Business Operations in Israel (Portfolio 7180)

Tax Management Portfolio, Business Operations in Israel, gives businesses (in particular, American businesses) and their professional advisers the technical tax and corporate data, as well as the general background information they should have in order to properly evaluate a proposed commitment in Israel and to cooperate fruitfully with Israeli counsel and CPAs.

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This Portfolio is part of the Premier International Tax Library, a comprehensive resource including nearly 100 international tax Portfolios, practice tools, primary sources and timely news.



The Portfolio analyzes the Israeli income tax structure in depth and pays particular attention to the important Law for the Encouragement of Capital Investments. Israeli tax law and forms of business organization are based on English law. American practitioners will find few concepts strange to them.

Throughout this Portfolio, an effort has been made to emphasize those aspects of Israeli law and practice which differ from their American counterparts.
The Worksheets contain, inter alia, model Articles of Association updated and compatible with the Companies Law, the 1975 Israel-United States Income Tax Treaty, as amended by the 1980 and 1993 Protocols, and a list of comprehensive double taxation agreements including a table of withholding tax rates.

The Detailed Analysis analyzes the problems confronting persons contemplating an investment or a business in Israel. A guide to the Detailed Analysis is provided by a Table of Contents. A Bibliography is provided as a research aid.

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Business Operations in Israel was authored by the following experts.
Dr. Amnon Rafael, member of the Israeli and New York Bars (Advocate); LL.M. graduate of New York University (Taxation); J.S.D. graduate of New York University (Doctoral thesis on Tax Aspects of American Investments in Israel); member of the International Fiscal Association.


Detailed Analysis

I. Introduction

A. The Country and Its People

1. Cities and Population

2. Infrastructure and Transportation

3. Climate

4. Natural Resources

B. The Government and the Economy

1. Democracy

2. Major Economic Indicators

3. Labor

4. Foreign Relations

II. Operating a Business in Israel

A. Opportunities

1. Trade Agreements

2. Government Incentives

a. General

b. Incentive Zones

c. Prerequisites for Incentives

d. Approved Enterprises Grants-In-Aid

e. State Guarantees

f. Industrial Facilities

g. Research and Development

(1) Grants and Royalties

(2) Incubators

(3) The Bi-National Industrial Research and Development Foundation and Similar Foundations

