ISRAEL: DOING BUSINESS IN ISRAEL
Israeli law is based mostly on a common law legal system, but also incorporates some aspects of continental law. It also reflects the diverse history of the territory of the State of Israel throughout the last two hundred years (Ottoman sovereignty and after it British sovereignty), as well as the legal systems of its major religious communities. The doctrine of legal precedent plays an important role in the Israeli legal system. The Israeli Declaration of Independence asserted that a formal constitution would be written though it has been continuously postponed since 1950. Instead, there are the Basic Laws of Israel, that function as the country’s constitutional laws de facto. These are enriched by the courts. The Israeli courts have been influenced in recent years in different legal fields by American law and Canadian law and by Continental law (mostly from Germany).
The Israeli court system comprised of three main courts. The Magistrate court, which handles civil cases of less than NIS 2.5 million (except to disputes over land ownership), and criminal cases in which the maximum sentence is for 7 years. The District Court, which deals with all civil and criminal matters not under the jurisdiction of the Magistrate court including disputes over land ownership and all corporate matters, it also has jurisdiction over most administrative cases, and hears appeals from the Magistrate court. The Israeli Supreme court, which mostly hears appeals from the District court but also sits as the High Court of Justice and as such hears administrative cases not under the jurisdiction of the District courts. There are also Labor tribunals (employer-employee cases), religious tribunals specific legal matters in Israel (e.g., matters of personal status such as marriage and divorce), and other specific tribunals.
For at least 2 decades, the Israeli Ministry of Justice, together with leading jurist’s professionals and academics, are working, on a volunteer basis, on a new recodification of all laws relevant to civil matters in Israel. This new proposed civil codex was introduced in 2006, and in 2011 it became a bill, but its adoption through legislation is not expected to take place soon.
Israel’s security cabinet decided at the end of 2019 to set up a new mechanism to monitor foreign investments. The mechanism will be headed by a committee of the Israeli Ministry of Finance, which will be responsible for examining the national security aspects of foreign investment. Such decision joins Israel to many other countries in the world, including the U.S.A, Canada, Britain, Germany, and Australia, that have launched similar mechanism for national security reasons. This monitoring shall concentrate on businesses, which will be considered as critical to the economy or national security, including business involved in infrastructure or Israelis’ data, such as telecommunications companies, financial institutions, and weapons manufacturers. The committee will not deal with the high-tech field. Referral to the committee will be done voluntarily by regulators of relevant sectors which investment is expected in their field. As of today, the aforesaid committee is in the process of establishment.
In addition, some several sectors in Israel require obtaining specific “control permits” from the applicable regulators, such as insurance and banking sectors, this in the event investors will want to acquire substantial shares of companies in the relevant sectors.
All companies in Israel must register with the Registrar of Companies and the Tax Authorities. The Registrar of Companies accepts documents in English. A foreign company (any corporation, excluding partnerships, incorporated outside Israel) that establishes a place of business in Israel must register as a foreign branch. A branch in Israel is treated as a subsidiary of the foreign company, which means that the foreign entity is responsible for the acts or the omissions of the branch.
Any foreign company or individual will need to decide under which type of legal entity they want to operate. The most common forms of legal entities are companies and partnerships. Generally, there are no limits on the nationality of the shareholders of an Israeli company.
A private limited liability company is the most common legal entity for doing business in Israel. The responsibility of shareholders is limited to the amount of their investment in the company shares, subject to special cases in which the corporate vail is lifted. Any transfer of their shares is subject to the conditions specified in the articles of association, or, if there are no such rules, according to the provisions of the Israeli companies law. A limited liability company needs a minimum of one shareholder and can have up to 50, and must have one director. Generally, annual financial statements complying with the accepted accounting principles and audited by qualified auditors must be presented at the shareholders’ annual meeting.
Other common legal entities are general partnership and limited partnership. In a general partnership, each of the partners is liable severally and jointly with the other partners. Foreign investors can become partners unless the law for a specific profession requires certain local qualifications as a pre-condition to be a partner. Limited partnerships are formed by at least one general partner and one limited partner. With respect to limited partnership, the general partner has unlimited liability for the obligations of the partnership, while, the liability of the limited partner is limited to the amount of its capital contribution. Limited partners are not allowed to take part in the management of the partnership. Foreign partnerships wanting to operate in Israel must be registered with the Registrar of Partnerships and provide details of the partners and designate an Israeli resident willing to accept notices on their behalf.
In general, for first registration purposes, main agreement is required (such as articles of association for company or partnership agreement for partnership), legal statements of the shareholders and directors, and notarized copies of the foreign investor as applicable on case-by-case basis. If an investment is made in an already established and registered Israeli corporation, a report to the Israeli registrar of companies must be provided which will include a notarized copy of the passport (if the investment was made by individual) or a notarized copy of the articles of association and good standing approval (if the investment was mad by corporation).
If all relevant documents are prepared and at hand, it is possible that such entities will be established and registered at the Israeli registrar of companies within few days.
