Doing business in Israel 2015

Transcription

1 Doing business in Israel 2015 P R E F A C E Crowe Horwath (Israel), an independent member of Crowe Horwath International in Israel, has prepared this profile of Doing Business in Israel This profile is designed to provide information on a number of subjects important to those contemplating investing or doing business in Israel. This guide is one of a series publication issue by Crowe Horwath (Israel) to clients and professional staff, and may be obtained from by contact Crowe Horwath (Israel). Doing Business in Israel 2015 has been designed for the information of readers. Whilst every effort has been made to ensure accuracy, information contained in this booklet may not be comprehensive and recipients should not act or rely upon it without seeking professional advice. Crowe Horwath (Israel) Doing business in Israel 2014 Page 1 of 92

2 Doing business in Israel 2015 C O N T E N T S 1. I n t r o d u c t i o n 1.1 Geography Population Political System Languages Currency Economy 6 2. B u s i n e s s E n t i t i e s a n d A c c o u n t i n g 2.1 Companies Branches Partnerships Audit and Accounting Requirements F i n a n c e 3.1 Exchange Control Sources of Finance The Law to prevent Money Laundering I n v e s t m e n t I n c e n t i v e s 4.1 General Law For Encouragement Of Capital Investment Tourism Project Tax benefits for building for rents Research and Development Support E m p l o y m e n t R e g u l a t i o n s a n d S o c i a l S e c u r i t y C o n t r i b u t i o n s 5.1 Work Permits Trade Unions and Worker Councils Labor Related Costs 32 Page 2 of 92

3 Doing business in Israel T a x a t i o n 6.1 News and Updates Income Tax Capital Gains Tax Benefits and Exemptions Employee Stocks/Options Plan losses Administration International Taxation Value Added Tax (VAT) Other Taxes Real Estate Taxes A p p e n d i c e s Withholding Taxes on Dividend Payments 59 Withholding Taxes on Interest Payments 60 Withholding Taxes on Royalty Payments 61 VAT: Zero Rating and Exemptions 62 Crowe Horwath (Israel) Firm Profile 64 Crowe Horwath (Israel) International 68 Division Executive Summary 70 Approach to Audit 72 Our Tax Approach 77 Our Team Approach 79 Firm Code 84 Page 3 of 92

4 Doing business in Israel 2015 Ar t i c l e 1 : I N T R O D U C T I O N 1. I n t r o d u c t i o n 1.1 Geography Population Political System Languages Currency Economy 6 Israel-European Union Free Trade Agreement 7 Israel-USA Free Trade Agreement 7 Israel-OECD Membership 7 Labor force 7 Inflation 7 Page 4 of 92

5 Doing business in Israel G e o g r a p h y Israel, lying on the eastern seaboard of the Mediterranean Sea, bordered by Lebanon on the North, Syria and Jordan on the East and Egypt on the South. Israel also borders the areas controlled by the Palestinian Authority. Excluding the Gaza Strip and the West Bank, but including the Golan Heights, Israel has an area of approximately 22,000 square kilometers (8,500 square miles) of which two thirds is desert (the Negev). The major urban centers are Jerusalem with a population of approximately 815,000 people, the metropolitan area of Tel Aviv with 414,600 and Haifa with 272,200 people. The greater part of the country is either hilly or arid. The climate is characterized by two sharply contrasting seasons a dry hot summer from April to October followed by a wet winter from November to March. The average annual rainfall varies from barely 40 mm. (1.6 in.) in Eilat in the south to over 800 mm. (32 in.) in the Upper Galilee in the north. The coastal area has a Mediterranean type climate. Average temperature range from 5 0 C (41 0 F) in Jerusalem in the winter to over 40 0 C (104 0 F) in Eilat in midsummer P o p u l a t i o n Since the state's independence in 1948, Jewish immigrants from all over the world have been settling in Israel. Israel s population has increased from 870,000 people in 1948, to about 7.1 million today. This figure consists of approximately 75% Jews with the remaining 25% comprising Moslems, Druze, Christians and others P o l i t i c a l S ys t e m Israel is a secular democracy, where General Elections are held every four years to elect 120 Knesset (the Israeli Parliament) members. Every Israeli citizen as of age 18 is eligible to vote, and be elected as of age 21. The elections are based on a system of proportional representation of party lists. The Israeli "head of government" is the Prime Minister who is the leader of the party that holds the most seats in the Knesset L a n g u a g e s The formal languages are Hebrew and Arabic. Hebrew is the main language throughout Israel. Page 5 of 92

