Opening foreign companies in Israel
Before starting any economic activity in Israel, foreign companies setting up in the country are faced with the dilemma of how to structure their business:
- set up a subsidiary in Israel, or
- open an Israeli "branch" of their foreign company.
The consequences of this choice are wide and varied. In this article, we will briefly review the range of considerations and differences that should be taken into account by a foreign company setting up in Israel.
If you have any specific questions, please use the contact form at the bottom of the page.ALSO READ: Understanding the tax system for a company in Israel
Opening a branch in Israel - Hevrat Houtz
In general, a branch is a commercial representation of the foreign company, through which the foreign company can operate and conduct its business in Israel.
The branch has no legal personality separate from the foreign entity that owns it. Consequently, a foreign company operating in Israel through a branch is liable for debts arising from operations in Israel.
There is no moral separation between the foreign entity and the Israeli entity.
The foreign company will therefore be directly liable for all the debts of the branch in Israel (to creditors/tax authorities/local employees etc.).
In the rest of this article, we'll look at the "practical" side of setting up this type of company.
Our firm can help you with all aspects of setting up your business (legal, accounting & tax).
Create a subsidiary in Israel - "Hevrat Bat".
On the other hand, opening a subsidiary in Israel constitutes a separate legal entity whose shareholder is the foreign company. As a result, the risk borne by the foreign company is limited to the amount of its investment in the subsidiary. (As in the case of the vast majority of companies).
This rule is withdrawn when actions are taken between the subsidiary in Israel and the parent company which may lead the Israeli court to ignore this separation. In so doing, they would "lift" the veil of incorporation of the subsidiary, allowing its creditors to approach the parent company. However, Israeli courts rarely go beyond the veil of incorporation, and to do so would require significant justification.
In addition, incorporation as a subsidiary in Israel, i.e. the creation of a separate entity, also offers greater flexibility. Particularly with regard to Israeli banks and tax authorities.
When ownership changes, when a new partner is brought in exclusively for Israeli activities, or when the Israeli company is sold, the transaction is greatly simplified. The subsidiary's shares can be sold, thus avoiding the need to "separate" the business and maintaining a degree of continuity.ALSO READ: The Limited Liability Company in Israel - Hevra Baam
What's legally better?
To sum up, in terms of legal implications alone, it is generally more advantageous to set up in Israel as a local subsidiary than to operate as a branch.
There may, however, be situations in which the Israeli activity is merely a "commercial representation" or a "storage facility".
In certain cases, the foreign company may not be required to register in Israel. Only those activities that would constitute a "permanent establishment" would require a company to register in Israel.
Not only the Israeli tax authorities, but also the banks, are not keen on branches.
If you want to buy a property with a loan, it will be much simpler to set up a subsidiary of your foreign holding company, rather than making the acquisition directly via your foreign company. You can always make a current account contribution to finance your investment.
Taxation for a subsidiary in Israel
An Israeli subsidiary of a foreign entity is subject to Israeli corporate income tax at the standard rate. Currently, corporate income tax (CIT) in Israel is 23% on realized profits.
If the subsidiary decides to distribute a dividend, it will generally be liable for dividend tax (generally deducted at source), at the following rates depending on the identity of the beneficiary:
- Individual, Israeli tax resident: 25% (30% for shareholders with more than 10% of shares).
- Israeli company: 0% (subject to conditions)
- Foreign company or individual not resident for tax purposes in Israel (in a jurisdiction other than Israel) with a tax treaty): in accordance with the applicable double taxation treaty.
- Foreign company or individual not resident for tax purposes in Israel (in a jurisdiction other than Israel) without a tax treaty): 25 % (30 % for shareholders with more than 10% of shares).
Taxation for the branch
On the other hand, an Israeli branch of a foreign company is only subject to tax in Israel on its Israeli profits at the corporate tax rate (i.e. 23%). However, the distribution of these profits to the parent company is not subject to Israeli tax, as they are not treated as dividends.
Invoicing services provided by companies in the same group
Be careful, however, to comply with the rules that apply to re-invoicing for services performed in Israel on behalf of the foreign company.
We recommend setting up a convention on the " transfer prices In addition, the Group has a policy of "recharging" (or re-invoicing) inter-company activities within the same group.
The OECD has issued several very clear circulars on this subject, and every company wishing to outsource part of its services to Israel must comply with the inherent tax guidelines. In Hebrew, the term is מחירי העברה - Transfer Pricing.
Example of companies concerned:
1. call center in Israel, billing the French company for the "appointment booking".
2. marketing company in Israel, performing services for a French company owned by the same shareholder. (Lead sales, content creation, training, etc.).
3. IT development company in Israel invoicing development services to the foreign company belonging to the same group.
Setting up your company in Israel
Section 346 of the Companies Law requires any foreign company whose business activity is in Israel to register with the Companies Registry as a foreign company operating in Israel.
In addition, commercial activity in Israel requires the opening of files and registration with the tax authorities in Israel (VAT, income tax, social file as an employer), even before the start of this commercial activity.
In general, setting up an Israeli subsidiary is a quick and simple procedure in Israel, while registering a branch of a foreign company in Israel can be slower and more complex.
Whatever the structure you choose, our firm can help you set up your business and keep your accounts in Israel, while respecting the international tax regulations applicable to your group.
The procedure for opening a bank account in Israel for a branch of a foreign company opening in Israel can be more complex than opening a bank account for a local Israeli subsidiary, and banking choices may be restricted.
It should be stressed that you must first open a bank account in Israel before opening a tax file with the Israeli tax authorities.
Appointment of a tax "representative
Section 60 of the VAT Law in Israel, 5736-1975 deals with the appointment of a local representative by non-residents doing business in Israel through foreign companies. Pursuant to Section 60, a foreign trader is required to notify the Israeli VAT office of the name of his local representative within 30 days of commencing business activity in Israel.
Article 60 stipulates that a representative who has been appointed is fully responsible for all matters relating to VAT for the foreign resident. It is important to recognize the extent of this responsibility that rests with a representative.
Other taxes - Section 68B of Israel's General Tax Code stipulates that a foreign resident is also required to appoint a representative for tax purposes. The representative will have the power of attorney to submit tax returns, to receive funds on behalf of the foreign resident and to deal with any matter required by law in Israel.
In a nutshell:
In terms of tax considerations, it will probably be more efficient for foreign companies opening in Israel to operate through a branch rather than a subsidiary in Israel. On the other hand, in terms of efficiency, simplicity and legal protection, operating via the creation of a subsidiary would be a better choice.
The above should not be construed as a recommendation and/or opinion and, in any case, it is recommended to obtain personalized professional advice. We will be happy to be at your disposal for any questions and/or clarifications on this subject.
Your questions - our advice
- Are there any differences or considerations to take into account if the shareholder is an Ole Hadash?
- How to regulate re-invoicing between the subsidiary and the parent company?
- How to optimize cash flows between the 2 entities?
- Does a current account contribution between these 2 entities have to be remunerated?