DOING BUSINESS IN ISRAEL (2013)

Transcription

1 The Guide for DOING BUSINESS IN ISRAEL (2013) FIRM PROFILE HEU Law Firm was established in 2007 by the named partners, all from leading law firms in Israel, in order to create a boutique and qualitative firm to provide utmost response to the firm's clients under the most strict and professional legal standards, on the one hand, as well as direct and personal treatment, on the other hand. The firm has unique and extensive experience in the legal fields of real-estate, litigation, corporate law and renewable energy, and its client list includes high profile investors, entrepreneurs and leading corporation from all aspects of business fields, among of which, communication companies, energy companies, asset management companies and more. The firm's partners and senior attorneys have extensive experience in legal counseling, which enables us to provide within our legal services, guidance and assistance in negotiations, legal proceedings and complex transactions in a broad range of legal fields and in a renewable business environment. 1

2 TABLE OF CONTENTS ISRAEL AT A GLANCE 3 ECONOMY 5 THE LEGAL SYSTEM 8 CORPORATE REGULATIONS 10 MERGERS AND ACQUISITIONS 15 REAL ESTATE 91 SECURITIES AND REPORTING 22 FINANCIAL Incentives FOR BUSINESSES 24 TAXATION 28 LABOR LAW 33 INTELLECTUAL PROPERTY 34 OPERATIONAL STEPS 36 2

3 ISRAEL AT A GLANCE Israel is a Middle Eastern country with a Western outlook. Israel enjoys a strong entrepreneurial culture, which has made it, among others, a true technology powerhouse, having many worldwide companies setting up their R&D centers in its trade cities (such as Google, Microsoft, Motorola and others). Israel is also known to have a valuable and highly skilled, motivated workforce. It is also recognized as the country with the highest number of granted patents per capita world-wide, and number four in the world as to the absolute number of patents approved. Recent finds of natural gas fields off the Israeli coast are a potential "game changer" for investors in Israel. Although it is difficult at this stage to estimate the repercussions on both the geo-political and economic levels of the findings, however it is estimated that the gas hoards could be immense. In 2010 Israel became a full member of the Organization for Economic Co-operation and Development (OECD). Official Languages: The official languages of Israel are Hebrew and Arabic. However, English and Russian are also very widely spoken. Population Israel's population has 7.8 million people. The major urban centers are Jerusalem with a population of approximately 720,000 people, the metropolitan area of Tel Aviv with 2,100,000 people (which is also considered as the business center of the country) and Haifa with 510,000 people. 3

4 Government Israel is governed by a democratically elected parliament (the "Knesset") with a traditionally high participation in elections. The Israeli prime-minister and the cabinet are appointed according to the parliament elections. In the head of the state stands the president, elected by parliament to serve a term of 7 years. Nevertheless, the president does not hold much power against the government. Currency The monetary unit used throughout Israel is the New Israeli Shekel ("NIS"). The average exchange rate in 2011 was USD 1 = NIS 3.81, and currently stands on USD 1 = NIS 3.69; The current exchange rate of the Euro is 1 = NIS (updated to June 2 nd, 2013). 4

5 ECONOMY It is relatively safe to say that Israel's economy is in a relatively solid situation despite the global financial crisis and the slowdown in the US and European countries. While many western countries faced negative growth during 2009, the Israeli economy grew by 0.5%. During 2010 the growth in Israel shoed 4.5% and during %, and %. These figures are also well above the OECD average. Accordingly, all leading rating agencies, such as S&P, Moody's and Fitch, have reaffirmed their A rating for Israel, while maintaining Israel on a "stable" outlook. State-owned corporations provide public utilities, such as electricity, water supplies, and railways. However, the government is committed to a privatization approach, and accordingly, in recent years it sold most of its interests in banks, the national telecommunications system ("Bezeq") and the national airline corporation ("El-Al"). Inflation 1.6% Unemployment - %age 6.9% (may, 2013) Average Monthly Wage Minimum Monthly Wage NIS 8,800; NIS 4,300 Foreign Currency Reserves($) $78.40 billion (Jan' 2013) High Tech Capital Raised Imports Goods & Services Exports Goods & Services $1,924 million $86.5 billion $64.7 billion (estimated) * Figures relate to the year of Israel - European Union Free Trade Agreement In 1975 Israel and the European Commission (EC) signed an agreement providing an establishment for a Free Trade Area for industrial and some agricultural products. According to the agreement, Israel's industrial exports to the EC are exempt from customs duties and other import restrictions. Likewise, Israel eliminated all duties on industrial imports from the EC. 5

