of the listed securities the Licenses Committee. was established in 1953; at the time • The articles of association must of writing, more than 473 equity provide that voting in the general Other functions of Israel’s Central companies were listed in TASE and meeting should be through Bank are: the average trade volume of shares counting votes amounted to approximately USD339 • It issues currency • The company must comply million per day. Bonds, shares, with the rules of the TASE and • Acts as the government’s banker options, derivatives, mutual funds its Board • Maintains foreign currency and exchange-traded funds are reserves and publishes some of the financial instruments Banking system representative exchange rates that can be traded in TASE. Israel’s banking sector is resilient, • It is responsible for foreign modern and well-developed. The Financial markets are regulated by exchange controls sector is highly concentrated; two the Israel Securities Authority (ISA). • Regulates and supervises banking groups hold almost 60 per The ISA was established in 1968 commercial banks activities in cent of total assets of commercial and it is responsible for protecting order to ensure sound practices banks. Banks operating in Israel are investor’s interests. Some of its subject to liquidity regulations which responsibilities include: Insurance industry often limit the volume of credit Israel has one of the largest available to the public. • Granting permission for and most developed insurance corporations and mutual funds to industries in the Middle East. Banking facilities have grown at the publish prospectuses Indeed, insurance premium and same pace as Israel’s exports and penetration are amongst the highest • Assuring that TASE is managed imports; consequently, banks are in the region; nevertheless, its correctly and fairly highly experienced in international size remains small by international • Investigating law infringements transactions. standards. The growing stable • Promoting the development of political and economic conditions The Bank of Israel is the country’s market infrastructures and the along with the rising demand of central bank. The Banking diversity of financial products insurance products have had a Supervision Department has the positive effect on the industry. The TASE’s listing rules and following functions: procedures, as determined in the The insurance supervisor is the • Maintaining fairness in Securities Law (1968) and its various Commissioner of The Capital bank-customer relations regulations, establish the criteria Markets, Insurance and Savings that companies must fulfil, such as • Ensuring the proper management Division (CMISD) of the Ministry shareholder’s equity, public float of banking corporations of Finance. The principal legislation and minimum distribution of its • Supervising the stability of for the supervision of insurance is securities. The purpose of these banking institutions; ensuring that The Control of Financial Services rules is to ensure that companies there is no excessive risk taking (Insurance) Laws (1981). have a minimum level of potential and protecting depositor’s money liquidity for the securities after the The insurance sector in Israel is Initial Public Offering (IPO). Listing The Banking Supervision concentrated, five large insurance stocks is subject to approval from Department performs regular companies account for 90 per cent ISA’s board and the following inspections and assesses banks’ of the insurance premiums in the pre-requisites apply: activity based mainly on the country. The big five insurers are information it receives from industry leaders in both life and • The capital stock must be them. Entities, either seeking non-life business. Indeed, most fully paid to perform banking activities or insurers in Israel are composite • The articles of association to hold shares which amount companies transacting in both must authorise the transfer of to five per cent or more from a life and non-life. While the Israeli listed securities banking corporation, must obtain a insurance market was severely

23 affected by the financial crisis, it recovered much faster than other international markets.

Asset management industry The Israeli hedge fund industry has grown considerably; funds have grown their assets by 24 per cent to USD3.3 billion. Despite the growth over the last couple of years, the industry remains small compared to other developed countries and attracting meaningful institutional investments remains challenging. Attracting institutional investors is easier for larger funds.

More than half of the industry’s assets under management are invested in equities. After equities, Israeli funds are most active in the derivatives and currency markets, followed by fixed income. Interestingly, more than half of the industry’s assets under management are invested outside of Israel. This is a clear sign that the industry is growing and maturing, as managers increasingly look for investment opportunities abroad.

The hedge fund industry in Israel employs around 314 people, an average of three to four people per fund.

It is considered that one of the biggest barriers for growth of Israeli funds is . At present, investors are subject to capital gains tax of 30 per cent if they allocate into hedge funds; however, they are only subject to 25 per cent tax is they choose a different investment vehicle.

Israeli hedge funds are not regulated by the Israeli Securities Authority. The lack of regulation and oversight may be interpreted as a problem by foreign institutions.

24 Infrastructure The overall quality and reliability of line with a significant increase in the infrastructure is a critical factor for number of passengers, the airport businesses across all sectors. has been extensively enlarged, with new state-of-the-art terminals. Transportation infrastructure in Non-stop flights from Israel travel to Israel is under the supervision of North America, Europe, the Far East the Ministry of Transport and Road and neighbouring countries in the Safety. Road transport is the main Middle East. method of transportation in Israel. The Israeli road network spans Israel has three modern deep-water the entire country and has been harbours at Haifa, Ashdod and extensively expanded and improved Eilat which serve international in the past few years. shipping needs. Haifa Port is one of the largest container ports on the The railway network of Israel Mediterranean Sea as well as a busy is operated by Israel Railways passenger terminal. Ashdod Port is Company which is responsible for used mainly for shipping goods and all inter-city, commuter and freight the port of Eilat on the Red Sea links rail transport in the country. Usage Israel to the southern hemisphere of the railway system has increased and the Far East. rapidly over the last decade, reaching 48.5 million passengers in Israel’s information and 2014. At present, the country does Israel scored not have railway links with other communication technology (ICT) countries, although one is planned infrastructure is well developed. well in how with Jordan. The 13 kilometre The country ranked 21st in the Jerusalem Light Rail system began 2015 Network Readiness Index, as well companies operating in August 2011 and is due published by the World Economic to be extended. The construction of Forum. The index showed Israel as can absorb the Tel Aviv Light Rail has begun and the world leader in areas such as the first line is set to be completed R&D and innovation and the use of and use new between 2017 and 2023. the ICT in business. Furthermore, Israel scored well in how well technologies Ben Gurion International Airport is companies can absorb and use new Israel’s main and largest terminal. In technologies (fifth place). (fifth place).

25 This document is issued by HSBC Bank plc, Israel Branch (the Bank). This guide is a joint project with Grant Thornton. It is not intended as an offer or solicitation for business to anyone in any jurisdiction. It is not intended for distribution to anyone located in or resident in jurisdictions which restrict the distribution of this document. It shall not be copied, reproduced, transmitted or further distributed by any recipient. The information contained in this document is of a general nature only. It is not meant to be comprehensive and does not constitute financial, legal, tax or other professional advice. You should not act upon the information contained in this document without obtaining specific professional advice. Whilst every care has been taken in preparing this document, the Bank and Grant Thornton makes no guarantee, representation or warranty (express or implied) as to its accuracy or completeness, and under no circumstances will the Bank or Grant Thornton be liable for any loss caused by reliance on any opinion or statement made in this document. Except as specifically indicated, the expressions of opinion are those of the Bank and are subject to change without notice. The materials contained in this document were assembled in January 2016 and were based on the law enforceable and information available at that time. Grant Thornton refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton International Ltd (GTIL) and its member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions. This publication has been prepared only as a guide. No responsibility can be accepted by GTIL for loss occasioned to any person acting or refraining from acting as a result of any material in this publication. HSBC retains all responsibility for the translation of the content of this guide. In the event of any discrepancy or inconsistency between the English and translated versions of this Guide, the English version shall apply and prevail.