“When you go to the Middle East looking for oil, you don’t need to stop in Israel .But if you go looking for brains, for energy, for integrity, It’s the only stop you need to make” (Warren Buffett )

By Shibolet & Co.  China Practice

Michelle Tzhori, Esq and Lital Abraham

Israel – Overview

Ranked 1st in the world for innovative capacity and 2nd for entrepreneurship[1] – Israel is a world-leading high-tech and innovation hub. Many young start-ups companies are born in Israel and, through hard working and persistence, mange to transform into profitable and competitive businesses.

In the past 66 years Israel has developed from an agrarian state, run along collectivist ideas, into a hi-tech economy. It has absorbed Jewish immigrants with diverse background, talents and skills from Europe, the Middle East, North America, the former Soviet Union and Ethiopia; this Jewish Melting pot has created a unique creative society that has been supporting and nurturing the young economy ever since.

Israel is located along the Mediterranean Sea, spread over an area of 22,000km. Over the past decades Israel population has grown by 24%, now consisting of 8,146,300 people. It is the world’s only Jewish-majority state; 6,110,600 citizens, (or 75.3%) of Israelis are Jewish.

Israel’s economy has changed throughout the years. In its first years as a young state, the Jewish national movement and the first pioneer communities were mainly socialist in nature. Over the years, the Israeli industry has developed from small establishments that engaged primarily in processing of agricultural products and clothing, to a flourishing high-tech industry. Israel has come a long way, evolving into a liberalized, open economy, leaning towards capitalism yet maintaining several aspects of social welfare.

Israel’s current economy is diversified, with technology-based industries (software and manufacturing of technology based products, TMT, life science, agriculture technologies etc.) at the frontline, followed by medium and lower tech industries, such as chemicals, plastics and agriculture.

Being a young state in the modern era, Israel has been recognized as a developed market by many major indices; this recognition was emphasized in several occasions including during Israel’s accession to the OECD in 2010 and throughout Israel’s great resilience to the latest global economic crisis.

ISRAEL’S Legal Environment

Israel is a parliamentary democracy whose parliament (the Knesset) is elected every four years under a proportional representation system. The Prime Minister serves as head of government and the Knesset serves as Israel’s legislative body. The President is elected by the Knesset for a seven-year term for one Term of service. The function of the President is primarily representative and includes the power to accredit diplomatic senior staff, pardon criminals, appoint Judges, sign and approve laws etc.

The Israeli legal system reflects the historical and political events that influenced the young state. While Israel’s legal system is mostly based on the common law dictated by the British mandate during the first half of the 20th century, indications of the civil law still remain from the Ottoman mandate in several legal area including the Israeli Property law. This combination created a unique, strong and independent legal system that gained the trust of the Israeli public and holds a respected and prestigious place in the international community.

The Israeli judicial system is independent and completely separated from the legislative and executive branches.  The court system composed of three tiers:

  1. Magisterial Courts

The Magisterial Courts is the lowest tier court, which has jurisdiction over civil cases of up to NIS 2.5 million (approximately $US 675,000) and criminal cases where the accused faces up to seven years imprisonment.

  1.  District Courts

The District Court is the intermediate tier, which has jurisdiction over civil cases of above NIS 2.5 million in dispute, and criminal cases where the accused faces more than seven years imprisonment. In addition, The District Court has jurisdiction over cases involving companies and partnerships, appeals over arbitration awards, prisoners’ petitions, appeals over tax rulings, petitions against government agencies and maritime cases.

The District Courts serve as the appellate instance for judgments of the Magistrate Courts. There are six District Courts in Israel.

  1. The Supreme Court

The Israeli Supreme Court is the highest judicial instance and its decisions and verdicts are binding and constitute precedents for lower instances.  Its judges use broad discretion and interpretive approach and its decisions and verdicts often function as de-facto laws, filling legal frames with contents, thus playing a significant role in Israel’s politics.