6 Israel - USA Free Trade Agreement In 1985 Israel and the USA signed a Free Trade Agreement, which was fully implemented only on January 1, The agreement eliminates all import duties and trade restrictions between the two countries. Stock Exchange The Tel Aviv Stock Exchange (TASE) provides a market for shares and other securities issued by public and bond companies. Trading in securities and raising capital from the public are regulated by the Israeli Securities Law, under which the Security Authority was established to protect the interest of investors. Supervisory of Banks The supervisor of banks is appointed by the Governor of the Bank of Israel. Two committees operate alongside the Supervisor: The Licenses Committee and The Advisory Committee. The Bank of Israel's responsibilities include: Regulating and directing monetary policies; Economic advice to the government; Banking supervision; Promoting financial stability; Currency issues; Foreign currency market and managing the foreign exchange reserves; Monitoring and analyzing foreign exchange activity; Banker of the government of the banks; Representing Israel in international institutions The Bank of Israel publishes daily reports regarding foreign exchange transactions (against the ILS). The reports are published within a delay of 3 business days, and include the following transactions: SPOT, FORWARD, SWAP and OTC. It is also 6

7 possible to receive weekly and monthly reports from the Bank of Israel, which include average turnovers information according to financial instruments and investors' residency. The information is available at the following address: 7

8 THE LEGAL SYSTEM The Supreme Court is an appellate court which also functions as the High Court of Justice for claims against the government and its agencies. Israel does not employ a jury system. Other types of tribunals which have been established in Israel to regulate issues and/or disputes in a specific area of law, include: The Financial Department Holds the authority to deal with disputes relating to financial matters that are due to be held in the Tel Aviv District Court. Family Courts - Holds the authority to deal with disputes relating to family law and related matters. Labor Courts Holds the authority to deal with labor law and related issues, to make decisions with respect to collective agreements and extension orders in Israel, as well as to handle employment disputes between, inter alia, employers and employees. Antitrust Tribunal Holds the authority to exempt or approve restrictive arrangements and to rule on applications submitted by the Antitrust Controller with respect to monopolies and mergers as well as on applications seeking injunctive relief in connection with the foregoing. The Antitrust Tribunal serves as a court of appeal on decisions given by the Antitrust Controller with 8

9 respect to the approval or exemption of restrictive arrangements, mergers and monopolies. Religious Courts - Mainly deal with marital and divorce issues. Its jurisdiction is subject to the religious convictions of the parties to the dispute. Patents, Designs and Trade Marks Office Its principal function is to facilitate the protection, in Israel, of intellectual property rights by the grant of patents and the registration of designs, trademarks, appellations of origin and geographical indications, to applicants entitled to such protection, in accordance with the relevant intellectual property laws. The Registrar has the authority to hear arguments raised by applicants against decisions of the examiners, as well as to rule on oppositions to the grant of patents and trademarks and on applications for the cancellation of registered patents and trademarks. 9

10 CORPORATE REGULATIONS Private Companies A private company consists of two or three main organs: (a) the General Meeting, which has the authority to amend the company's articles of association and, usually, the authority to appoint the company's directors; (b) the Board of Directors, which must have a minimum of one director and whose primary function is to formulate the company's policy; and (c) optionally, the general manager, who may or may not be a member of the Board of Directors and who is responsible for the day-to-day operation of the company's affairs under the instruction of the Board. Public Companies A public company is generally a company which its shares were offered to the public (defined in securities regulations as 35 offerees within a timeframe of a year). If a public company's shares are traded on the Tel Aviv Stock Exchange (TASE), the company, among other provisions, is required to do as follows: Publish annual audited financial statements and quarterly unaudited (but reviewed by a CPA) financial statements. Appoint at least two directors who do not have any business or other relationships with the company, known as "outside" or "nonexecutive" directors. Appoint an audit committee, comprised of at least three directors, two of whom are outside directors. Appoint an internal auditor. File annual and quarterly reports to the Registrar of Companies, TASE and the Security Authority. Any offer to the public must be made according to a published prospectus. Make an immediate announcement of any major event 11

11 Recent Corporate Governance Provisions During the recent years, the Israeli legislator performed few substantial amendments to the Israeli Companies Law of 1999, and a several amendments to the Israeli Securities Law of 1968 and its regulations. The 16 th (and largest) amendment to the Israeli Companies Law set a number of provisions addressing proper corporate governance in public (and bonds) companies, alongside a list of recommended provisions to be adopted by public companies, according to the approach of "comply or explain". These corporate governance rules were set as an attempt to address the centralized capital market structure in Israel and the power handed to the controlling share holders within the balance of power in Israeli public companies. List of a Number of Mandatory Amendments set in the 16 th Companies Law: amendment to the Outside directors would be nominated in the General Assembly upon the vote of the majority of the minority shareholders. Re-appointment of the outside directors to second and third terms shall not be subordinate to the approval of the controlling shareholders. The Audit Committee would be comprised of all the outside directors appointed in the company and the majority of its members would be "independent" directors (a hybrid of a "regular" director and an outside director). Expending the range offunctions of the Audit Committee. Extraordinary transactions (as defined in law) with controlling shareholders would be authorized in the General Assembly upon the vote of the majority of the minority shareholders. Emphasizing the prohibition on controlling shareholders (and others) to influence the independent judgment of the director. List of a Number of Recommended Amendments set in the 16 th amendment to the Companies Law: If the company has a controlling shareholder, the majority of the The company shall perform "training programs" to new and 11

