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Israel
Company formation in brief
Except special cases which are extremely rare in practice, the Israeli law has no restrictions with respect to nationality of shareholders and directors of companies operating in Israel. Actually, all employees, directors and shareholders of an Israeli company may be non-residents.
Any business in Israel may be organised through companies of various organizational and legal forms, namely:
• companies
• partnerships
• cooperatives
• commercial agencies
• joint ventures
• foreign companies’ branches and representative offices
• not-for-profit organizations
Companies are regulated in Israel by the Companies Law adopted on the model of the UK law. Companies may be of all known and generally accepted types in the world - public, private, with limited and unlimited liability, limited by shares and guarantees.
The incorporation procedure includes registration of the Charter and the Memorandum of Association with the Registrar of Companies in Israel. Those documents may be filed in English.
Private limited companies are organized in Israel without any prescribed minimum charter capital and may have from two to 50 shareholders limited in liability for the company’s debts and obligations. Such limitation of liability is not, however, comprehensive and may be overturned by court in cases where shareholders have abused the company for criminal purposes or for the purpose of understating the value of corporate assets.
Private companies may not offer their shares to the public, and any redistribution of share capital between shareholders must be approved by directors’ and shareholders’ meetings.
The company may have one director of any residence.
Private companies have to report each year to the Israeli tax authorities but are not required to provide copies of financial statements to the registrar of companies.
Open joint-stock companies have at least 7 shareholders. Unlike private companies, public companies may place their shares at the stock exchange, having issued the Prospectus to be approved by the Israel Securities Commission (ISC). And the ISC may request that the company be incorporated with a certain capital if it deems it appropriate for protecting future investors. A public company may also arrange the placement of its shares by private subscription if the offer is made to no more than 35 investors.
The ISC may also request that the company be incorporated with a certain capital if it deems it appropriate for protecting future investors.
If a public company’s shares are listed on the Tel Aviv Stock Exchange, they are subject to the laws related to stock market transactions, securities transactions and the rules established by the Israeli Securities Commission (ISC).
The Israeli Securities Law 1968 requires that the public issue of securities may be made after the Prospectus has been provided to the ISC for approval. The Prospectus is reviewed by the ISC and published within a few days. The law requires that the Prospectus should guarantee the maximum disclosure of information and thereby the protection of interests of the investor, and also provides that persons who signed the prospectus are liable for any inaccuracies or errors in the Prospectus.
A public company must hold a shareholders’ meeting at least once a year to review the management’s report and audited financial statements. At the meeting, the shareholders may, among other things, approve the amount of dividends to be paid, elect new directors and appoint auditors. If the company's shares are traded at the stock exchange, the board of directors must include two independent external directors to protect investors’ public interests.
A public company is required to provide audited financial statements to the Registrar of Companies of Israel.
Directors of public companies may be of any nationality and residence.
Israel's legislative initiatives impose serious responsibility on directors of any companies. Directors should act so that not to create a conflict of interest between themselves and the company and not to compete with their company. They should not use their official position for their own purposes and are required to disclose their personal interest in the event of any transactions made by the company. A company director in Israel may participate in profits from the company's transactions but this will require the approval by the board of directors, the audit committee, and if the transactions are not core for the company – by the shareholders’ meeting. Interested directors may not take part in the board of directors’ meeting, and at least 1/3 of disinterested shareholders participating in the shareholders’ meeting must adopt a resolution approving the transaction.
The establishing of limited and unlimited partnerships in Israel is regulated by the Law "On Partnerships". A partnership may have from 2 to 20 members, and all relations between them are determined by the Memorandum of Association (Partnership Agreement).
Unless otherwise specified in the Memorandum of Association (Partnership Agreement), any partner may withdraw from the partnership at any time. This entails the partnership dissolution, unless otherwise provided in the Memorandum. Partnerships must be registered with the Registrar of Partnerships, although the Partnership Act indicates that if a partnership has no registration, it does not mean that it does not exist, however, a limited partnership may not do business until it is registered. Persons of any nationality and residence may be partners .
Each limited partnership must have at least one general unlimited partner and one limited partner. The general partner has unlimited liability for the partnership’s debts and obligations, the limited partner’s liability is limited by his contribution to the partnership. The limited partner may not participate in the management of the partnership. Also, a limited partner may not, while the partnership exists, directly or indirectly withdraw any part of its investments from the partnership. Should this principle be violated, the limited partner will bear the liability for the partnership’s obligations identical to that of the general partner, and other restrictions.
Unlimited partnership is characterised by joint and several unlimited liability of all partners for the company’s debts and obligations with all their property.
Each partner may be involved in the management and is deemed his partnership’s representative with full authority.
