Entering the Israeli Market

Israeli Market

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

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

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

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

Starting a Business in Israel

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

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

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

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

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

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

Expanding into Israel

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

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

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

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

Israeli Business Facts

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

Advantages and Challenges of the Israeli Market

Advantages of the Israeli Market include:

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

Challenges of the Israeli Market include:

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

Limited Company / Subsidiary or Branch in Israel?

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