12 Board shall be independent directors. If not, at least one third of the Board members shall be independent directors. The appointment of directors in the company shall be according to principles of gender equality and according to the special needs of the company. existing directors and instruct the directors regarding the relevant corporate governance provisions applicable on the company and its organs. The audit committee shall gather at least once a year to discuss deficiencies in the business management of the company, in the presence of the internal auditor and the auditor (CPA) only. An additional attempt to address the centralized structure of the capital market in Israel is comes to expression in a new bill of 2012, suggesting to limit the number of public daughter companies which, the controlling shareholder's financial rights are significantly less than his power to control the company. The bill also sets a number of regulations regarding such daughter companies, as determining that at least one third of the Board members shall be outside directors, and several other provisions. Organ's Liability Directors and Officers (D&O) The Israeli Companies Law determines all D&Os hold a FIDUCIARY DUTY toward the company and must always consider and follow the best interest of the company. Accordingly, no D&O shall pursue a business opportunity of the company. Despite owing a fiduciary duty to the company, the law states that D&Os may also owe fiduciary duties to other company organs or third parties. Alongside the fiduciary duty, D&Os are also subject to the DUTY OF CARE toward the company. The Israeli Supreme Court has tried to cast content to the valve concept of the duty of care, declaring that D&Os' negligence is not to be examined compared to the "reasonable person", rather to the "reasonable D&O", imposing a more strict duty upon D&Os. The breach of either of the aforementioned duties may impose both civil and criminal remedies. The Israeli legislator has yet to address the American BUSINESS JUDGMENT RULE (BJR), developed mostly in Delaware courts, which creates a procedural barrier from scrutinizing the D&O's actions, as long as the D&O performed no uneven 12

13 distribution to the company's shareholders or has been involved in an approval of a transaction of the company with its organ, who holds personal interest in its approval. Nevertheless, Israeli courts were found to address and implement the BJR in several cases. Israeli courts have also implemented the ENTIRE FAIRNESS RULE, also developed in Delaware courts, used to shift the Burdon of proof toward the D&Os to prove they did not breach the duty of care, in cases where the plaintiff showed a prima facie proof that the D&O was involved on an approval of a transaction of the company with its organ, who holds personal interest in the approval of the transaction. Israeli law has also recently embraced provisions imposing administrative enforcement, such as financial sanctions. The most salient of which are financial Sanctions by the ISA for breaching provisions of the Companies Law Sec. 363A (Corporate- 500,000 NIS; Individual- 6,000 NIS) and financial sanctions according to the 45 th amendment to the Securities Act (7 th Addendum, Corporate- 5,000,000 NIS; Individual- 1,000,000 NIS). Controlling Shareholders (CS) Prior to the Israeli Companies law of 1999, the Israeli old Israeli Companies Ordinance did not set ground rules as to CS's liabilities and duties toward the company and third parties. A renowned case (the KOSOI case) did address this matter, imposing fiduciary duties upon shareholders toward third parties. Nevertheless, the new Israeli law of 1999 did not impose such duties on CSs (however also did not prevent the possibility of imposing such). According to the new law, CSs owe the company and the shareholders a DUTY OF FAIRNESS. This valve term has not yet been addressed by the Israeli courts, however, it is usually interpreted as a hybrid duty, somewhere on a scale between the strict fiduciary duties to the more flexible duty of "good faith", as described herein bellow. Minority Shareholders (MS) MSs hold a duty of "good faith" toward the company. The Company Law does not indicate that MSs also hold a duty of good faith toward third parties; however it does not prevent such an option. The duty of good faith is woven like a thread all across the Israeli law, stems from a special section within the Israeli Contracts Law, which applies the provisions of this "good faith section" on a range of legal aspects. The former president of the Israeli Supreme Court once stated that the duty of good faith does not require one to perform as an "angel" toward the other, nor does it require performing as a "wolf", rather as a "person". 13

14 The recent legislative trend in Israel is to emphasis the duties of MSs toward the company (and toward the SC's investors, when relating to institutional investors). The legislator also enhance the power given to the MSs to affect a number of proceedings in the company (please see several examples are describes herein above relating to the 16 th amendment to the Israeli Companies Law). Partnerships The Israeli Partnership Ordinance governs the activities of partnerships. A partnership established for the purpose of conducting business in Israel, is to be registered with the Registrar of Partnerships at the Ministry of Justice (however its registry is not prerequisite to its existence as a performing corporation, unless in limited partnerships). Registration requires, among others, furnishing the Registrar of Partnerships with the partnership's name, activities, address, partners etc. Audit and Accounting Requirements All companies are obligated under the Israeli Companies law to prepare audited annual financial statements, drawn up in accordance with Generally Accepted Accounting Principles (GAAP) and file them with the Companies Registrar. The financial statements have to be audited by a certified public accountant. As from 2007, the Israeli Accounting Standards Board (IsASB) has adopted the International Financial Reporting Standards ("IFRS") for public companies. Public companies, traded in the Israeli Stock Exchange are required to publish their financial statements drawn up under IFRS. Small and Medium enterprises ("SMEs") have the option to use Israeli GAAP or apply IFRS. During July 2009, the IFRS for SMEs has been introduced by the International Accounting Standard Board. As of October 2009, the adoption of IFRS for SMEs is under discussion of the IsASB. The directors of the company are responsible for the preparation of the financial statements. The balance sheet must be signed on behalf of the directors. The signature indicates the approval of the board. All businesses need to maintain proper books of accounts for taxation purposes and to retain the accounting records and associated documents for not less than 7 years. All companies must have their accounts audited by a qualified accountant. In addition, all companies must file audited financial statements with the tax authorities.. 14

