Investment Climate in Israel

A Hot Tip about Foreign Direct Investment in Israel

Last updated: 24 Feb 2011

Openness to Foreign Investment

Israel is open to foreign investment, and the government actively encourages and supports the inflow of foreign capital. There are few restrictions on foreign investors, except for parts of the defense or other industries that are closed to outside investors on national security grounds. There is no screening of foreign investment and no regulations regarding acquisitions, mergers, and takeovers that differ from those that Israelis must follow. Foreign investors are welcome to participate in Israel's privatization program. Investments in regulated industries (e.g. banking, insurance), however, require prior government approval. Investments in certain sectors may require a government license. Other regulations may apply, though usually on a national treatment basis.

 

The Investment Promotion Center of the Ministry of Industry and Trade seeks to encourage potential investors to invest in Israel. The Center stresses Israel’s developed infrastructure, educated work force, open economy, and ties to the U.S. and Europe, and provides information about investment incentives available in Israel (details are discussed in the section Performance Requirements and Incentives).

 

Conversion and Transfer Policies

Israel’s foreign exchange liberalization process was completed on January 1, 2003, when the last restrictions placed on the ability of institutional investors to invest abroad were removed. Foreign-currency controls have been completely abolished, and the Israeli shekel has become a freely convertible currency. Israeli individuals can invest, without restriction, in foreign markets. Foreign investors can open shekel accounts that allow them to invest freely in Israeli companies and securities. These shekel accounts are fully convertible into foreign exchange.

 

Most transactions must be carried out through an authorized dealer. An authorized dealer is a banking institution licensed to arrange, inter alia, foreign currency transactions for its clients. The authorized dealer must report large foreign exchange transactions to the Controller of Foreign Currency. There are no limitations or significant delays in the remittance of profits, debt service and capital gains.

 

Expropriation and Compensation

There have been no expropriations of U.S.-owned businesses in Israel in the recent past. Israeli law requires adequate payment, with interest from day of expropriation until final payment, in cases of expropriation.

 

Dispute Settlement

Israel has a written and consistently applied commercial law based on the British Companies Act of 1948 as amended. Israel's commercial law contains standard provisions governing company bankruptcy and liquidation. Personal bankruptcy is covered by a separate bankruptcy ordinance. Monetary judgments are always awarded in local currency.

 

The GOI accepts binding international arbitration of investment disputes between foreign investors and the state. Israel is a member of the International Center for the Settlement of Investment Disputes (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.

 

Performance Requirements and Incentives

There are no universal performance requirements on investments, but performance requirements, including investment requirements, are often included in sales contracts with the government. In some sectors, there is a requirement that Israelis own a percentage of a company. Israel’s visa and residency requirements are not onerous. The GOI does not impose preferential policies on exports by foreign investors. Israel complies with TRIMS.

The Israeli government offers a wide variety of investment and business incentives to both domestic and foreign investors who meet certain requirements. Among these are grants, tax incentives, marketing and training assistance, technological incubators, incentives for investment particularly in research and development (R&D) and the hi-tech industry and in specified regions of the country. All benefits available to Israelis are also available to foreign investors, who in some cases may enjoy even more generous tax treatment than domestic investors. Some of the benefits and requirements are described below.

 

For complete information, potential investors should contact:

Investment Promotion Center

Ministry of Industry, Trade and Labor

5 Bank of Israel Street,

Jerusalem 91036

Tel: 972-2-666-2607

Fax: 972-2-666-2938

Israel Investment Center

Ministry of Industry, Trade and Labor

5 Bank of Israel Street,

Jerusalem 91036 490.

Tel: 972-2-666.2236

Fax: 972-2-666.2905

Ministry asks that requests be in writing.

 

Israeli laws that authorize investment incentives include the Encouragement of Capital Investments Law, 1959 (with amendments); the Encouragement of Industry (Taxes) Law, 1969; the Encouragement of Industrial Research and Development Law, 1984; and the Law for the Encouragement of Investments (Capital Intensive Companies), 1990. To receive certain investment incentives, an investment must receive “Approved Enterprise” status for grants and Beneficiary Enterprise status by the Tax Authority if it chooses one of the tax benefits programs. It is then eligible for incentives, such as grants of up to 24% of tangible fixed assets (grants program only) and/or reduced tax rates, tax exemptions and other tax related benefits.