(4) The MAGNET Program

h. Export Marketing Assistance and Export Insurance

3. Restrictions on Foreign Investments

B. Currency and Exchange Controls

1. General

2. Classification According to the Duty to File Reports

3. Enforcement

4. Exemptions

5. Penalties under the Administrative Offence Law, 1985

6. Prohibition of Money Laundering Law, 2000

7. Secrecy

C. Trade and Commerce Regulations

1. Imports and Exports

a. Imports

(1) Permits

(2) Dumping and Unfair Competition

b. Exports

(1) Permits

(2) Military

2. General Regulation of Business

a. Regulation of Competition

(1) Monopolies

(2) Mergers

(3) Restrictive Trade Practices

(4) Enforcement Measures

b. Restrictive Covenants - Employee-Employer

c. Price Controls

d. Securities Regulation

(1) Public Offering of Securities

(2) Regulation of Stock Exchange Operations and Trade in Securities

3. Licensing and Franchising in Israel

a. Patents

b. Trademarks and Trade Names

c. Designs

d. Business Names

e. Industrial Know-how

f. Copyright

g. Performers' Rights

D. Immigration Regulations

E. Financing the Business

1. Banking

2. Bank of Israel

3. Financing and Credit

III. Forms of Doing Business in Israel

A. Principal Business Entities

1. Companies

a. The "New" Companies Law

b. Incorporation and Registration

c. Reports

d. Fees

e. Shares

f. Dividends

g. Charges

h. Directors

i. The Shareholders

j. Amendment No. 3 to the Companies Law

2. Partnerships

3. Sole Proprietorships

4. Foreign Companies

B. Capital Market

1. Tel-Aviv Stock Exchange

2. The Trading Method

a. The Equity Market

b. The Fixed Income Market

c. Options and the Derivatives Market

d. Foreign Investors

C. Wages, Salaries and Fringe Benefits

1. Basic Salary

2. Cost-of-Living Allowance

3. Overtime

4. Shift Work

5. Productivity Bonus

6. Thirteenth Month

7. National Insurance

8. Severance Pay, Provident Funds, Pension Funds

9. Advanced Education Fund

10. Annual Vacation and Recreation Allowance

11. Sick Leave Pay

12. Gifts, Work Clothes, Meals, Professional Literature, Stock Options, Housing

13. Commuting Allowance - Company Car

14. Military Duty

15. Minimum Wages Law, 1987

16. Assurance of Income Law, 1980

IV. Taxation of Domestic Companies

A. In Brief

1. Rates

2. Corporate Residence

3. Income Determination

4. Capital Gains

5. Group Taxation and Intercompany Dividends

6. Losses

7. International Aspects

8. Other Significant Taxes

9. Tax Incentives

10. Administration

B. What Constitutes a Domestic Company

C. The Company Tax

1. Taxation of Worldwide Income

2. Accounting

3. Calculation of Gross Income

a. General

b. Capital Gains

(1) General

(2) Capital Gains on Share Transfers and Liquidations

(3) Bonus Shares and Capital Gains

(4) Incorporation Rollover

(5) Corporate Reorganizations

(6) Unlinked Loans Transferred with Shares

(7) Exchanges of Depreciable Assets

(8) Conversion to Inventory

(9) Shares and Securities Traded on the Tel-Aviv Stock Exchange

(10) Capital Gains from the Sale of Foreign Securities

(11) "Departure" Tax

(12) Capital Losses

(13) Taxation of Land (Appreciation and Purchase) Law, 1963

(14) Real Estate Investment Trusts

(a) "Real Estate Investment Trust" - Definition

(b) Distribution Rules

(c) Taxation Rules

c. Dividend Income

d. Controlled Foreign Corporations

e. Foreign Vocation Company

f. Stock Options and Other Options

g. Notional Income

h. Other Inclusions in Gross Income

i. Exclusions from Gross Income

4. Business Expenses

a. General

b. Organizational Expenses

c. Travel and Entertainment Expenses

d. Interest

e. Royalties

f. Taxes

g. Depreciation and Amortization

h. Obsolete Equipment

i. Charitable Contributions

j. Capital Losses

k. Casualty Losses and Thefts

l. Reserve Accounts

m. Bad Debts

n. Inventory Write-downs

o. Rent

p. Salaries and Wages

q. Life Insurance

r. Economic Counseling and Management Fees

s. Treatment of Child Care

t. Academic Studies

5. Capital Expenditure

6. Loss Carryovers

7. Tax Rates and Calculation of Taxable Income

a. General

b. Transparent Company and Family Company

V. Taxation of Foreign Companies

A. What Constitutes a Foreign Company

B. Determination of Taxable Income

C. Method of Taxation

1. Special Relief for Israeli Taxed Shareholders of Foreign Companies

2. Withholding

3. Special Instructions

VI. Taxation of a Branch

A. Determination of Taxable Income of a Branch

B. Method of Taxation

C. Subsidiary v. Branch

VII. Taxation of Partnerships

VIII. Taxation of Trusts

A. Old Tax Regime

B. New Tax Regime

C. Classification of Trusts and Relevant Applicable Tax Regime

1. Israeli Resident's Trust

a. Definition

b. The Tax Regime

c. A Change of Status from an Israeli Resident's Trust to Another Category of Trust

2. Non-Resident Settlor's Trust

a. Definition

b. The Applicable Tax Regime

3. Non-Resident Beneficiary's Trust

a. Definition

b. The Applicable Tax Regime

c. Change of Status from Non-Resident Beneficiary's Trust to Another Class of Trusts

4. Testamentary Trust

a. Definition

b. Applicable Tax Regime

c. Summary Table

D. Reporting Requirements

E. Transfer by a Corporate Body

F. Transitional Provisions

G. Exceptions

H. Regulations

I. Collection of Taxes

IX. Taxation of Resident Individuals

A. Scope of Taxation and Residence

B. Determination of Gross Income

C. Allowances, Deductions and Credits

D. Rates and Calculation of Taxable Income

E. The Tax Unit

X. Taxation of Nonresidents

XI. Assessment, Filing, Withholding and Advance Payments

A. Assessment of Nonresidents

B. Books of Account

C. Duty to File a Tax Return

D. Assessment and Appeal

E. Withholding of Tax at Source

F. Pre-Ruling

G. Advance Payments

XII. Inter-company Pricing

XIII. Tax Incentives

Introductory Material

A. The Law for the Encouragement of Capital Investments, 1959

1. Duration of Benefits - Approved Programs

2. Tax Benefits of Approved Enterprises and Property

a. Foreign Investors' Company

b. Tax Benefits Program for Beneficial Enterprises

(1) General

(2) Definitions of "Beneficial Company" and "Beneficial Enterprise"