15 MERGERS AND ACQUISITIONS Merger v. Full Tender Offer Merger Agreement by Merger by Arrangement (sec. 350) Full Offer Tender Required majority among shareholders >50% of participating public shareholders 57% of participating public shareholders 95%* Involvement of BoD Members Active involvement BoD members are direct side to the process Active involvement BoD members are direct side to the process BoD is usually not involved (as opposed to partial tender offer) * If approved by 95%, the renderer may acquire all shares; If approved by less than 95%, the renderer is prevented from holding more than 90% of the shares (public companies) or 80% (private companies). Merger by Agreement Approvals Required Audit Committee; Independent committee examines the fairness of the merger (Makhteshim/Chem China case, 2011); BoD (non interested members); Following the approval of the board of directors of the merging companies, an application for the approval of the merger is jointly submitted to the Registrar. Approval of the SHs (usually in both companies). 15

16 Exemptions from SHs Approval In the purchased company, in case it is fully owned by the buying company; In the buying company, once the merger does not require a change in its AOI; In the buying company, as long as it did not issue (during the merger) more than 20% of its voting rights, causing a person to hold control over the company. In the buying company, if there are no cross holdings: (1) buyer holds shares of the purchased company; (2) a shareholder in one company holds more than 25% of the shares of the other company. Third Party Approvals Procedural approval of the Merger by the Israeli Companies Registrar. The Registrar s approval is subject to the expiration of the statutory waiting periods (at least 50 days have passed from the submission date of the Merger Proposal to the Registrar and at least 30 days have passed from the date in which the merger was approved by the general meetings of shareholders of the merging companies). Creditors approval: o Creditors approval is not required under the Companies Law or under the Partner s debentures (subject, however to the creditors right to submit an objection request to court; in such case the parties may consider to perform the process through Merger by Arrangement); o Creditors approval may be required under contractual covenants in finance agreements with banks (merger, change of control in Partner). Court approval is not required; Required approvals by other third parties (e.g. parties to commercial agreements, license agreements, etc., due to change of control in Partner) if applicable. Regulatory approvals: o Minister and the Ministry of Communication; 16

17 o Antitrust (if applicable); o Israeli Tax Authority (pre-ruling re tax withholding, including with respect to non-israeli shareholders of Partner and re ESOP treatment); o Other approvals (if applicable). Merger with Court Approval (Arrangement) Section 350 of the Companies law allows a merger under court approval. This procedure provides high level of legal certainty as to the conduct of the transaction and its execution, and limits the ability of third parties to raise legal challenges. According to this procedure, the mandatory required majority of shareholders to approve a merger is 50% of participants, holding at least 75% of the value of the shares represented at the general meeting. This majority is required in every class meeting (i.e., separated meeting to the public shareholders). Following the shareholders' approval, the court grants an order for the approval of the merger by arrangement. It has been determined that the court has a broad discretion to set special arrangements under this procedure, and it is also prevented to perform hostile takeovers under this procedure (the Aspen case). Partial Tender Offer According to this procedure, the bidder becomes owner of at least 25% of the voting rights (if there is no control block in the company) or becomes owner of at least 45% of the voting rights (if there is no other who holds 45% of the voting rights). This procedure requires directors involvement, as the board of the purchased company ought to provide an opinion to the offered shareholders regarding the expedience of the offer. The required majority of shareholders required to perform this procedure is at least 50% of the offered shareholders who voted (excluding shareholders who hold personal interest in the offer). Antitrust The Israeli Antitrust Law sets a number of cases in which "mergers" (as described herein bellow) require the approval of the commissioner of the Antitrust, and are otherwise forbidden: 17

18 Merging companies, which their part in production, sales, marketing ect. of a product or service exceeds 50% of the industry; or Merging companies, which their joint sales exceeds 150 million USD; If one of the merging companies is a monopoly. The law provides a broad Definition of "Merger" including direct or indirect acquisition of 25% share capital, voting rights or rights to appoint directors; or acquiring most of the assets of the company by another. It is also required to notify the commissioner of the Antitrust regarding the merger before the actual merger. Lake of proper approval may result in civil and criminal liabilities and nay also cancel the transaction. Commissioner s discretion The commissioner may resist the merger if there is a reasonable risk to a significant damage to the competition in the industry or that the public would be damaged by the price levels of a product, service, its quality or its quantity, as a result of the merger. 18

