Legal Aspects of Running a Business in Israel
By Russell Mayer, Adv.

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Israel, the hi-tech “mecca” of the Middle East, with extensive domestic and foreign resources including skilled labor, is an attractive location for the establishment of new businesses and the transplantation of existing enterprises.  The entrepreneur who wishes to develop a business in Israel should consider a variety of factors.  In this article we will consider some of the aspects pertaining to the available choices.

Domestic Branch Office

A business which is already operating outside of Israel may consider establishing a presence in Israel in one of three forms: (a) appointing a local representative/ agent, (b) opening a local branch office and registering with the local authorities or (c) forming or acquiring a subsidiary.  Considerations include the extent to which the business wishes/plans to expand, the extent to which it wishes to have its own personnel “on-site”, tax implications and exposure to liability.

Israel Entity

Israeli businesses are, generally, organized in one of four forms: (a) sole proprietorship, (b) partnership, (c) company (a.k.a. “corporations” in the U.S.) and (d) joint venture. A “joint venture” is a collaborative business association which generally is reflected in a contractual relationship or is embodied in either a partnership or company.  If established as a mere contractual relationship, it does not constitute a separate legal entity.  The enterprise’s founders should consider several factors in determining which form is chosen including (i) liability issues, (ii) tax ramifications, (iii) liquidity of interest and (iv) fund raising needs/opportunities.   Many local businesses require operating licenses and all require the opening of tax files for the enterprises and,  personal tax files for owner/managers.  The parties should enter into a detailed agreement up front reflecting their interests, obligations, undertakings and dispute resolution procedures with respect to the venture. In addition, it is important to be aware that the solicitation of investments in business enterprises, may trigger securities laws violations.

Following is a brief summary of the entities and some of their characteristics:

Companies. One of the most attractive features of the corporate form is that shareholders (i.e. owners) and managers/directors are generally subject to only limited liability for the obligations of the company.  Also, businesses that are targeted for growth, which anticipate seeking outside financing and which wish to retain earnings, will usually choose a company as their vehicle.

Shareholders of a company are taxed, individually, on earnings which they receive from the business in the form of dividends while the company is taxed, at the generally lower corporate tax rate, on its net income.

All companies must be registered with the Israeli Companies Registrar by execution of various declarations by the prospective company’s directors and shareholders.  When signed in Israel, these documents must be signed in the presence of an Israeli lawyer but if signed abroad they must be executed at the local Israeli consulate, by Apostile, in accordance with the Hague Convention or in the “consular chain”.  An Israeli company’s records at the Companies Registrar, include its corporate information (such as address, registered purpose, share capital, shareholders’ names, ID numbers, addresses and shareholders’ holdings in the company,  directors’ names, addresses and ID number, registered liens, outstanding registration fees and corporate resolutions.  All of these records at the Companies Registrar and are accessible to the public.

Where businesses expect to seek fundraising abroad, particularly in the U.S. and/or which anticipate international sales, they generally will establish a “parent company” abroad  with an Israeli wholly owned subsidiary serving as the research and development arm of the business notwithstanding that, in recent years, there have been several success stories of businesses which operated solely as Israeli companies.

Companies are the most recognized vehicles for investment, both by prospective investors and even the Israeli government (which may provide financing grants). 

Partnerships. Partnerships provide a pass-through of income to their partners (i.e. owners) although they generally do not insulate their partners nor managers from liability.  A partnership is, however, a legal entity which has contractual capacity.

Sole proprietorships. Sole proprietorships are usually small businesses that are closely held by their individual owners.  Owners of sole proprietorships have the most flexibility with respect to transferring ownership interests but have unlimited liability and are directly taxed on the business’ profits.

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Israel, as the democratic star of the Middle East, is an ideal location for establishing business relations.  We look forward to welcoming you to our ranks.

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This article is not to be considered as a legal opinion. For legal advice, we suggest you contact legal counsel directly

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