6 6 Doing business in Israel C u r r e n c y The monetary unit used throughout Israel is the New Israeli Shekel ("NIS"), divided into 100 Agorot. The average exchange rate in 2014 was USD 1 = NIS E c o n o m y A mixture of private enterprises and Government controlled enterprises characterizes the Israeli economy. Private enterprises are the largest industrial manufactures, though the public sector has, for reasons related to the history of the country, invested heavily in some of the largest enterprises in the country. State-owned corporations provide public utilities, such as electricity, water supplies, and railways. However, concurrent with international trends and local priorities the government is now committed to and is implementing a program of divestment and privatization. In the recent years the Government sold most of its interests in banks, the national telecommunications system ("Bezeq") and the national airline corporation ("El-Al"). Several government-controlled companies are quoted on the Tel Aviv Stock Exchange. Israel natural resources are limited to a few minerals such as Potash, Phosphates, Bromine and Salts, found in the Dead Sea and in the surrounding area. Most of raw materials required for industry are imported. The most important industries are Hi-Tech industries, tourism, Bio-Tec industries, and production of precision instruments, chemicals, pharmaceuticals, textiles. Israel has entered into several trade agreements in order to strengthen its position in the international markets. The most significant agreements are the Free Trade Area, with the European Union, Free Trade Area with the United States and Free Trade Area with the European Free Trade Association States (EFTA). The agreements with the European Union, the United States and the EFTA countries place Israel in the unique position of being a Free Trade Area partner with the world s main economic regions. Thus, Israel is able to bridge countries that do not have mutual agreements, provided that the products meet the rules of each agreement. In addition, Israel has signed Free Trade Area agreements with Canada and Turkey. Israel-European Union Free Trade Agreement In 1975 Israel and the EC signed an agreement providing an establishment for a Free Trade Area for industrial and some agricultural products. According to the agreement, Page 6 of 92

7 Doing business in Israel 2015 and subject to rules of origin, Israel s industrial exports to the EC are exempt from customs duties and other import restrictions. For its part, Israel has likewise eliminated all duties on industrial imports from the EC. Israel-USA Free Trade Agreement In 1985 the Governments of Israel and the U.S.A. signed a Free Trade Agreement. This agreement was fully implemented on January 1, The agreement, subject to rules of origin (which are different from those of the European agreement), eliminates all import duties and trade restrictions between the two countries. Israel-OECD Membership As from may 2010, the Organization for Economic Co-operation and Development (OECD) accepted Israel as full member in the organization. Labor force The labor force is approximately 3.6 million people, with women comprising 47% of employees. Following the economic slow-down and the waves of immigration since 1989, unemployment was at a high of approximately 10% of the labor force in December 2002, and decreasing gradually towards 6%. Inflation The rate of inflation has been in the range of 1% to 3% for the last few years. In 2014 the inflation rate was 0.5%. Page 7 of 92

8 Doing business in Israel 2015 Ar t i c l e 2 : B U S I N E S S E N T I T I E S AN D AC C O U N T I N G 2. B u s i n e s s E n t i t i e s a n d A c c o u n t i n g 2.1 Companies Private Companies Public Companies Branches Partnerships Audit and Accounting Requirements 11 Page 8 of 92

9 2. 1. C o m p a n i e s The most common form of business entity in Israel is a limited company with shared capital. The Companies Law governs the activities of the companies. A company can be either limited by shared capital or by guarantee, or unlimited, in which case its members do not have any ceiling to their liability. There are no requirements as to nationality or residency of shareholders and directors of companies. In order for a company to be considered incorporated, it should be registered with the Company Registrar at the Ministry of Justice. Apart from other requirements, an incorporated company should have Articles of Association. The Company Registrar usually accepts the English language P r i v a t e C o m p a n i e s A private company may have between 1 to 50 shareholders. A private company must file an annual report with the Registrar of Companies, which includes information regarding shareholders and directors but not financial statements. Annual financial statements, prepared according to generally accepted accounting principles and audited by professionally qualified auditors, should be presented at the shareholders annual meeting. Shares and other securities should not be offered for sale to the public. There may be restrictions, upon shareholders agreement, on the transfer of a private company s shares. Page 9 of 92