Foreign partnerships may do business in Israel but may not open an office in Israel until they are registered with the Registrar of Partnerships and subsequently approved by the Ministry of Justice.
A foreign company may establish a branch, a representative office or a subsidiary in Israel in accordance with the Israeli law. A foreign company wishing to establish its presence in Israel must register with the Registrar of Companies providing the Registrar with a list of the company’s directors and a power of attorney for its representative in Israel.
Joint ventures are an effective form of doing business in Israel between companies from different countries; they may be established on the basis of a contract to be registered in Israel in the form of a partnership or a company.
Commercial agencies in Israel may also be of interest to foreign investors. It should be noted that commercial agents’ and distributors’ activities are not regulated with a separate section of the law (except for the fees limitation if goods and services are provided on the basis of Government orders). Israel has no formulated requirements to the form and content of agency agreements as well as to the agent’s nationality and place of business.
Cooperatives in Israel are more common in the transport and agricultural industries and are usually established by local residents. A cooperative member’s liability is usually limited with the shareholding or as determined by the statutory documents.
Not-for-profit organizations in Israel are registered in a simplified form and usually used by charitable, sports, educational and other entities not for making a profit. However, the companies may be engaged in business activities if the entire income from them are used for development.
Under the Israeli law, any commercial profit and other types of income received by companies in Israel and abroad are taxed, including:
• dividends
• interest
• royalty
• rental income
• income from real estate sale
• capital gains
Foreign companies’ branches in Israel are taxed in the same way as typical local companies but only on profits earned in Israel. At the same time, a branch can deduct from the tax base all Israeli business expenses regardless of where those expenses are incurred.
Partnership is not subject to income tax, and tax entities are partners themselves unless otherwise provided by the double taxation agreement. Partnership income is distributed among partners pro rata to their business shares. The Israeli law has a rule that if a partner has incurred his share of losses in the partnership in the current fiscal year, he may deduct those losses from the income received from other sources when calculating the taxation base.
The tax on capital gains resulting from changes in the real estate value in Israel is planned to be gradually reduced until it is completely abolished. Capital gains resulting from securities trading at the Israeli Currency Exchange (or at a foreign exchange by persons not operating in Israel) are exempt from tax. It should be borne in mind that if securities were sold by professional licensed dealers in Israel, those transactions are not exempt from tax.
Interest and dividend taxes for companies - non-resident of Israel are subject to relevant double taxation agreements.
If a company which is the source of dividends is in compliance with the the Investment Promotion Act in Israel, a lower dividend tax rate is applicable.
Israel has the Land Betterment Tax equivalent to the capital gains tax in companies and calculated each year, in particular, on the basis of the inflation in the country. There is also the land acquisition tax. Land not occupied by buildings as well as buildings and structures on the land are taxed. Agricultural land is not taxed.
Israel also has the Stamp Duty tax used although not necessarily in documents certification by notary.
Israel has no inheritance or gift taxes.
In order to attract foreign investments, Israel has a special policy aimed at significant reduction of tax burden for investors in certain areas - the so-called National Priority Areas. For example, investors may obtain a full tax exempt for 10 years in a number of industrial projects and in hotel construction.
It is impossible to discuss here all the variety in various taxes application in Israel, and we recommend that a potential investor be sure to get advice before making any final decision.
Although, as a rule, no foreign exchange control is used in Israel, some foreign exchange transactions for foreign investors in Israel are subject to approval as provided and regulated by the Foreign Exchange Control Act.
A foreign resident may repatriate profits from investments in Israel and transfer all proceeds received from the sale of such investments if the Israeli tax authorities decide that all taxes on those proceeds have been duly paid. A non-resident may invest in Israeli companies’ shares and issue loans to Israeli companies and individuals.
The Israeli banking system is modern and well developed. The country has commercial banks, financial institutions, foreign banks’ and investment banks’ representative offices which provide a full range of commercial services, many of them have branches and offices in the financial hubs of the world. Approximately 75 percent of all commercial banks’ assets are held by three largest banking groups (Bank Hapoalim, Bank Leumi and Israel Discount Bank). The official Central Bank is the Bank of Israel responsible, among other things, for currency issue, monetary policy and controls.
Israel is not a tax heaven or offshore jurisdiction, and a concept of Israeli tax exempt company (and/or Israeli international business company (IBC), offshore company, trust, foundation etc. registration) does not exist in Israel as such. A company formation in Israel could be arranged with a professional registered agent providing incorporation, virtual office and other corporate services in Israel. To set up a company in Israel is possible by correspondence, but to open a bank account in Israel will, most probably, require a personal visit.
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