19 REAL ESTATE A Real Estate Transaction Performing Transaction in Writing The Israeli real estate law sets that a real estate transaction in Israel must be put in writing. This provision is not evidentiary in nature, rather establishes the legal rights themselves. Exception to the aforementioned is rental rights up to 5 years. Registration All real estate transactions must be registered in the Israeli Land Registry as a condition to the very creation of the legal rights, however the Israeli law leans to grant a special status to unregistered rights under certain provisions and for a limited period of time commencing the date of the transaction. Rental rights up to 5 or 10 years (according to circumstances) may not be registered at all. Real Estate Taxation Capital Gains Tax Profits from the sale of a real estate asset or real estate rights are subject to capital gain tax under the Israeli Taxation Law (betterment and purchase). The tax rate to be paid by individuals and corporates differs according to the dates of purchase and sale of the assets. Capital gains tax due to realization of shares of a property association is imposed as capital gains tax on an individual. For this matter, "property association" is defined as a corporation, which all (overwhelming majority) of its assets is real estate. Purchase Tax Purchasing real estate rights in Israel is subject to purchase tax, calculated as a proportion of the value of the property rights. The tax rates due to the sale of apartments for living, varies according to whether the apartment is the only apartment owned by the purchaser ("sole apartment") or not. 19

20 Sole Apartments: (1) Value up to 1,470,560 * NIS 0%; (2) Value over 969,330 * NIS and below 1, * 3.5%; (3) Value over 1, * NIS 5%. Other apartments: (1) Value up to 1,981,350 * NIS 5%; (2) Value over 1,981,350 * NIS and below 3,268,040 * 6%; (3) Value over 3,268,040 * NIS 7%. * Linkage is to be added. The purchase tax is reduced according to exemption provisions, among of which, transfer of assets between family relatives. Sales Tax Currently not applicable in Israel. Benefits for "Rental Buildings" The Law for Encouragement of Capital Investments sets new provisions regarding "rental buildings", among of which tax reductions due to taxable income and exemptions of capital gains tax and sales tax under certain conditions. For this matter, "rental buildings" are defined as buildings which include at least 6 apartments used for living, and at least half of which is rented for living. Assets are to be approved as such in order to receive the aforementioned tax benefits. Procedure Real estate transactions are relatively complex, and therefore call for a thorough legal examination by an attorney. Nevertheless, it is possible to obtain more information regarding the rights attached to the assets, by following these instructions: 21

21 (1) Obtain a land registration extract from the Land Registry Office; (2) Examine the municipality records regarding the building (check if the building is built according to the relevant permits); (3) Obtain tax clearance from the municipality; (4) Obtain tax clearance from the Tax Authority; Once receiving, among others, the aforementioned information, it is required to sign the sale deed and apply for registration on the regional Land Registry Office. 21

22 SECURITIES AND REPORTING Annual Reports The annual report will comprise the compensation paid during the reported year to each of the following: The five highest paid D&O of the company or its subsidiaries, if such compensation was paid in connection with the company or subsidiary; Each of the three D&O receiving the highest compensation in connection with their service within the company itself, if not included within the five above; Any director, CEO or principal shareholder who is not included within the above, provided that the compensation was provided to him in connection with his work at the company or services which he provided to the company. Immediate Reports Requirements It is required to file an immediate report in any of the following events: An event not in the ordinary course of business of the corporation due to its nature, scope or potential result and which have or may have a material effect on the corporation; or An event that may materially affect the price of the corporation s securities. Timetable If the corporation first learns of a reportable event before 9:30 AM on any trading day the report must be filed no later than 1:00 PM on that day; If the Corporation first learns of a reportable event at another time - no later than 9:30 AM on the next trading day. 22

23 Specific Events Convening of a shareholders meeting and the results of such meeting; Recommendations and decisions of the BoD; Changes with respect to senior corporate officers; Holdings of principal shareholders and D&O; Approval of a self acquisition plan. o Negotiating stage a general description of the asset, the estimated purchase price and the estimated timetable for the completion of the negotiations; o Signing of a preliminary document the main issues of the signed document; o Signing of an acquisition agreement full disclosure regarding the acquisition: date and manner of acquisition, concise description of the acquired asset, the consideration and manner of financing, tax aspects, etc. Delay A corporation may delay the submission of an immediate report, in whole or in part, if disclosure of said information may prevent the completion the transaction, or could significantly worsen the terms of such transaction. The delay is subject to the following requirements: The delay will not occur during the period commencing five days before the last date for converting convertible securities of the corporation. The report will be filed once the cause for delaying is removed. The report will state the reason for the delay and the time in which the cause for the delay was removed. If information regarding the material event is made public, the corporation is obligated to submit an immediate report about the material event and to relate to the correctness of the information that has already been made public. 23

