2010 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
May 2010
Report

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
http://www.investinisrael.gov.il
E-Mail: Investinisrael@moital.gov.il

Israel Investment Center
Ministry of Industry, Trade and Labor
5 Bank of Israel Street,
Jerusalem 91036 490.
http://www.moital.gov.il/NR/exeres/111C2143-2296-44C0-96F9-C29C082A19CC.htm

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
· Jerusalem (for hi-tech enterprises)

Priority Area B includes:
· Lower Galilee
· 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. The percentages are:

Table 1 - Investment grants table

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Priority Area A*
Priority Area B
Industrial projects
Up to NIS 50 million **
24%
10%
Industrial projects
Above NIS 50 million
20%
10%
Investment in hotels and other accommodations
24%
-
Other tourist enterprises
15%
-
* Plus an additional grant of up to 8% for companies locating in the south ("Negev Law") AND first two years of benefits an exemption from company tax
** Or located in low socioeconomic area

Time to Completion
Under the provisions of the grants scheme, 20 percent of the approved program for industrial projects should be completed within 24 months from the date of approval. The investment program should be completed within five years from the date of approval.

Tax Benefits

a) Grant Program
Companies choosing the grant program receive tax benefits as well for a period of seven consecutive years, starting with the first year in which the company earns taxable income (grants are not considered income).
Moreover, an Approved Investment located in Priority Area A is entitled to a complete tax exemption for the first two years.

Tax benefits are determined by the percentage of foreign control: the more foreign control in the enterprise, the higher the benefits. If at least 25% of an Approved Enterprise's owners are foreign investors, the enterprise is eligible for a 10-year period of tax benefits.
See table below (all figures are in %)

Table 2 - Tax benefits table


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Company owned by Foreign Investors
Company that is not an Approved Enterprise
Tax rates by ownership stake (in %)
90 to100
74 to 90
49 to 74
Less than 49

Taxable Income
100
100
100
100
100
Company Tax
10
15
20
25
26
Balance
90
85
80
75
74
Dividend tax: 15% of balance
13.5
12.75
12
11.25
18.5*
Total tax on distributed income
23.5
27.75
32
36.25
44.5
* Based on 25% standard dividend tax for controlling shareholder


b) Automatic Tax Programs

There are 3 types of automatic tax programs:
1. Alternative tax program
2. Priority area program
3. Strategic program


1. Alternative tax program: A company can choose this program by waiving the project's rights to a grant and will receive complete exemption from corporate tax on its undistributed income, as detailed below.

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.
Priority Area A:
Priority Area B:
Area C / Central Israel:
10 years of complete tax exemption
6 years of complete tax exemption and 1 year of tax benefits, 4 years for a foreign investor*
2 years of complete tax exemption and 5 years of tax benefits, 8 years for a foreign investor*

* As in table 2

Remark: Should the company decide to pay dividends during a period when the tax exemption is in effect the dividend tax rate will be 15% and the corporate tax rate the company was exempted from (as per the tax benefit table above ) will be payable.


2. Priority area program: For companies investing in Priority Area A, benefits include:

a. Corporate tax rate of 11.5%
b. Dividend tax rate of 15%, total tax rate of 24.5%
For a foreign investor, the dividend tax rate is 4% and a total tax rate of 15%.

The benefit period is for 7 years. If at least 25% of the company is foreign owned then the benefit period is 10 years.


A. Greenfield (new) investment- at least 300,000 NIS
B. Expansion- at least 300,000 NIS or an amount equal to the "approved rate" of the productive assets (the higher of the two) as in the table below:

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Value of productive assets (mil NIS)
Required investment as % of the productive assets
Up 140
12%
140-500
7%
500+
5%


3. Strategic program: This program is intended mainly for large multi-national companies meeting the following criteria: an annual turnover of at least 13 billion NIS and a minimum investment of 600 million NIS in the project itself. Location: Priority Area A
Benefits include:
a. Corporate tax – 0% (i.e. complete tax exemption)
b. Dividend tax – 0%
c. Benefit period – 10 years

Accelerated Depreciation

An Approved/Preferred Investment is entitled to accelerated depreciation on its property and equipment. During the first five-year period of operation for these assets, the company may depreciate its assets for tax purposes at 200% of the ordinary rate of depreciation for equipment and 400% of the ordinary rate for buildings. Depreciation on buildings shall not exceed 20% per annum.

Advanced Rulings: To provide greater certainty, investors choosing one of the automatic tax programs may apply to the Israel Tax Authority for an advanced (or pre-) ruling to ascertain the scope of the benefits he will be entitled to if he meets the investment conditions as stated in the Law.

A Foreign Investment Intensive Company: A company that is 90% foreign owned, which has an approved investment program of at least $20 million and is internationally competitive, will be granted an extra 5 years of tax benefits.

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. However, a recent agreement between the Israeli government and the United States seeks to address this issue. Future promised changes in legislation will improve protection and reduce administrative delays.

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 Israeli-occupied 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.

Competition from State Owned Enterprises

The Government Companies Authority at the Ministry of Finance has responsibility for State Owned Enterprises. Prominent sectors/industries include: defense, security, building and land, gas and oil searching, agriculture, electricity and water, education training funds, services, transportation, communication, tourism, industry, trade, and culture and the arts.