10 Public Companies A public company must have at least 7 shareholders, with no maximum limitations. There should not be any restrictions on the transfer of a public company s shares. If a public company s shares are traded on the Tel Aviv Stock Exchange (TASE), the company is required to: 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 Public Directors. Appoint an audit committee, comprised of at least three directors, two of whom are Public 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 through a published prospectus Make an immediate announcement of any major event B r a n c h e s Foreign companies wishing to conduct business in Israel must be registered with the Registrar of Companies and provide the Memorandum and Articles of Association, list of directors and other required information. All documents can be in either Hebrew or English P a r t n e r s h i p s The Partnership Ordinance governs the activities of partnerships. If a partnership is established for the purpose of conducting business in Israel, it can be either registered with the Registrar of Partnerships at the Ministry of Justice or remain non registered. Registration requires, among others, furnishing the Registrar of Partnerships with the partnership s name, activities, address, partners etc. Page 10 of 92

11 A partnership cannot comprise more than 20 partners. A partnership may be general or limited. A partnership does not have to file annual reports of any kind. Profit or loss should be added to the partners financial reports or income statement Au d i t a n d Ac c o u n t i n g R e q u i r e m e n t s 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 Tel-Aviv 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. Commencing 2011, IFRS for SME's has been adopted as an alternative basis of accounting for non-public companies, targeting 2015 as the year for a final decision for this basis of accounting. As of January 2015, no decision to that effect has yet been taken by the IsASB. 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 certified accountant - statutory full scope audited financial statements). Page 11 of 92

12 Doing business in Israel 2015 Ar t i c l e 3 : F I N AN C E 3. F i n a n c e 3.1 Exchange Control Sources of Finance Banking Stock Exchanges and Trading Facilities Venture Capital Companies The Law to prevent Money Laundering No assistance to money launderers No Tipping Off Voluntary Disclosure Page 12 of 92

13 3. 1. E x c h a n g e C o n t r o l s There are no exchange controls in Israel on inward or outward investment. Foreign currencies can be bought and sold freely and there are no restrictions on the maintenance of foreign currency bank accounts in Israel. There are no limitations on the repatriation of profits from Israel S o u r c e s o f F i n a n c e Banking The Israel s central bank, the Bank of Israel, acts as banker to the Government. It is responsible, inter-alia, for setting base interest rates through its Monetary Policy Committee. Overdrafts with fluctuating interest rates are the most commonly used facility for financing working capital or for funding seasonally affected business. Technically, overdrafts are repayable on demand. Banks also offer short, medium or long-term loans. The repayment terms are negotiable and the rate of interest may be fixed or variable. To obtain bank finance, the business will normally be required to provide adequate security. Security will typically be in the form of a fixed or floating charge over the business assets, as well as, in certain circumstances, personal guarantees from the owners. In addition to these traditional services banks offer various other financing arrangements through subsidiaries or affiliates. These include installment credit, leasing, factoring and invoice discounting and mezzanines finance Stock Exchanges and Trading Facilities The Tel Aviv Stock Exchange (TASE) provides a market for shares and other securities issued by public companies and government bonds. Trading in securities and raising capital from the public are regulated by the Securities Law, under which the Security Authority was established to protect the interest of investors. Page 13 of 92

14 To become and remain listed, a company has to satisfy and abide by the extensive rules established by the TASE and the Security Authority, which is independent from the Tel Aviv Stock Exchange (TASE) Venture Ca p i t a l C o m p a n i e s For businesses that are not large enough to consider Stock Exchange entry but which require equity or mezzanine finance, Venture Capital Companies can provide equity for start-ups, for development or for management buy-outs. Venture capital companies may also be a source of finance for a business that does not have sufficient security to borrow from a bank. However, they may require a higher return than a traditional bank T h e L a w t o p r e v e n t M o n e y L a u n d e r i n g Israel has joined the fight against the Money Laundering by enacting the Money Laundering Law. This Law enables Israel to take an active role in the international fight against money laundering. On the 22 October 2014, the Israeli government confirms the conclusions of the "Loker Committee" that was established in order to reduce the use of cash in the Israeli economy. The main purpose was to fight the undeclared capital ("Black Capital"), and the laundering of money in order to enable "Real Tax" collection. The benefits driven from reduction the use in case, are as follows: 1. Expanding the tax basis. 2. Reducing the competitive advantage of business which violates the law, compared to those who follow the law. 3. Truth Tax collection. 4. Implement advanced method of payments. 5. Reduce criminal activities and laundering of money. Page 14 of 92

