A Guide to Establishing a Business in Israel

 

Despite the geopolitical challenges, Israel continues to attract international corporations that view its innovative ecosystem, advanced technological infrastructure, and high-quality human capital as potential  for developing their business overseas.

International corporations planning to establish a presence in Israel must make several key decisions regarding the nature of their operations and the legal structure through which they will operate. One of the first decisions is choosing between setting up a local branch or establishing a local subsidiary in Israel. This article provides an analysis of the primary considerations involved in this decision.

 

Fiscal and Tax Perspective

Israel's tax framework offers competitive conditions compared to OECD countries, including a corporate tax rate of 23%, which is lower than some other jurisdictions. However, when dividends are distributed to the parent company abroad, a dividend tax of 25% applies, or a different rate depending on the relevant tax treaty.

There is an incentive to operate through a local branch, as opposed to a subsidiary, as Israeli tax regulations allow the transfer of profits to the parent company without additional dividend tax (branch tax). However, tax considerations require a comprehensive review of additional international tax aspects related to operating in Israel, such as tax treaties, transfer pricing, and the global tax implications for the corporation.
 

Interaction with the Financial System

One of the significant challenges when establishing operations in Israel is interacting with the local banking system. Having a bank account in a local bank, is a precondition to open income tax and VAT files in Israel. However, foreign company branches must navigate strict regulatory requirements imposed by banks, including submitting numerous incorporation documents from the home country, undergoing extensive Know Your Customer (KYC) procedures, and, in many cases, holding a physical meeting with bank representatives.

In contrast, an Israeli subsidiary, especially one with an Israeli director, enjoys improved access to financial services, a more accessible bank account opening process, a wider range of financing options, and significantly greater operational flexibility when managing banking activities.
 

Legal and Corporate Risk Management Considerations

The choice of legal structure has a substantial impact on corporate risk exposure. A subsidiary, as an independent legal entity, provides a legal protection framework that limits the parent company's liability for the local operations, while enabling flexible local contractual engagements. Conversely, operating through a local branch exposes the foreign corporation directly to local business risks.
 

Fiscal Representation

A foreign corporation's Israeli subsidiary can appoint an Israeli director, which facilitates the opening of a VAT file relatively easily. On the other hand, foreign company branches must appoint a fiscal representative as a prerequisite for opening VAT files. The representative assumes significant personal liability, and local branch employees often refuse to take on this responsibility, requiring the company to pay high fees to external service providers offering these fiscal representation services.

 

Branding and Strategic Considerations

From a long-term strategic perspective, a local subsidiary offers advantages in branding and business reputation. A local entity is perceived as more committed to the Israeli market and enables the development of a strong brand tailored to the local business dynamics.
 

Growth and Expansion Strategy

An Israeli subsidiary provides a better platform for future growth and expansion. A local entity allows for more effective integration with local business partners and strategic collaborations.
 

Conclusion

The decision between establishing a branch or a subsidiary requires a thorough analysis of relevant parameters and a deep understanding of the long-term implications for the projected business operations. It is advisable to conduct comprehensive due diligence, including consultations with local experts in taxation, law, and finance. Additionally, a detailed review of the company's long-term business plan and an assessment of its impact on global operations are essential.