 

To obtain this designation, an investor must apply to the Investment Center (not the same as the Investment Promotion Center), providing physical and financial details of the projected investment; background information on the investors; sources of financing; forecasts of sales, operating results, cash flow, and "break-even point"; and projected manpower requirements. Among the criteria applied by the Investment Center in deciding whether to grant approved enterprise status is a legally mandated cost-benefit analysis that evaluates the long-term value of the project from the point of view of the Israeli economy. Government approval for the incentives program is not given if investment in a proposed area is considered saturated. Investors may be required to disclose proprietary information in the application for approved status.

 

Investment incentives are outlined in the Law for the Encouragement of Capital Investment which was recently revised. The new Law differs from the previous one in that it adds a new path for incentives - an automatic one. The incentive programs can be divided into 2 main types:

1) The Grants program - administered by the Israel Investment Center (IIC), a department of the Ministry of Industry, Trade and Labor;

2) The Automatic Tax Benefits program administered by the Tax Authorities. To qualify, investment projects must meet certain criteria including: international competitiveness, minimal designated investment, high added value and registration of the company in Israel.

 

Once these criteria are met, the enterprise gains Approved Enterprise status from the IIC if it chooses the grants program and Preferred Enterprise status by the Tax Authority if it chooses one of the tax benefits programs. It is then eligible for incentives, such as grants of up to 24% of tangible fixed assets (grants program only) and/or reduced tax rates, tax exemptions and other tax related benefits.

 

Summary of Program Benefits

Grants Program

A. Investment Grants according to the National Priority Area in which the enterprise is located as per Table 1.

B. Tax benefits as per Table 2

C. Accelerated depreciation

Tax programs

 

A. Tax benefits (see details below)

B. Accelerated depreciation

Location

The government grants scheme is affected in part by the location of the company's activities. In December 2009 the cabinet approved a new national priority map which focuses on the Negev, Galilee and Arab towns and villages, but it is still a work in progress. At present, the following in Israel have been declared National Priority Regions:

 

Priority Area A includes the Galilee, Jordan Valley, the Negev and Jerusalem (for hi-tech enterprises). Priority Area B includes the lower Galilee and northern Negev. Area C includes the rest of the country.

 

Grant Program

 

The amount of the government grant is calculated as a percentage of the original cost of land development and investment in buildings (except in Area C), in machinery and equipment. This cost includes installation and related expenses.

 

Right to Private Ownership and Establishment

The Israeli legal system protects the right of both foreign and domestic entities to establish and own business enterprises, as well as the right to engage in remunerative activity. Private enterprises are free to establish, acquire, and dispose of interests in business enterprises. As part of its current privatization efforts, the Israeli government actively encourages foreign investment in privatizing government owned entities.

 

Israel has a law against unfair competition. It is government policy to equalize competition between private and public enterprises, although the existence of monopolies and oligopolies in several sectors stifles competition. In the case of monopolies, defined as entities that supply more than 50% of the market, the government controls prices.

 

Protection of Property Rights

Israel has a modern legal system based on British common law that provides effective means for enforcing property and contractual rights. Courts are independent. Israeli civil procedures provide that judgments of foreign courts may be accepted and enforced by local courts. Secured interests in property are recognized and enforced by the Israeli judicial system. A reliable system of recording such security interests exists. Patent protection is provided for twenty years from filing. Both product and process patent protection for pharmaceuticals are permitted. However the Israeli patent system still allows for pre-grant opposition to patents, which may result in significant delays for some applicants. Israel employs compulsory licensing in very limited circumstances, mostly when the product is not being supplied in Israel on reasonable terms.

 

Israel is a Member of the WTO and the World Intellectual Property Organization (WIPO). It is a signatory to the Berne Convention for the Protection of Literary and Artistic Works, the Universal Copyright Convention, the Paris Convention for the Protection of Industrial Property, and the Patent Cooperation Treaty. Israel was obligated to implement the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) by January 1, 2000.

 

Of particular importance is the inadequate protection against unfair commercial use of data generated to obtain marketing approval for pharmaceuticals. Administrative delays at the Ministry of Health further erode the ability of U.S. pharmaceutical companies to obtain a fair term of protection, even if they submit registration requests in Israel immediately upon approval in the United States. Israel’s use of a pre-grant opposition system for patents impairs the ability of rights holders to protect innovation. In 2005, Israel reduced the term of extension of pharmaceutical patent protection provided to compensate for delays in obtaining regulatory approval of a drug. The 2005 legislation has discouraged U.S. companies from substantial investment in the health sector.

