Akasaka International Law, Patent & Accounting Office.

Israeli Law Series: 1. Setting up a Business

Feb 08, 2016

Israeli Law Series: 1. Setting up a Business

 

With significant advancements in technology, notably meditech and cyber security, Israel is an exciting and promising new investment environment for foreign businesses.

For this reason we would like to introduce the first topic for our new blog series on Israeli law and investment – Setting up a Business. On this topic will give a brief outline and guide to setting up a business in Israel. In particular, we will identify the business options and requirements for foreign companies.

  1. Israeli Business Entities

The principal corporate forms used for doing business in Israel are public companies and private companies. Public companies are registered on the Tel Aviv stock exchange or other recognized stock exchange out of Israel, in accordance with the local laws and regulations in that jurisidction. As such, public companies have certain public disclosure responsibilities as required under Israeli Securities Law and its regulations as well as the Tel Aviv Stock Exchange Rules (for more information see the Tel Aviv Stock Exchange listing rules, or that of the relevant stock exchange). By contrast, private companies do not have a public share offering and do not have the same disclosure requirements as publicly listed companies, although it is important to note that details of private companies are publicly available, such as the identity of the shareholders and directors, and liens or other encumbrances over its assets.  

Companies can also choose to participate in co-operative societies, general or limited partnerships, or non-profit organizations. 

For foreign companies there are 3 main options for setting up business.

  1. Foreign Company Registration Options

Foreign companies can choose to register a Branch Office, Subsidiary Company, or to operate a Representative Office. Which is the best choice for any given business depends on the specific needs, strategic goals and objectives of the company.

  1. Representative Office

The first option for foreign companies looking to set up a business presence in Israel is to establish a representative office without formal registration with the Israeli Companies Registrar. This is a good choice for foreign companies wishing to undertake market research and liaison activities in Israel. However, representative offices cannot engage in any profit yielding business activities, cannot form a “place of business” and do not have legal capacity. Therefore, representative offices cannot enter into any contracts or engage in business on behalf of the foreign company who bears full liability for any acts of omissions of the representative office.

For this reason these are usually temporary fixtures (often as a pretext to establishing a branch office or subsidiary company) and do not need to be registered.

  1. Branch Office

Foreign companies may establish a branch office registered with the Israeli Companies Registrar in Israel through which they may conduct any type of business within the scope of the foreign company. And the profits of which may be repatriated to the foreign company.

Branch offices are treated as an extension of the foreign company, and therefore do not have separate legal corporate status. In this sense, to establish a branch office they must bear the same name as the foreign company’s headquarters. And the foreign company bears the ultimate responsibility for any liabilities that may arise due to any acts or omissions of the branch office.

There are also a number of other regulations for branch offices such as annual filing of accounts for both the branch office and foreign company. This is one reason why foreign investors may prefer establishing a subsidiary company over a branch office.

Generally, a registered branch is a mere reflection of the foreign company, and on the practical level, in certain cases it would be easier to conduct business as an Israeli company as opposed to a foreign registered company, for instance when it comes to obtaining licenses to operate certain aspects of a business (depending on the industry) or even opening a bank account or leasing an office space.  

  1. Subsidiary Company

Foreign companies can choose to set up a subsidiary company in Israel. A subsidiary company is a locally incorporated private limited company whose majority shareholder can be another local or foreign company or individual. Israel allows 100% foreign ownership in companies so a foreign company or individual can own 100% of the shareholding if it chooses to establish a subsidiary company. 

Subsidiary companies bring several benefits, in particular; the liabilities of a subsidiary company generally do not extend to the parent company.  Subsidiary companies can also enjoy resident status and is taxed accordingly.

Directors of the subsidiary company need not be Israeli citizens or residents, however for some purposes (such as VAT reporting) the company must appoint a representative who has Israeli residence status.

III. Comparison of Registration Options

 

ISRAEL REP. OFFICE

ISRAEL BRANCH

ISRAEL SUBSIDIARY

Legal Type

Has no legal status but just a temporary administrative arrangement

Not a separate legal entity but an extension of the foreign company

Separate legal entity  distinct from the foreign company

Liabilities

Liabilities extend to foreign company

Liabilities extend to foreign company

Liabilities limited to subsidiary

Entity Name

Depends on the circumstances.

Must be the same as the foreign company

Can be the same or different from the foreign company

Allowed Activities

Can only conduct market research or feasibility studies, cannot form a place of business

Must be the same as the foreign company

Can be the same or different from foreign company

Validity Period

No need to register

Registered forever until delisted

Registered forever until liquidated and dissolved

Registration time

No need to register

 Approximately 14 business days

Approximately 2-14 business days (depends on method of registration)

Taxation

 

N/A as Rep Office cannot generate income and is not a legal entity.

Depends on the specific circumstances

Taxed as Israel resident entity

Annual Filing

No need to file.

Must file branch office as well as the foreign company’s accounts.

Must file accounts of the Israeli subsidiary.

Bank Account

Depends on circumstances

Can open bank account in Israel

Can open bank account in Israel

Staff Hiring

No restrictions on hiring local or foreign staff

No restrictions on hiring local or foreign staff

No restrictions on hiring local or foreign staff

Appointment of Officers

No special rules

In order to open VAT file must appoint at least one locally resident person or local entity directed by a local resident person

In order to open VAT file, must appoint at least one locally resident person or local entity directed by a local resident person

 Table Reference: The above table is based on the information provided by the Ministry of Economy STATE OF ISRAEL; please see the Invest in Israel website.

  1. More Information and Regulations for Establishing a Subsidiary Company

Considering subsidiary companies enjoy limited liability and are open to 100% foreign ownership, they are an appealing option for foreign investors. For this reason we have highlighted some other requirements for limited companies below.

Capital: There is no official minimum capital requirement for setting up a company (but the company must have a share capital).

Founders and Shareholders: There are no minimum requirements for the number of founders and shareholders of a company. Nor is there any specific requirement with regard to the nationality or residence of shareholders. However, please note that a private company that has more than 50 shareholders is required to disclose its financial reports and therefore, practically, private companies do not have more than 50 shareholders.

Board of Directors: Private companies must have at least one director and public companies must have at least two external directors, as well as a chairman. There are no nationality or residence requirements for Directors however; foreign directors are required to submit a copy of their passport to register a foreign company or to be registered as directors in a local subsidiary.

Management: There is no minimum requirement for the number of managers of a private company; however, public companies must have at least one manager to serve as the chief executive officer (CEO). There are no nationality or residence requirements for managers, but residence status must be stated in founding documents and annual reports.

Registration Fee: The fee for registering a company or a branch is approximately 2, 600 NIS (for more information please see: Israel’s Ministry of Justice website page here).

According to the Invest in Israel website, applications to register a foreign company will usually be processed within 14 business days. Once registration is complete the company will be issued with a certificate of incorporation and a 9 digit company number.

Other Documentation: Further information regarding documents and forms to be submitted when registering a foreign company with the Registrar of Companies can be found on the Invest in Israel and the Israel Ministry of Justice websites.

 

 

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