(3) Tax Benefits Accorded to a Beneficial Company Electing for Alternative Benefits with Respect to Income of a "Beneficial Enterprise"

(4) Tax Benefits of Regular Beneficial Enterprises

(5) Additional Relief for Beneficial Enterprises with Foreign Investment and Beneficial Enterprises of Intensive Foreign Capital Companies

(6) Special Relief for Jumbo Investments

3. Tax Benefits for Approved Investments and Loans

4. Tax Relief for Rental Buildings

5. Tax Relief for Equipment Rental Enterprises

6. Accelerated Depreciation

7. Protection of Capital

8. Tax Relief Granted to International Trading Companies

9. Israeli Holding Companies

a. Taxation of Profits of Israeli Holding Companies

b. Taxation of Dividends Distributed by a Holding Company

c. Preconditions to Enjoyment of the Preferential Tax Regime

d. Notional Taxation of Income of Israeli Residents Holding Shares in Israeli Holding Companies

e. New Immigrants

f. Holding Companies Changing Their Status

10. Research and Development

B. Relief for Individuals

1. New Residents (Olim) and Returning Residents

2. Dividends Paid to Nonresidents

3. Approved Specialists

C. Tax Relief Under the Law for the Encouragement of Industry (Taxes), 1969

D. Research and Development Expenses

E. Relief from Tax on Investments in Tel-Aviv Stock Exchange Traded Securities

F. Intensive Research and Development Company

G. Income of a Company the Business of Which Is Controlled from Outside Israel

H. Rebate of Noncreditable Taxes

I. Petroleum Industry

1. Depletion Allowance

2. Exploration and Development Expenses

3. Cost of Land

4. Abandonment Losses

5. Carryover

6. Approved Enterprise Status

7. Income Tax (Rules for the Computation of Tax Upon Holding and Sale of Participation Certificates in Oil Exploration Partnerships) Regulations, 1988

J. Film Industry

K. Interest and Linkage Differentials

L. Encouragement of the Renting of Apartments and Construction of Rental Dwellings

M. Exemption for the Sale of Apartments

N. Encouragement of Capital Investments in Agriculture

O. Tax Incentives in the Eilat Free Trade Zone

P. Employee Stock Option Plans

1. Employment Income Category

2. Capital Gain Category

3. Other Employee Stock Option Plans

XIV. Avoidance of Double Taxation

A. Foreign Tax Credit

1. The New Regime

2. Foreign Tax Credit

a. General

b. What Constitutes a Foreign Tax

c. Credit Method

d. Foreign Taxes on Israeli Exempt Income Not Allowed as a Credit

e. Foreign Tax Credit for Israeli Resident Corporations

f. Foreign Tax Credit for an Individual

g. Excess Credit

h. Dividends Received from a Corporation Considered to be Resident in Israel by Virtue of the "Control and Management" Test

i. Date of Payment of a Foreign Tax

3. Losses Derived from Outside of Israel

B. Tax Treaties

1. General

2. 1975 Israel-United States Tax Treaty

XV. Other Taxes

A. Value Added Tax

1. Rates

2. Deductions

3. Zero Rate Transactions

4. Exempt Transactions

5. Value Added Tax in the Palestinian Authority

B. Payroll Taxes

C. Stamp Duties

D. Property Taxes

E. Estate Duty

F. Purchase Tax and Customs Tax

G. Sale Tax

XVI. Inflationary Effects on Tax

A. Inflationary Periods

B. Decline in Hyperinflation and Periods of Price Stability


Working Papers

Table of Worksheets

Worksheet 1 Articles of Association (Sample)

Worksheet 2 Application for "Approved Enterprise" Status

Worksheet 3 Encouragement of Capital Investments Law 5719-1959

Worksheet 4 1975 Israel-United States Income Tax Treaty

Worksheet 5 List of Comprehensive Double Taxation Agreements and Related Protocols Signed by Israel as of March 1, 2008

Worksheet 6 Income Tax Circular No. 17 2002 re Income Tax Reform - Tax Relief for New Immigrants and Returning Residents

Worksheet 7 Income Tax Circular 21 2002 re Income Tax Reform - International Taxation

Worksheet 8 Back to Basics: Tax Evasion v. Tax Avoidance

Worksheet 9 Map of Israel