 

Investors in real property, whether personal or commercial, should note that Israel is negotiating with the Palestinian Authority to determine the final status of the Israelioccupied West Bank. While the final status negotiations are likely to ensure adequate protection of property rights in the event of a change in sovereign authority, investors should factor possible sovereignty changes into their investment decisions.

 

Copyright

Israel's present copyright law is based on the United Kingdom Copyright Act of 1911, with subsequent amendments. Protections include the exclusive right to (a) copy or reproduce the work; (b) produce, reproduce, perform or publish translations; (c) publicly perform plays or novels; and (d) make recordings of literary, dramatic or musical works. Criminal penalties are also provided for certain commercial infringing activities.

 

The Knesset recently passed new copyright legislation. In general, this law is an improvement over the old Israeli law, in that is more modern its structure, terminology and scope. Temporary copies are explicitly protected and a “making available” right is explicitly provided. Under this law, a person who is a non-Israeli national has no rights in their sound recordings that were not published for the first time in Israel, unless the person is a national of country that has an agreement with Israel concerning sound recordings. In the case of the United States, the Israeli government promulgated an order which implements a 1950 bilateral agreement between Israel and the United States which does protect U.S. sound recordings.

 

The term of protection for sound recordings is 50 years; for other works, it is the lifetime of the author plus 70 years.

 

Copyright law in Israel also falls short of certain protections that have become common in the copyright laws of developed countries including, protection of “technological protection measures,” “rights management information,” provisions related to internet service provider liability and safe harbors and parallel import protection. Israel has also not acceded to the “WIPO Internet Treaties.”

 

Transparency of Regulatory System

It is government policy to encourage increased competition through market liberalization and deregulation, but tax, labor, health, and safety laws can be impediments to the foreign investor. Although the current trend is towards deregulation, Israel's bureaucracy can still be difficult to navigate, especially for the foreign investor unfamiliar with the system. It is important that potential investors get approvals or other commitments made by regulatory officials in writing before proceeding, rather than relying on unofficial oral promises.

 

Israel is a signatory to the WTO Agreement on Government Procurement (GPA), which covers most Israeli government entities and government-owned corporations. Most of the country’s open international public tenders are published in the local press. However, government-owned corporations make extensive use of selective tendering procedures. In addition, the lack of transparency in the public procurement process discourages U.S. companies from participating in major projects and disadvantages those that choose to compete. Enforcement of the public procurement laws and regulations is not consistent.

 

Efficient Capital Markets and Portfolio Investment

Credit is allocated on market terms. Various credit instruments are available to the private sector, and foreign investors can receive credit on the local market. Legal, regulatory, and accounting systems are transparent and conform to international norms, although the prevalence of inflation-adjusted accounting means that there are differences from U.S. accounting principles.

 

Three large banks - Bank Hapoalim, Bank Leumi, and Israel Discount Bank - dominate Israel's banking sector. Bank Leumi had assets of USD 86.6 billion at the end of 2008; Bank Hapoalim had assets of USD 85.5 billion at the end of 2008, and Discount Bank, the third largest bank, had assets of USD 50.7 billion at the end of 2008. . Bank Hapoalim was fully privatized in 2000. A little more than 10% of the shares of Leumi remain in the hands of the State of Israel, and the bank remains on the agenda of the Government of Israel to complete privatization. A group led by Matthew Bronfman purchased 26% of the shares of Discount in 2005. The group has the right to purchase an additional 25%, which remains in the hands of the government.

 

Many Israeli firms are not publicly traded or are controlled through integrated holding companies. In the case of publicly traded firms where ownership is widely dispersed, the practice of "cross-shareholding" and "stable shareholder" arrangements to prevent mergers and acquisitions is common, but not directed in particular at preventing potential foreign investment. Hostile takeovers are a virtually unknown phenomenon in Israel, given the high concentration of ownership of most firms.

 

Israel has no laws or regulations regarding the adoption by private firms of articles of incorporation or association that limit or prohibit foreign investment, participation, or control.

 

Political Violence

Israel is a parliamentary democracy with a stable domestic environment. Nonetheless, the unresolved conflict between Israel and the Palestinians means that the potential for politically inspired violence and terrorism exists.

 

Israel signed peace treaties with Egypt (1979) and Jordan (1994), and its borders with them are open. The borders with Lebanon and Syria are closed, and the potential for violent incidents remains, the most recent example being the 2007 conflict with Hizbullah.

 

Read the full market research report

 


Posted: 19 August 2010, last updated 24 February 2011

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