24 FINANCIAL INCENTIVES FOR BUSINESSES The state of Israel supports investment initiatives by developing and granting a wide range of incentives and benefits in order to achieve a favorable balance of trade, improve revenues, maximize productivity in designated industrial sectors, ensure healthy competition in the relevant markets and facilitate overall growth. Accordingly, Israel offers substantial benefits and concessions through a number of laws and regulations. Special emphasis is laid on high tech companies and R&D activities. Israeli companies may also be eligible for benefits from international funds created as a result of cooperation agreements established between the Israeli and foreign governments, including Canada, the United States, the European Union, etc. In order to promote weaker economic regions within the country, Israel offers differential benefits in designated priority regions. Israel also grants foreign investors under several conditions increased tax benefits. The Law for Encouragement of Capital Investments The law (of 1959) was legislated in order to boost the Israeli economy by attracting local and foreign investors to contribute capital investments to the Israeli industry. The law promotes a more geographically balanced distribution of the population across the country and strengthening of the peripheral regions. The law presents two main schemes of government incentives: (A) grant scheme, up to dozens percent of the investment's cost; and (B) tax incentives. In 2011, the law was drastically amendment (the 68 th amendment). The new amendment updates some of the law's objectives to stand in line with the changes that have taken place in the Israeli economy characteristics, emphasizing on encouraging investments, generating added value in innovation and heightened competitiveness of Israeli industry. The new amendment also simplifies the tax benefits scheme, establishing flat tax rates on all income of "preferred companies" and giving preference to the peripheral regions by lowering the reduced tax rate for companies in those regions. 24

25 Applicability The Law applies to industrial enterprises, which qualify as "International Competitive Enterprise", according to the definition set in law, which includes enterprises that own productive activities, such as textiles, food, electronics, chemicals, pharmaceuticals, biotechnology, etc. The definition of productive activity had also been applied to developing of software programs and Research and Develop industrial centers located in Israel, in order to include high tech companies, which are a major growth engine of the Israeli economy. Industrial enterprise could be approved as such either by the Investment Center or by the Israeli Tax Authority. In order to meet the International Competitive Enterprise provision of the law, at least 25% of the enterprise's revenues should be driven from exporting to large international markets. Company's Location The government grants scheme is affected according to the location of the company's activities. Several regions in Israel have been declared as regions of national priority (Priority Area A), among of which: (A) The Galilee; (B) Jordan Valley; (C) The Negev; (D) Jerusalem (for hi-tech enterprises). Grant Scheme An industrial enterprise located in "priority area A" may be eligible for grants to be calculated as percentage of the approved investment. The grants may be 20% or 30% of the actual investments of the enterprise on the follow assets: Buildings, machinery and other equipment (not including private vehicles) owned by the enterprise and used according to the approved program (by the Incentive Center). Expenses made for land developing. Expenses made for renovation of the building. * Enterprises from other areas are not qualify for the grant scheme, but can be entitle for tax benefits. Nevertheless, enterprises located in "area A", complying with the requirements of the law, may benefit simultaneously from both tax benefits as well as applicable grants. 25

26 Tax Benefits Schemes The new Encouragement of Capital Investments Law provides reduced company tax rates for "preferred income" derived by a "preferred enterprise" of a "preferred company" as follows (see definitions hereinafter): Area percent tax in tax in tax in 2015 onward Area A Elsewhere in Israel * In the case of a "Special Preferred Enterprise" the company tax rates from 2011 are as follows: Area A - 5%; elsewhere in Israel - 8%. This benefit is limited to a period of 10 tax years. "Preferred Enterprise" - an industrial enterprise that its main activity within the tax year, is to perform competitive industrial activity. According to the legal requirements, no more than 75% of the total income should be attributed to sales in a single market, and at least 25% of the total income of the enterprise should be from sales to a market that consists of at least 12 million residents. "Preferred company"- a company incorporated in Israel (or a partnership registered under the Partnerships Ordinance, and its partners are all companies incorporated in Israel), that meets various conditions set within the law, such as: it owns a "Preferred Enterprise"; its business is controlled and managed in Israel; it keeps proper accounting records (according to the Israeli tax laws), ect'. "Special preferred enterprise" a preferred enterprise which meets the following conditions: (a) A total annual income in Israel of at least 1.5 billion NIS; (b) A combined balance sheet of at least 20 billion NIS; (c) The company's business plan includes one of the following: (c1) Investment in productive equipment of at least 800 million NIS in the center of the country or of 400 million NIS in priority areas, over a 3 year period; (c2) Investment in R&D of at least 150 million NIS in the center of the country or of 100 million NIS in priority areas; (c3) Employing at least 500 employees in the center of the country or 250 employees in priority areas. Research and Development Support The Office of the Chief Scientist (OCS) of the Ministry of Industry and Trade offers support and encouragement of industrial research and development in Israel. 26

27 The variety of support programs provided by the OCS, have played a major role in placing Israel at the top of the pyramid in terms of world-wide high tech centers. Development of a Novel Product Development of a processes or method in order to manufacture new products, which have sizeable potential for export sales. The support is in the form of a conditional grant amounting to 30-50% of the approved R&D budget. Support for Start-up Companies A start-up company is defined as one whose R&D program is its only activity, so that the R&D staff is the sole source of financing. The support is in the form of a conditional grant of 66% of the approved R&D budget up to a maximum of $250,000 per year. The support is handed for up to two years. R&D Support for Companies in Special Geographical Areas Any approved R&D program-taking place in area A is entitled to a conditional grant of 60% of the approved budget. In areas which are defined as "Front Lines" the conditional grant amounts to 70-75% of the approved budget with the higher figure for companies that also manufacture in those areas. Royalty Payments Any income deriving from an R&D program that has enjoyed governmental support is liable for royalties to the OCS. The royalty payments are based upon a percentage of sales up to the repayment of the grant. 27

