Alon Kaplan, Ph.D., TEP
Israel’s strong and growing economy, supported in particular by its robust high-technology sector, attracts many foreign companies seeking to establish a formal presence in the country. These include the local operations of most major global technology corporations, as well as many venture capital funds. Large infrastructure projects have also drawn major engineering firms, while numerous foreign-controlled real estate developers are active in Israel. In addition, many global brands operate Israeli franchises, sometimes controlled by foreign investors, and commercial entities whose activities require a local presence maintain offices in Israel. This article reviews the general legal requirements for establishing a business in Israel.
I. Options for Activities
Three options are generally available to foreign entities wishing to do business in Israel: (1) opening a branch in Israel; (2) incorporating a subsidiary company in Israel; and (3) establishing a partnership in Israel within the framework of a company.
1. Opening a branch in Israel
If the foreign business operates in its country of origin as a company, it may open a branch in Israel that will operate under the same name as the foreign company. There may be tax reasons to choose this option.
Generally, any action of this nature requires formal company registration with the Registrar of Companies. Israeli law recognizes the term “Foreign Company”, and in accordance with Common Law tradition, which forms the basis of Israeli Companies Law, the foreign company can be registered in Israel and is then, for all intents and purposes, deemed an Israeli company.
The procedure for registration of a foreign company is simple and quick, and is usually done by a lawyer. A foreign company operating in Israel must be registered within a month of commencing operation. The documents listed below must be filed with the Registrar of Companies. In practice, the documents will usually require confirmation by apostille procedure or by an Israeli consulate in the foreign country concerned.
- of the company (by-laws).
- -laws.
Special attention should be paid to cases where the activities of a foreign company in Israel would be considered as “doing business” in Israel with consequential liability for Israeli taxes.
2. Incorporating a subsidiary in Israel
There are times when tax and other considerations will lead towards incorporation of a subsidiary company in Israel. For example, in certain cases, a double taxation treaty between Israel and the foreign company’s home country will grant tax benefits.
There are additional practical reasons for creating a subsidiary in Israel: Where the foreign company wishes to enter into a joint venture agreement with an Israeli partner under a corporate structure, or to separate the obligations of the Israeli business from the assets of the foreign business.
The following are some important aspects relating to the incorporation of a company in Israel:
2.1 Company name
Registration of a company is done through a lawyer, or an accountant assisted by a lawyer, at the Registrar of Companies, a unit of the Ministry of Justice.
Frequently, the foreign company will wish to set up an Israeli company bearing an identical or similar name to that of the company abroad. The Registrar usually authorizes this if there is no risk that the public will confuse the name with that of a company already operating in Israel. The Registrar will, at times, request that the lawyer dealing with the incorporation of a subsidiary for a foreign company provide a letter from the foreign company verifying the legal connection between the two companies, and that the foreign company agrees that the subsidiary use its name in Israel. The name of the company should be in Hebrew with the optional addition of an English name.
Registration grants the company protection of its name under Israeli Companies Law and, if necessary, one may petition the court for an injunction against use of the name in a way that may mislead the public. It can be prudent to register a trademark with the Registrar of Trademarks in order to further protect the name.
2.2 Registering a new company
Unlike Continental Europe, companies are not registered with a notary as Israel’s Companies Law is based on the English Companies Act, 1929.
A lawyer will prepare the company’s Articles of Association, the document that describes the company’s objectives and its internal management and administrative procedures, principally those regarding its shareholders and board of directors. The lawyer will also submit to the Registrar of Companies details regarding the registered address of the company, the directors and shareholders.
To register a company, a fee of NIS 2,606 (approximately USD 745). The Registrar of Companies updates this fee from time to time.
The registration process can take a few days if no special problems arise regarding the company’s name or its registration documents, whereas if the application is made online, the process can be completed within 24 hours.
Following registration, a Certificate of Registration will be forwarded to the company’s lawyer.
2.3 Disclosure of information on companies
The Registrar of Companies maintains a public record showing basic information on companies, such as a company’s name, the address of its registered office, and its outstanding annual fees. An extract, available upon payment of a standard fee, contains more extensive information about the company, including names of shareholders and directors, liens or charges against the company’s assets, indications of special resolutions that may alter the Articles of Association, and indications of decisions of voluntary liquidation of the company.
2.4. Recording the names of shareholders in the records of the Registrar of Companies
The names of the initial shareholders of the company, usually its founders, will appear on the first incorporation documents of the company. However, the company may be founded by nominees, or trust companies, who will be registered as the initial shareholders and, after incorporation of the company, the shares will be transferred to the final beneficiaries or to the client who requested the incorporation of the company.
2.5 Holding shares for or in the name of the purchaser
There are instances when a foreign entity that purchases or sets up a company in Israel does not want to appear on the public records as a shareholder.
However, under Israeli Companies Law, the Registrar of Companies recognizes only the official shareholder; the so-called “beneficiary” – the real owner of the shares, will not be recorded in the books of the Registrar. This arrangement may prove advantageous to entities wishing to keep their business confidential and their names out of the public record.
Note that bearer shares may not be issued by a private company. All shares must be registered in the name of a person or legal entity.
2.6 Appointments
2.6.1 Appointment of directors and officers
Under Israeli Companies Law, a company is managed by a board of directors consisting of one or more directors, as decided by the incorporating entity. In most cases, the Articles of Association will contain a clause determining the number of directors who may comprise the board of directors. A legal entity, such as a company, may serve on the board as a director.
There is no mandatory provision in the law for the board of directors to have an Israeli director. A foreign person may serve as a director, even if not resident in the country.