The Supreme Court is located in Jerusalem and acts in two types of tribunals:

(1)    As a further appellate instance for decisions and verdicts issued by the District Courts.

(2)   As the High Court of Justice, in matters concerning the legality of decisions of state authorities as a court of first instance.

Besides the above three layers of courts, Israel’s judicial system also includes Labor Courts with jurisdiction over labor dispute, Military Courts with jurisdiction over military related disputes and Religious Courts as well as Family Courts, both with jurisdiction over matrimonial and familial cases.

Israel Hi-Tech and Investments overview

Named “the start-UP nation”, Israel is internationally recognized as an innovative and technology intensive nation powered by the high-tech industry. Israel’s large concentration of talented and innovative people makes it an ideal place for investment. Characterized by highly educated and creative workforce, Israel yields cutting edge technologies, profitable business opportunities and high investment returns. Furthermore, its innovative spirit and culture has encouraged some of the world’s largest multinational corporations to use local talents to develop their key breakthroughs. Companies like Google, Facebook, Intel IBM etc, all have established R&D centers in Israel.

The state of Israel seeks to encourage capital and industrial R&D; the government, therefore, offers highly supportive conditions for technology companies. Special emphasis is given to companies in the fields of life science, Bio-med, TMT, Agri-Tech and Clean-tech; such attention pays off as more than 50% of Israel’s export derives from the high-tech and life science industries.

As part of Israel’s R&D policy and as early as 1974, the Israeli government established the Office of the Chief Scientist (“OCS”), which is responsible for implementing Israel’s policy in the high-tech industry. The OCS provides a variety of support programs that operate on a yearly budget of about $US 400 million.

The incubators program that provides financial support for early-stage, high-risk Innovative projects – is a perfect example of such kind of state’s support; the total budget for an average investment in a single project over a two years term ranges between $US 500,000 to $US 800,000, depending on the field of activity of the project. The program has initiated over 1,700 companies with an aggregate investment amount of over $US 650 Million. The majority of the companies supported by state’s funds has completed the incubator term and attracted private investments. The total cumulative private investment in the graduate incubator companies has reached over $US 3.5 billion; i.e. for every dollar that the government invested in an incubator company, the company raised an additional $US 5-6 from the private sector. These days, the project consists of 24 technological incubators containing more than 200 projects in electronics and communication, software, medical devices, new materials and biotechnology. This incubator program has undoubtedly proven itself as a fertile manufacturing line for technology startup companies  in Israel.

To learn more about the Israeli Incubator Program, click here

Setting up a business in israel

The most common legal entities in Israel are corporation (formed under the Companies Law) and partnerships (formed under the Partnerships Ordinance). Other incorporation forms are joint ventures, commercial agencies, cooperatives and non-profit organizations.

The usual corporate form is the limited liability company, which can be private or public, limited by shares or guarantees or unlimited.

To register a company in Israel, the applicant shall go through the following stages, and submit documents, most of which are in the Hebrew language with financial data expressed in NIS:

  1. A.     File with the Registrar of Companies, Ministry of Justice:
  • Application to register the company.
  • Declaration by the initial director(s) of competence to serve.
  •  Declaration by shareholders stating that they have the capacity to hold shares in the company.
  •  Articles of association signed by the Initial shareholders.

All signatures on the application documents must be authenticated by an Israeli attorney. The current filing fees are 2,640 NIS.

  1. B.      Tax Registration with the Ministry of Finance

Being a new employer in Israel, the newly established company must open a tax deductions file with the income tax authorities.

To register for corporate taxation, the company must file the certificate of incorporation. Final registration confirmation may take up to 28 days.

  1. C.      Register for VAT at the Ministry of Finance, Customs and VAT Department

In order to register, the applicant shall present certain documents such as the certificate of incorporation, identity documents for all directors, a lease agreement, and other information.

For VAT refund purposes, the company is required to have a bank account in Israel. After choosing the right bank for the company (bank commissions may vary according to the bank institution and the bank account features) the company shall provide all required documents, including a company’s resolution which expresses the company’s decision to open the account and indicates the  signature rights, and a declaration regarding the control of the company.