Branches can conduct any type of business falling within the scope of the foreign company and there are no restrictions on the repatriation of funds. A foreign company (which do not establish an Israeli incorporated company) needs to have a registered office in Israel and must appoint an agent resident in Israel.
Foreign companies must submit their financial reports to the Registrar of Companies according to the classification of the company (private or traded company).
The corporate tax rate for incorporated businesses in 2020 is 23%. Business partnerships, are generally not subject to Israeli taxation at the level of the partnership, they are taxed based on the pro rata rights of its partners, which may be taxed up to 50%.
If dividends paid by an Israeli subsidiary to shareholders located abroad, the withholding tax rate is generally, 25% or 30% withholding tax depends of the rate of the shareholder holdings in the company at the last 12 months before the dividend was distributed, and foreign corporations are subject to withholding tax pursuant to the corporate tax rate 23% in 2020.
Such previously mentioned tax rates may be reduced according to applicable double tax treaties. There are over 50 double tax treaties to which Israel is a party that are in force in Israel. Israel generally follows the OECD model with the exception of three old treaties before the OECD model was widely accepted.
Israeli labor law is comprised from various laws, statutes, and regulations, which provide extensive protections to employees in Israel. The Israeli National Labor Court has developed a substantial case law suitable to the particular characteristics of the labor contract.
Israeli law sets out a 42-hour workweek. For those with a five-day workweek, the length of a workday is set out as 8.6 hours, while those with a six-day workweek have a workday of 8 hours. Employees are entitled to breaks, depending on the length of the workday, week of work and type of work in which they are employed.
The law grants employees additional compensation when they work overtime. This compensation is 125% of the hourly wage for the first 2 overtime hours and 150% for additional hours. For Sabbath work (the day of rest according to Jewish religion which is Saturday), the law grants the worker 150% of his hourly wage for all hours worked. Employment for more than the legal amount of hours is a criminal offence by the employer, with some exceptions with respect to specific fields of employment. There is a global overtime arrangement that can be made, and there are exceptions for special positions such as a Company’s officer position, which may be deemed as “trust position”.
In addition, all Israeli employees are entitled, according to the law, to annual leave, sick leave, recuperation pay, Pension and Severance Scheme, and travel payment.
With respect to dismissal, employer is forbid from dismissing his employee without first performing a hearing. The employer must summon the employee to a hearing in advance, in order to allow the employee to prepare for his case. The notice should include the reasons for convening the hearing and the details of the complaints raised against the employee. The employee can present the arguments himself, or with the help of a lawyer or other representative on his behalf according to its full discretion.
During the hearing, the employer is required hear the employee’s arguments openly and fairly, and to consider them seriously before making a final decision on whether or not to terminate the employment. The hearing’s minutes must be recorded and a decision should be made based on the arguments of both employer and employee.
Labor court may order the employer to make amends, such as return the employee to his position or provide monetary compensation for unlawful dismissal if all the process of dismissal was amiss.
According to the law, a prior notice for termination of an employment agreement should be given according to a period specified in the law (or according to contractual agreement, only the extent the parties agree on a longer period than what is mandated by the law, and generally will obligate mainly the employee, a shorter period from what is stated by the law will be void and unlawful). In any termination of an employment by prior notice, the employer shall be entitled to terminate the employee’s employment, immediately or at any time during the prior notice period as above mentioned, and in such event, the employer shall pay the employee the applicable prior notice redemption.
The current retirement age in Israel is 67 for men and 62 for women. Employer may require an employee to retire at age 67 (for women and men), but in case an employee wishes to continue working beyond that age, the employer must consider his request individually. Early retirement can be taken out at age 60 subject to different conditions.
For obtaining the required legal protection with respect to intellectual property in Israel, not all-intellectual property rights have to be registered, such is the case of copyrights. While there is no requirement for registration a copyright and the copyright subsists and vests with its owner automatically from the moment the work is crated, other main forms, such as – patents, trademarks and designs, a registration is required.
Generally, subject to some exceptions, copyright protection of a work starts as of the date of creation until the end of 70 years after the year of the death of the creator.
With respect to trademarks, well known marks receive broader protection, can protect more goods and services. Under the Israeli law, the protection of the trademark is for 10 years as of the date of the trademark application. The registration may be renewed for additional periods of 10 years each, while a trademark may be deleted from the register due to non-use.
Israel is a member of the Madrid Protocol, hence international applications in Israel through the procedure provided by the protocol is allowed, and it is also possible to file international applications under the protocol, through WIPO.
Patent protection is for 20 years from the date of the application. Israel is a member of the Paris convention and grants priority status to foreign convention’s state member applications according to the convention. The Patent Authority has so far refused to register business method patents, this is despite, for example, the US patent registration trend, which is increasingly recognize business practices as patentable.
There is also design protection, which is for original, previously unpublished designs of objects. The protection is given for a total of 25 years. Israel’s copyright law does not protect the design elements of industrial objects, so seeking protection for design is crucial in that aspect. It is important to know that such protection is not provided for the functional aspects of a design (as protection for functions of product can be obtained through the patent protection). Non-registered designs may be protectable under alternative legal instruments, such as the law of unjust enrichment, or the law of passing off, however the strongest protection is the registered design.