15 The conclusions of the committee were as follows: 1. Limiting the cash transactions between individuals carrying on a business to 10,000 NIS (Instead of 20,000 NIS) 2. Limiting the cash transactions between individuals to 15,000 NIS (instead of unlimited amount). 3. Limiting the possibility to pay off checks that were transferable more than once, (up to 10,000 NIS). It was also recommended to prohibit transferring check without beneficiary's name. 4. Starting using debit cards that are credited immediately and debit cards that can be loaded No assistance to money launderers Anti Money Laundering Law imposes certain identification and reporting obligations on financial institutions, including banks, stock exchange members and money changers. These institutions are required to positively identify anyone, either a person or a corporation, requesting services such as opening of an account, change of ownership of an account, or execution of certain transactions No Tipping Off To prevent money laundering the aforementioned institutions are also required to report certain transactions to the authorities. These transactions fall into two categories: Transactions which exceeds defined amounts. Unusual transactions transactions which appear to be unusual in light of the information the institution possesses - for example, a transaction whose aim seems to be avoidance of the "size defined" reporting requirements or an account whose holder seems to be operating on behalf of someone else, etc Volunt a r y D i s c l o s u r e The Israeli Tax Authority (hereby - ITA ) released on 7 September 2014 a new Voluntary Disclosure Program (hereby - "The Program") for unreported income and assets, (which replaces the former 2005 and 2011 programs) and applies to all types of Page 15 of 92

16 unreported assets and income, whether offshore or domestic, passive income or income derived from a trade or business. The program consist two temporary programs in the following courses: 1. A procedure allowing anonymous applications (Hereby - "the Anonymous course ). 2. An expedited procedure for taxpayers with funds not exceeding 2,000,000 NIS provided that the estimated taxable income does not exceed 500,000 NIS. (Hereby - "The Expedited course ). This program is not available to taxpayers who are already subject to investigation by the ITA, even a confidential enquiry, when they apply for the program. Is also not available for funds derived from criminal activities. Israeli taxpayers can apply for the general voluntary disclosure procedure until 31 December The Anonymous and the Expedited courses are available until 6 September Taxpayers who wish to regularize their tax situation and apply for the program must file a request through their representative (lawyer, accountant or tax advisor). The application should contain all relevant information on all unreported assets (offshore or domestic) and their related income and gains, including passive income (capital gains, interest, dividends, etc.) or active income (derived from a trade or business) gained in the 10-year period preceding the application for the program. Unreported assets and their related income and gains will be assessed by the tax inspector who will calculate the principal amount of tax, late-payment interest and penalties. The main benefit of the program is the full relief from criminal liabilities relating to tax avoidance for taxpayers. Page 16 of 92

17 Ar t i c l e 4 : I N V E S T M E N T I N C E N T I V E S 4. I n v e s t m e n t I n c e n t i v e s 4.1 General Law For Encouragement of Capital Investment Overview Applicable of the Law Location The Grant Scheme The tax benefits scheme Preferred Corporation Preferred Enterprise Preferred Income Tax benefits Dividends from preferred enterprise Tourism Project The Grant Scheme Accelerated Depreciation Corporate Income Tax rates Dividends Tax benefit Scheme Tax benefits for building for rents Accelerated Depreciation Tax Rates Research and Development Support Overview The development of a novel product R&D Support for a start-up company R&D Support for Companies in Special Geographical 28 Areas Royalty "Engels" Law- for Investment in Research and Development Companies 29 Page 17 of 92