  1. D.     Register with the National Insurance Institute

Upon obtaining a deductions file number from the income tax authorities, the National Insurance Institute (the Israeli social insurance bureau) will automatically open a deductions file for the company. The funds managed by this institution include social security, unemployment insurance, severance payment, training funds, health insurance, and pensions. The relevant deductions will appear in each employee’s salary slip.

Labor Environment

Being a social country with welfare system, all employees are entitled to labor protection under the Israeli labor laws, and mandatory labor protection stipulations are implied into each employment agreement, even if not written in the agreement. If a written stipulation in an employment contract contradicts a mandatory labor protection stipulation, the latter supersedes the written agreement.

The main sources of employment laws are protective Labor legislation and precedents. In most cases, these sources are cumulative in nature, and can be expanded but not reduced even upon the explicit consent of the employee. Thus, Israeli employees are not permitted to forfeit their statutory rights, collective agreements or other mandatory arrangements.

In addition to the national basic labor rules, including the law on Work Hours and Rest Time, Minimum Wage law, Severance Pay law, the law on Early Notice and Dismissal and the law on Full Equality Between Women and Men in Work Place, the Israeli government has ratified many international labor conventions. These conventions constitute a basis for the interpretation of the Israeli labor law In Israel.

Independent labor courts have jurisdiction over all matters relating to employment relationships; the rulings of the Israeli labor courts constitute a significant source of Israeli labor law, for example, it guarantees workers right to organize, prohibits dismissal of striking workers and ensures the right for a proper hearing before dismissal. In a few cases regarding Anti-Competition, the labor courts held that Anti-Competition provisions can be cancelled in case it contradicts with public policies; such provision will be acceptable if it is reasonable and only to the extent there is a legitimate interest which such provisions is meant to protect. Another influential decision that has great impact on the high-tech industry, is a recent decision regarding “Services Invention”. In May 2014, a governmental committee held that the right to receive royalties under the Patent Law can be waived by an employee, even when such wavier is part of general wavier of rights during the termination of employment relationship. To read more about the decision on “Service Invention” click here


 

GOVERNMENTAL SUPPORT

The State of Israel welcomes foreign investments particularly in projects related to technology and R&D. Most benefits available to Israelis are also available for foreign investors, and in some cases foreign investors enjoy even a broader support comparing to domestic investors.  Investment incentives are outlined in the different laws and regulations, and are managed by the Israel Investment Center (IIC).

Two main laws governing these benefits are as follows:

  1. A.     The Law on the Encouragement of Capital Investment: This Law grants various incentives for foreign and domestic investors. Companies that meet the criteria are entitled to preferential tax treatments and various grants related to land development, constructions and capital equipment. Increased grants and benefits are offered to investors who invest in certain priority areas determined by governmental policies from time to time. As Israel is a small country, a priority area may be located just one to two hours away from Israel’s international airport and Tel Aviv hub.
  2. B.      The Law on the Encouragement of Industrial Research and Development: The main objective of this Law is self explanatory, that is, the development of science-intensive industry. The law provides grants, loans, exemptions and reduction in taxes.

As early as 1974, the Israeli government established the Office of the Chief Scientist (“OCS”) and since then, it is responsible for implementing the above encouragement policies. The OCS provides a variety of support programs on a national level (as discussed in the previous chapter – ‘Israel Hi-Tech and Investments overview’). The support programs have proven themselves and are now the driving force of technological, medical and agricultural innovations in Israel.

On the international level, the executive agency of the OCS, MATIMOP, offers international programs carried out in cooperation with foreign governments and institutions. The international support programs provide support through bi-national funds, and enable joint R&D ventures with foreign counterparts. In 2010 Israel and China signed a Memorandum of Understanding (MOU) aimed at fostering joint R&D collaboration, pursuant to which the two countries have signed several cooperation agreements related to various provinces in China including Shanghai, Jiangsu, Shandong, and Guangdong. For more information on the bilateral agreements, click here

Through international bilateral R&D agreements – the bilateral agreement with China being a good example – Israel together with its cooperating countries is able to expend innovation and development to even a further extent.