Government companies have a 12 member Board of Directors that appoint a General Manager. The appointment of the Chairman of the Board and General Manager requires approval by the Ministry in question and the Ministry of Finance. Directors cannot be a Minister, Deputy Minister, or member of the Knesset. No more than two thirds of the members of the Board can be state employees. At least one seat is appointed by the government.

There are no sovereign wealth funds in Israel.

Corporate Social Responsibility

There is awareness to the issue among enterprises and the civil society. Israel adheres to the OECD Guidelines for Multinational Enterprises and a National Contact Point is operating in the Foreign Trade Administration. See also examples for CSR activities in NGOs:

CSR Report by the Academic Center for Law and Business (in Hebrew): http://www.clb.ac.il/uploads/csr.pdf

Maala–Business for Social Responsibility: http://www.maala.org.il/eng/home/about/01/default.asp?ContentID=333

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. The State Department web site provides updated information on travel advisories: http://travel.state.gov

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.

Corruption

Bribery and other forms of corruption are illegal under several Israeli laws and Civil Service regulations. Israel became a signatory to the OECD Bribery convention in November 2008. There are several NGOs that focus on public sector ethics. Transparency International has a local chapter in Israel.

Bilateral Investment Agreements

Israel has protection of investment agreements with Albania, Argentina, Armenia, Belarus, Bulgaria, Croatia, Cyprus, Czech Republic, El Salvador, Estonia, Ethiopia, Georgia, Germany, Hungary, India, Kazakhstan, Latvia, Lithuania, Moldova, Mongolia, Poland, Romania, Serbia-Montenegro, Slovakia, Slovenia, South Korea, Thailand, Turkey, Turkmenistan, Ukraine, Uruguay, Uzbekistan. Agreements are waiting to be ratified with China, Guatemala, South Africa, and Azerbaijan. Agreement initiated with Peru.

OPIC and Other Investment Insurance Programs

OPIC is involved in several projects in Israel and also finances projects sponsored by U.S. investors in Israel, but not in the Golan Heights. Israel is a member of the Multilateral Investment Guarantee Agency (MIGA).

Labor Trade Zones

Israel's civilian labor force numbers approximately three million people. Highly skilled and well educated, the Israeli labor force is the economy’s major asset. More than 40% of the work force has more than 13 years of education and over 22% have 16 or more years of education. More than 30% of university students specialize in fields with high industrial R&D potential, including engineering, mathematics, physical sciences, and medicine. According to the Investment Promotion Center, there are more than 135 scientists out of every 100,000 workers, the highest in the world. The rapid growth of Israel's high-tech industries in the late 1990s increased the demand for workers with specialized skills. However, in the last few years Israel consistently ranks at the end of the list of Western countries in international student assessment tests.

As a result of the difficult security situation, global slowdown, and slowdown in the high tech sector at the beginning of the decade, unemployment reached a level of 10.7% in 2003, and since that time declined each year, reaching a level of 6.1% in 2008, a level not seen since the mid 1990’s. In light of the economic crisis, unemployment increased to 7.7% in 2009. The number of Palestinian workers had declined drastically due to security concerns, but in 2008 totaled 61,000, up 22% from 50,000 in 2007. The number of legal foreign workers had declined significantly after implementation of the Economic Reform plan in 2009 which intended to reduce the number of foreign workers in order to encourage employment of Israelis. The average number of foreign workers in 2009 was around 255,000 foreign workers, including legal and illegal, which is lower than 2008’s 269,000 foreign workers on average.

The national labor federation, the Histadrut, organizes about one-third of Israeli workers. Collective bargaining negotiations in the public sector take place between the Histadrut and government entities. In the private sector, negotiations at the national level between the Histadrut and the employers association are supplemented by local negotiations to finalize details. The number of strikes has declined significantly as the public sector has gotten smaller. However, strikes remain a viable negotiating vehicle in many difficult wage negotiations.

Israel strictly observes the Friday afternoon to Saturday afternoon Sabbath and special permits must be obtained from the government authorizing Sabbath employment. At the age of 18, most Israelis are required to perform 2�'3 years of national service. Until age 50, Israeli males are required to perform 30�'50 days of military reserve duty annually, during which time they receive compensation from national insurance companies.

Foreign-Trade Zones/Free Ports

Israel has one free trade zone, the Red Sea port city of Eilat. In addition to the Eilat Free Trade Zone, there are three ports that offer free trade: Haifa Port (including Kishon), the Port of Ashdod and the Port of Eilat.

The GOI has plans to expand and upgrade the major ports of Haifa (in the north) and Ashdod (in the center). There is good quality warehousing including cold storage in all of the major ports and trade zones, but current capacity may become inadequate in the face of growing demand

Foreign Direct Investment

Foreign Direct Investment in Israel totaled USD 14.3 billion in 2006, an increase of almost 200% compared with FDI of USD 4.8 billion in 2005. The sharp increase was due in large part to Berkshire Hathaway’s purchase of 80% of Iscar Metals for USD 4.4 billion and Hewlett Packard’s purchase of Mercury Interactive for USD 4.5 billion. In 2007 and 2008 FDI totaled USD 9 billion and USD 9.6 billion, respectively.

Foreign Direct Investments for the first 9 months of 2009 totaled about USD 3.5 billion.
Source: Bank of Israel

Web Resources

Ministry of Industry & Trade
Investment Promotion Center
State Department Website
Multilateral Investment Guarantee Agency
The Overseas Private Investment Corporation
The National Committee for Labor Israel
Bank of Israel

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