18 4. 1. G e n e r a l The state of Israel supports its 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. To attain these goals, Israel offers substantial benefits and concessions through a number of laws and regulations, as summarized below. Special emphasis is laid on hightech companies and R&D activities, as considerable importance is attached to these fields. Furthermore, numerous programs have been formed, starting from grass roots, to support the high-tech industry. 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. Additionally, to promote weak economic regions within Israel, differential benefits are granted (A, B and Central Israel) - being substantially higher in the designated priority regions (A, B) than in the center of the country. Enterprises are however eligible for benefits anywhere they are erected, provided they comply with the relevant criteria (see below). Additionally, Israel grants foreign investors and major investments increased tax benefits. Page 18 of 92

19 4. 2. L a w F o r E n c o u r a g e m e n t o f C a p i t a l I n v e s t m e n t s (See "Doing business in Israel " to learn more about the Law prior the amendment No 68) O v e r v i e w The Law for Encouragement of Capital Investments (on this chapter will be referred by "the Law") was originally introduced in 1959, in order to boost the Israeli economy by attracting local and foreign investors to contribute capital investments to the Israeli industry. The Law's main goal is to amplify the attractiveness of the Israeli economy in the international competition over local and foreign capital for investment and development. Likewise, through the set of incentives prescribed by it, the Law promotes a more geographically balanced distribution of the population across the country and strengthening of the peripheral regions. Traditionally, the law includes two main schemes of government incentives: the grant scheme which allows up to 24% government's grant on qualified investments for establishing or expending industrial enterprise at preferred areas; and the tax incentive scheme. At the end of 2010, the Knesset (the Israeli parliament) had decided on the 68 amendment of the Law, which concludes an extensive reform of the Law, which would be applied on income attributed starting January 1, 2011 (hereinafter will referred as "68 Amendment"). As studies have indicated inefficiency in the allocation of resources according to the Law's provisions, and based on the conclusions of the professional public committee appointed by the ministry of finance, government announced extensive amendments in the Law. Outline below are some of the main changes: Updating the Law's objectives in line with the changes that have taken place in the Israeli economy characteristics, placing emphasis on encouraging investments, generating added value in innovation and heightened competitiveness of Israeli industry; Allowing the Israel Investment Center flexibility to establish other support schemes besides the existing schemes, for a range of investments, focusing on Page 19 of 92

20 investments in human capital, and in line with industry characteristics at any given time; Prioritizing the peripheral regions through the grants scheme; Simplifying 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; Eliminating the distortions created through the concentration of resource allocation in the tax benefits scheme, by preventing the grant of greater tax benefits to foreign investors, and by excluding companies based on the exploitation of natural resources, including petroleum and natural gas, and other companies for which there is no room for granting incentives through tax breaks, such as state-owned companies. Customizing a dedicated tax track aimed at promoting the operation of huge companies in Israel A p p l i c a b l e o f t h e L a w The Law applies to industrial enterprises which qualify as "International Competitive Enterprise". The definition of industrial enterprise includes enterprises who own Productive activities as textiles, food, electronics, chemicals, pharmaceuticals, computer software, biotechnology, nanotechnologies, etc. The High-Tech industry, being a major growth engine of the Israeli economy, had been promoted to the Law. In accordance, the definition of productive activity had also been applied to developing of software programs and Research and Develop industrial centers located in Israel. Industrial R&D for a foreign resident will be recognized as industrial enterprise once approved by the Head of Industrial R&D Administration. The Amendment No 68 excluded companies based on the exploitation of natural resources as petroleum and natural gas from obtaining incentives under the Law. Stateowned companies had also been excluded from obtaining benefits under the Law. Industrial enterprise could be approved either by the investment center or by the Israeli Tax Authority. In order to meet the International Competitive Enterprise rule, 25% of the enterprise's revenues should be driven from exporting to large international markets. Page 20 of 92