28 TAXATION Income Tax According to the Israeli Tax Ordinance, Israeli residents (as defined bellow), either individuals or corporations, are subject to income tax upon their worldwide "taxable income". What is the "Taxable Income"? It is referred as the income from defined sources, after deduction of disbursements and expenses incurred in the production of the income (including taxes on capital gains and special benefits provided for certain investors). Non residents are subject to tax only from income derived from an Israeli source. In cases of double taxation, it is recommended to follow the relevant conventions between Israel and the other countries. However please note that different countries may use deferent terms to define "taxable income". With a few exemptions, accounting should be conducted in Israeli currency. As mentioned hereinabove, Financial Reports are based on the IFRS accounting system. Nevertheless, for tax purposes, the financial report should be based on Israeli GAAP. Accounting GAAP Taxation IFRS 28

29 Residency A corporation is considered an Israeli resident if one of the following conditions has been fulfilled: (a) The corporation was incorporated under Israeli law; or (b) The corporation is managed and controlled from Israel. Tax Rates The taxable income of Israeli corporations is subject to a Company Tax of 25%. Tax on dividends is imposed as follows: Individual Shareholder Substantial Shareholder* Mother Company Percentage 25% 30% No Tax! * Holding at least 10% of the control power of the company. Administration The Israeli tax year is normally the calendar year. However, subsidiaries of foreign publicly traded companies may sometimes be allowed to use a different fiscal year. Companies are generally required to file audited annual tax returns and financial statements within five months after the end of their fiscal year, but extensions may be obtained. Companies must normally file monthly or bimonthly reports and make payments with respect to the following taxes: Company tax advances, which are typically computed as a percentage of a company's sales revenues; Supplementary company tax advances with respect to certain nondeductible expenses; Tax withheld from salaries and remittances to certain suppliers; Value-added tax (VAT). Nonresidents are required to appoint an Israeli tax representative and VAT representative if a part of their activities is conducted in Israel. The VAT representative is deemed to be the tax representative if no other tax representative is 29

30 appointed. The tax representative is empowered to pay tax out of the foreign resident's assets. Controlled Foreign Occupational Company "Foreign Occupational Company" - a foreign corporation, which meets the followings: A company held by no more than 5 persons. (For this purpose, related individuals would be considered as a single person); At least 75% of the company's shares are controlled, directly or indirectly, by Israeli individuals; The Israeli shareholders are engaged in a "Special Occupation" for the benefit of the company; 50% of the company's income stems from the "Special Occupation". A Controlled Foreign Occupational Company is deemed to be managed and controlled from Israel. Any income attributed from the "special Occupation" by the Israeli shareholders is deemed to be accrued as Israeli source income; therefore it is subject to Israeli company tax. Tax credit will be granted in respect of the foreign tax paid. Controlled foreign corporation (CFC) "Controlled foreign corporation" - a foreign corporation, which meets the followings: More than 50% of its shareholders are Israeli residents, whether directly or indirectly. Most of the corporation's income during the tax year is passive income (income from interest or linkage differentials, dividends, royalties, rental fees, proceeds from a sale of an asset not used by the corporation for its business). The corporation's shares are not listed for trade on the stock exchange; however, if its shares are partly listed, than less than 30% thereof were offered to the public. The tax rate on the passive income derived from foreign countries does not exceed 20%. 31

31 The Israeli controlling shareholders would be deemed to receive dividend from the CFC according to their portion in the undistributed profits of the CFC by the end of the tax year. The controlling shareholders are relieved from foreign tax applied in the country of the CFC's residency, if the dividend were actually distributed. Losses A loss incurred during the tax year in a business or vocation may be set off against the total chargeable income from other sources in that tax year. If all losses cannot be wholly set off in the said tax year, then the remainder of losses shall be carried forward to the subsequent years in succession and shall be set off against the total chargeable income from business or vocation in those years, including against capital gains from business or vocation. Capital losses in a giving tax year are to be set off against capital gain. Capital loss incurred by selling securities may be also set off against interest or dividends, as long as the tax rate applicable to the interest or dividends received would not exceed 25%. Capital losses which could not be set off during the said tax year would be carried forward to the subsequent years in succession and it shall be set off only against capital gain. Value Added Tax (VAT) The Value Added Tax Law requires the payment of VAT of 18% on goods sold and services rendered and is collected from the buyer by the seller at the time of sale. These amounts, less VAT paid by the seller on his inputs, are paid monthly to the tax authorities. In case the VAT on inputs exceeds amounts collected in any given period, the excess is refundable. Some transactions are 'zero-rated'. This means that a nil rate of tax is to be charged, but the business supplying the goods or services is nevertheless entitled to a refund of the VAT it has incurred on its purchases. Businesses making only zero-rated supplies will therefore be in a position to obtain periodic refunds from the tax authorities. Some services are 'exempt' from VAT. However, in contrast to the position on zerorated supplies, as mentioned herein above, the vendor is not entitled to a refund of the VAT paid on purchases. Businesses that make exempt supplies in addition to 31