Under Israeli law, a trade secret is confidential information as long as it is not in the public domain or easily available, and provided the owner takes reasonable steps to keep it confidential. Trade secrets are protected from unlawful use by others or unauthorized use. Under the Israeli commercial torts law, a court may award statutory damages of up to NIS 100,000 to a successful plaintiff.
Some of the protections above are subject to different payments of governmental tolls.
The main regulatory agency, which are relevant for making business in Israel, are as follows:
Israeli Corporations Authority – works within the Israeli Ministry of Justice and incorporates the registration, supervision and enforcement bodies operating in the authority: Registrar of Companies, Registrar of Partnerships, Registrar of Pledges, Registrar of Associations, Registrar of Charitable Trust and Registrar of Political Parties.
Israel Competition Authority – formerly called the Antitrust Authority, is a government authority which responsible for maintaining the principles of commercial competitiveness in Israel. The Authority handle different market branches in which the market structure does not allow real competition between the businesses operating there, especially monopolies, cartels, and other structures that prevents competition.
The Israel Securities Authority – is a statutory authority in Israel dealing with the interest of the public of investors in securities. Its main responsibility is regulations of traded public companies, providing a permit for prospectus, regulating the activity of the trust fund industry and overseeing it, and overseeing the proper and fair management of the Israeli stock exchange.
Consumer Protection and Fair Trade Authority – is an independent governmental authority that acts as an independent, expert enforcement arm, with the exclusive focus: providing mandatory instructions and all enforcement processes of the Consumer Protection Act provisions.
The Israeli Tax Authority – is a government body operating within the Israeli Ministry of Finance and mainly deals with tax collection as well as the granting of certain government grants. Also responsible for compliance with conditions of import and export legality. In recent years, as a result of international treaties and agreements signed, the authority has increased its activities in intellectual property and money laundering.
The Privacy Protection Authority – is a unit within the Ministry of Justice, which is responsible in regulating, supervising and enforcing privacy protection. As a regulator of the basic right to privacy and protection of personal information in Israel, the authority is responsible for the protection of personal information in digital databases and for strengthening the right to privacy. For this purpose, this authority exercises its powers, including administrative and criminal enforcement, on all entities in Israel – private, business and public, who hold or process digital personal information. As of today, almost every business holds personal data, and therefore this authority becoming more active and more important player in the business and technology world.
Beside proceedings at the court, there is also arbitrary and mediation mechanisms, which constitutes alternative dispute resolutions.
Arbitrator can be appointed by the parties with the court’s approval. Those arbitrators are often retired judges or attorneys. Alternatively, parties may choose an arbitrator from a list of arbitrators provided by the Israel Bar Association. If the parties fail to reach an agreement regarding the identity of the arbitrator, the court may appoint one from a list provided by the parties, or in the absence of such list, at his own discretion. In the case of mediation, if a mediator is not agreed upon by the parties, the court may appoint a mediator from a list of mediators provided by the court.
The parties can also implement certain contractual mechanism in the agreement itself for resolving different kinds of disputes, subject to any applicable cogent laws.
Multiple legislations and administrative precedents comprised the Anti-corruption norm in Israel, and they impose strict compliance requirements in conducting business in Israel or with Israeli agents and officials.
Israel is party to the Organization for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and the UN Convention against Corruption.
There is no “compliance programs”, but a company can prepare a compliance policy ensuring that it does not carry out any act considering to bee deemed as bribery offence under the Israeli Penal Law (which is the main regulation with respect to anti-corruption) and further committing to comply with Israeli anti-corruption laws and any other relevant countries’ anti-bribery laws.
Israeli Employees may be summoned by the IDF (Israel Defense Forces) to perform reserve military duties during their employment term from time to time. Reserve military duty cannot be deducted from the employee’s annual leave days, and employers are required by law to allow employees to attend such duties.
“The Angels Law” – a nickname for Section 20 of the Israeli 2011-2012 Economic Policy Law, which encourages investment in Israeli hi-tech companies by providing substantial tax benefits to investors. This is relevant to investors who invest in very early stages of the company in which the investment was made. This law is a “temporary order” law, which means an enacted legislation, which was limited in advance. As of today, an extension to the temporary order has not yet been published and ended at December 31, 2019, so anyone interested in investing and enjoy the benefits of the law must wait to see if it will be extended this year.
On March 12, 2018, a new law was enacted with the purpose to limit the use of cash in transactions whether business or personal. This new legislation limits the use of cash in transactions, of NIS 11,000 (or up to 10% of the transaction, whichever is lower) between businesses, which could be further reduced to NIS 6,000 in 2020. Furthermore, attorneys and accountants will not receive cash in excess of the amounts stated above when providing business services to the client.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
If you need further info please contact Granot Speiser Law Office, Oren Speiser Adv., Orens@grs-law.co.il, or through the following link: http://www.grs-law.co.il/.