The board has the power to appoint a number of officers who will run the day-to-day business of the company. These officers may be titled CEO, manager, managing director, Chairman of the Board, etc., but in practice, it is not the title that is important, but the nature of the work and the authority granted to the officer by the resolutions of the board.
Private companies in Israel need not have a company secretary, though some companies do appoint an officer with such title.
The documents of incorporation of the company allow for great flexibility as to how the directors run the company. When dealing with this aspect, it is advisable to consult with the lawyer handling the registration and the various company appointments.
2.6.2 Appointing an auditor (CPA)
By law, a company must appoint an auditor who will review the company’s books. The auditor (a “Certified Public Accountant”) is appointed at a shareholders’ meeting and is responsible for the preparation of the company’s annual audited financial statements, which must be filed with the Israel Tax Authority. Private companies need not file their financial statements with the Registrar of Companies, provided the required provisions are included in their Articles of Association.
2.6.3 Appointing a lawyer
There is no requirement for the appointment of a lawyer. In order to prepare legal documents, however, it will be necessary for the company to use the services of a lawyer, who may also be required on occasion for other aspects of the company’s business.
II. Commencing Business
Whether the foreign company chooses to operate as a foreign company with a branch in Israel, or to incorporate as a subsidiary in Israel, there are a number of legal and commercial requirements that must be undertaken in order to commence business activities. There are generally six main requirements:
- Registering the company with the Israel Tax Authority.
- Registering the company with the Customs and VAT Authority.
- Opening an employer file with the National Insurance Institute.
- Opening a bank account.
- Attending to various technical matters.
1. Registration with the Israel Tax Authority
Registration with the Israel Tax Authority should be made within 30 days of commencement of operations. Registration requires providing details on the company’s business activities. Upon registration, the company receives a file number assigned to it. The file number is usually the same as the one issued by the Registrar of Companies.
2. Registeration with the Customs and VAT Authority
Value Added Tax (VAT) is imposed on business entities at every stage of the commercial cycle. VAT paid on expenditures may be set off against VAT received on income. VAT reports are submitted periodically. VAT does not apply to banking and similar transactions, and exports are zero-rated. Non-compliance with VAT provisions may lead to criminal charges.
Companies must register as “Authorised dealers” for VAT purposes no later than the commencement of operations. In most cases the company’s Certified Public Accountant will attend to this.
Upon registration, the company will receive a certificate of registration for VAT purposes. The registration number is usually the same as that issued by the Registrar of Companies. A foreign resident person or entity that starts to conduct any part of its business in Israel must also appoint a local VAT representative with responsibility for handling all Israeli VAT matters.
3. Opening an employer file
3.1 Employer file with tax authorities
The company will be regarded as an employer if it employs people. It must report salaries paid to employees and the amount of tax deducted. This tax must be paid to the Israel Tax Authority. Reporting is monthly and deducting tax from salaries is obligatory. Non-compliance may lead to criminal sanctions imposed on the company’s directors.
3.2 National Insurance (social security) contributions
The National Insurance Institute provides Israeli residents with a comprehensive system of social security benefits financed by contributions (payments) from employers and employees. Employers are responsible for withholding employees’ contributions from salaries and remitting these, together with the employers’ own contributions, to the National Insurance Institute.
4. Opening a bank account
The account must be opened immediately after registering the company with the Registrar of Companies in order to allow for the depositing of share capital received for shares redeemed by the shareholders, as well as to permit regular business activities. The following documents are generally required in order to open a commercial account:
- Articles of Association, Registration Certificate and an updated extract from the Registrar of Companies.
- Board of Directors’ resolution to open a company bank account at the particular bank and a determination of the rights of signature on the account, along with a lawyer’s or certified public accountant’s [ML1] confirmation of the Board of Directors’ resolution.
- A foreign company must provide certified copies of its incorporation documents, such as its Articles of Association, Certificate of Incorporation, and Certificate of good standing, as well as a written confirmation from a lawyer in the country of origin confirming the validity of the resolutions taken with respect to opening a bank account in Israel.
CONCLUSION
STARTING AND OPERATING A BUISNESS IN Israel is a regulated procedure with legal and tax consequences. Additional issues of Intellectual property, trademark registrations and similar considerations may require special attention. Advice of professionals is required and recommended.
5. Technical Matters
After registering the company, it is necessary to take the following technical/organizational steps:
5.1 Corporate letterhead
There is no requirement that a company provide certain information on the company letterhead. The law requires that the company’s full name appear on its stationery and it is usual to provide a street or POB address, although this is not essential. It is not customary to stipulate the company’s bankers on the letterhead.
5.2 Company sign
The law requires a sign in front of the registered office of the company. When the registered office of the company is at the office of a lawyer or accountant, the company’s sign is often added to the already existing list of signs placed at the door of the professional’s office. The tax authorities also require the company to place a clear sign bearing the company’s name on the mailbox at the company’s place of business.
5.3 Bookkeeping and auditing of accounts
Immediately on commencement of the company’s business activities, it is necessary to manage the accounts according to law. An auditor or certified public accountant must be appointed, whose job is to audit the accounts and to prepare a yearly balance sheet. The company’s shareholders at a general meeting appoint an auditor who ensures that the company’s accounts are properly managed.
III. Conclusion
After almost 70 years of statehood, Israel is today a modern and dynamic industrial and commercial country brimming with potential. The foreign company that, prior to investing, avails itself of the many opportunities and uses the appropriate local resources, including professionals such as lawyers, accountants, economists, land appraisers and engineers, can make a very successful entry into the Israeli business world.