32 either standard-rated or zero rated supplies may be able to recover part of the VAT they incur on their purchases. Free Ports Zones The Free Ports Zones Law of 1969 declares the ports of Haifa, Ashdod and Eilat as free port zones. Authorized enterprises in any of these ports are eligible for direct and indirect tax benefits with respect to goods: (i) imported from abroad to the relevant free port zone; (ii) manufactured in such free port zone; or (iii) exported from the free port zone abroad, provided that such goods relate to the activity in which the authorized enterprise engages in the relevant free port zone. In order to qualify for such tax benefits, the authorized enterprise must be owned by a company registered in Israel, and must have obtained the necessary approvals, confirming that it has been duly registered and incorporated in a free port zone. Free Manufacturing Zones The Free Manufacturing Zones law of 1994 contains several exemptions with respect to the obligation to pay direct and indirect taxes. Entities eligible for the incentives specified under the law are usually private entities, whose principal activity is manufacturing or rendering of services abroad. 32

33 LABOR LAW Israeli law provides fundamental employee rights, regulated by mandatory provisions. Among of which, are minimum wage, paid leave, sick pay, maximum working hours, overtime working hours, rest days, holidays pay, notice of dismissal, severance pay, maternity leave, social security and wage protection,. The laws apply to all employees (subject to very specific exceptions). Additional employee rights, such as travel expenses, are protected by extension orders of general collective agreements. These orders apply to all employees (subject to specific exceptions). Other fundamental rights, such as pension and fringe benefits are granted may be protected by general or collective agreements. Generally, the rights of employees pursuant to mandatory provisions of law, extension orders and/or general and collective agreements, as aforesaid, cannot be waived or derogated from. On the other hand, individual work agreements may increase employee rights beyond said fundamental rights. Under the Minimum Wage Law, the minimum monthly wage is NIS 4,300 (starting October, 2012). 33

34 INTELLECTUAL PROPERTY Intellectual property rights are protected in Israel under a number of laws and provisions. Our firm provides legal support to customers in all aspects of intellectual properties, among of which: patents, trademarks, copyrights, moral rights, trade secrets and more. Please see a concise review of patent and trademarks rights in Israel: Patents The protection of patents in Israel is governed by the Israeli Patents Law of 1967 and additional regulations set by it. A patent is granted for an "invention", which is referred to by law, as a product or a process, that is new, useful and susceptible to industrial use and which involves an inventive step - non-obvious to him, who is skilled in the art). An invention is deemed new, in general, if, prior to the date of filing the relevant patent application therefore, it has not been published to the public (other than the affiliates of the person to file), whether in Israel or abroad. All patents must be registered in the Israeli Patent Office after examined and approved by the registrar, and are protected for a period of 20 years from the date of filling the application (subordinate to a few extension provisions set in law). Trademarks The Israeli law grants protection of trademarks, if registered, and if are unregistered, providing they are well known to the public. The legal protection is governed by the Trademarks Ordinance (for registered trademarks) and the Civil Wrongs Law (for unregistered trademarks). Trademarks may be registered of letters, numbers, words, devices, signs or combinations thereof, which are used to describe of distinguish goods. Service marks, collective marks and certification marks may also be registered. Trademarks may be protected by registration at the Israeli Trademarks Office for a period of 10 years, which may be renewed to additional periods of 10 years each, 34

35 indefinitely. That said, well known trade mark may also be protected by law, even if not registered. The law defines well-known trade mark as a well-known mark in Israel (according to the pertinent public circles and the degree to which the mark is known as a result of marketing), which is owned by a person who is a citizen of a member country of the World Trade Organization (WTO), or who has a permanent establishment in Israel, even if the mark is neither registered nor used in Israel. The registrar of trademarks is managed according to categories of services and products. If one wishes to register a trademark in several categories, he is also subordinate to separate fees and applications regarding each category. 35

36 STARTING A BUSINESS IN ISRAEL? USE THESE OPERATIONAL STEPS! Obtain company registration documents certified by an attorney: Application to register a company; Affidavit approving the directors' competence to serve; Initial shareholders' signatures on the articles of association; Initial shareholders' affidavits regarding lack of legal restrictions on the company. File the aforementioned documents with the Registrar of Companies (Israeli Ministry of Justice) Register for tax payments at the Ministry of Finance (Income Tax Department) Register for VAT payments at the Ministry of Finance (Customs and VAT Department) To register for VAT, the promoter must file the certificate of incorporation, identity documents for all directors, a lease agreement, and other information. The VAT authority asks for a bank account for VAT refund purposes (or for VAT payment). Register with the National Insurance Institute. The National Insurance Institute program covers all gainfully employed individuals, with provisions including social security, unemployment insurance, severance pay, training funds, health insurance and pensions 36