On the trading arena, Israel has signed several tax treaties with various countries including China, which are meant to avoid double taxation. According to the tax treaty between Israel and China, companies involved in trading between the two counties are entitled for a substantial tax reduction related to dividends and royalties.

 China–Israel relations

Since the establishment of diplomatic relations between China and Israel in January 1992, the two countries have been constantly developing their relations, with the highlights of the historic visit of Chinese President, Mr. Jiang Zeming, in Israel in 2000, Israeli Prime Minister Benjamin Netanyahu’s visit to China in May 2013, and the presidential visit to China by former Israel President Mr. Shimon Peres in April this year.

Over the last few years, there has been a significant increase in the economic ties between Israel and China on both bilateral and global level:

  • Special China-Israel Task Force: Pursuant to Prime Minister Netanyahu’s visit in China last year, China and Israel have established special task forces aimed at deepening economic cooperation and boost trade between the countries. The task forces, headed by the Israeli Ministry of Economy – on one side, and the National Development and Reform Commission of the PRC (NDRC) – on the other side, met last summer in Israel to discuss the development of cooperation in various areas including trade, technology transfer, agriculture and public works.
  • Financial Protocols: Israel and China have signed several financial protocols since the establishment of the diplomatic relationship in 1994. The financial protocols are agreements between the governments of Israel and China for the establishment of special credit lines for financing trade and investments between the two countries. The protocols grant long-term loans for export transactions from Israel to China, therefore provide competitive advantage for Israeli exporters. Among the financial protocols are the financial protocol for general exports, which has been enhanced several times including the recent addition of $US 400 million in 2013, and the financial protocol on the export of water technologies for agriculture use, signed on March 2012, which provided credit line of more than one billion NIS. The executor of such financial protocols is ASHRA, Israel’s state owned company, established in 1957 in order to encourage export from Israel and help minimize political and commercial risks.
  • Bilateral R&D cooperation program: As previously discussed, MATIMOP, on behalf of the Office of Chief Scientist (OCS), leads and manage cooperation agreements with various provinces in China regarding industrial R&D projects.

Investment-wise, the Chinese government expressed interest in the Israeli industry; two main examples are the high profile acquisitions of Makhteshim Agan by China National Chemical Corporation, where 60% stake of the Israeli company were acquired against $US 1.44 billion, and the acquisition of the Israeli Tnuva Food Industries Ltd. (with valuation of $2.5 billion) by the Chinese state-owned Bright Food Group. Another recent important investment is the acquisition of the Israeli Alma Laser Ltd., an aesthetic laser company, for a consideration of  US$ 221,630,000 by the largest non-SOE Fosun Pharma Group.

Simultaneously to the Chinese investments in Israel, Israeli business activities in China are also flourishing and in order to support the increasing business activities, Israel’s Ministry of Foreign Affairs has established Trade Representative Offices in the cities of Guangzhou, Shenzhen and Chengdu in addition to the already existing offices in Shanghai and Beijing, which have been active since to inception of the diplomatic relations between the countries. These Trade Offices are initiating business delegations to different provinces of China in order to introduce the local industries to Israeli companies in their field. Delegations to all areas of China including Jiangsu, Zhejiang, Qingdao, Guangdong, Sichuan, Yunnan, Hainan and Heilongjiang have already taken place, and more delegations are on the pipeline.


[1] (IMD Global Competitiveness Yearbook, 2013)

DISCLAIMER: The article has been prepared for general information purpose only. The information in this article is not a legal advice. A legal advice is dependent upon the specific circumstances of a case and various laws and regulations related to the circumstances. Therefore, the information contained in this article cannot replace the advice of a competent legal counsel licensed in the relevant jurisdiction.