21 Location The government grants scheme is affected by the location of the company's activities. Several regions in Israel have been declared National Priority Regions (Priority Area A), among them: The Galilee Jordan Valley The Negev Jerusalem (for hi-tech enterprises) Areas which do not include in the Priority Area A are considered under the Law "Other Areas" The Grant Scheme An industrial enterprise located in "Priority Area A" fulfilling the terms of the Law, may be eligible for grants to be calculated as percentage of the approved investment. The grants may be 20% of the actual investments of the enterprise on the follow assets: Buildings, machinery and other equipments (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. The grant scheme would only be applicable for enterprises located in Priority Area A. Enterprises from other areas are not qualify for the grant scheme, but can be entitle for tax benefits under the Law. Under the amended law, applies for income accrued starting 2011, enterprises complying with the requirements of the law may benefit simultaneously from both the tax benefits (lower corporate tax rate as described earlier) as well as applicable nonrefundable grants (only relevant for Area A). 1 Before the Amendment No 68 to the Law, the country's regions were divided for 3 zones: Priority Area A, Priority Area B and Other Areas. According to the amendment, Area B was cancelled. However, for the purpose of incentives for Tourism Project (see below) all three areas are relevant. Page 21 of 92

22 The T ax B e n e f i t s S cheme The Law prior to the Amendment No 68 determined differed tax exemption for a "Beneficiary Enterprise". However, the exemption was concluded only for the growth in the enterprise's revenue which was attributed to the extension of the plant 2. The tax exemption was concluded based on the location of the enterprise 3. Under the amended Law, all prior tax benefits schemes had been canceled. The "Beneficiary Enterprise" was replaced with "Preferred Enterprise", as defined below. Instead of differed tax exemption schemes, reduced flat tax scheme had been introduced. Enterprises located in Priority Area A would be eligible for reduced corporate tax of 9% on all preferred income. Corporate tax rate on other regions would be 16% " P r e f e r r e d C o r p o r a t i o n " Preferred Corporation is a legal entity which conducts all the following: An Israeli company, which was incorporated under the law of Israel, and the business of which is controlled and managed within Israel. The company may not be transparent entity for tax purpose, as a family company, a transparent company or a Kibbutz. Notwithstanding the above, registered partnerships may be consider as Preferred Corporation provided all its partners are Israeli companies which fulfill the above mentioned. The corporation owns a Preferred Enterprise (as defined below) The company must maintain admissible books and records and file any reports required under Israeli Tax Law. The company and its officers must be free of previous convictions on tax fraud charges during the 10 years proceeding the benefits periods. It should be noted that companies own factories and quarries for producing natural resources (minerals, gas and oil), as well as governmental corporation, will be excluded from the definition of "Preferred Corporation", and not be eligible for benefits under the Law. 2 It is possible to be eligible for the tax exemption on all the enterprise's taxable income in case the enterprise had fulfill the requirements of the Law from the first year income had been accrued (mainly for R&D centers). 3 Under the Law before the 68 Amendment, Priority Area A was entitled for 10 years exemption. Priority Area B 6 years. Other Areas 2 years. Page 22 of 92

23 " P r e f e r r e d E n t e r p r i s e " As mentioned, the tax benefits scheme would apply only on Preferred Income (as defined below) of a Preferred Enterprise. According to the law, Preferred Enterprise would be an industrial enterprise fulfilling the following terms: The enterprise is competitive within the international market; and The enterprise contributes to the Gross Domestic Product of Israel. An enterprise will be deemed to have fulfilled this condition if it is one of the following: Engaged mainly in biotechnology or nanotechnology, and obtained an approval of the Head of Industrial R&D Administration; At least 25% of its Preferred Income of the enterprise which was produced from direct exporting to international markets; or Engage mainly on the field of renewal energy " P r e f e r r e d I n c o m e " The Preferred Income would be determined as the gross income of a Preferred Enterprise (not including discounts) which was produced or which accrued during the course of business activities of the enterprise in Israel, as follow: Income from products manufactured in Israel, including components manufactured by subcontractors. Income derived from natural resources (Gas, Mineral, Oil) would not be calculated as part of the Preferred Income. Income from the sale of semiconductors manufactured by independent subcontractors, as long as the IP belongs to the Preferred Enterprise. Income derived from royalties for the use, or the right to use, a patent or knowhow which was developed in the Preferred Enterprise. Income derived from industrial research and development made for foreign resident, as long as an approval of the head of the R&D center had been provided T a x b e n e f i t s Preferred Enterprise would be eligible for tax benefits for each tax year on which it has fulfilled the 25% export condition. Page 23 of 92

24 Corporate Income Tax of a Preferred Enterprise would be 9% in 2015 if the enterprise is located on "Priority Area A", and 16% if it is located on other regions. However, a transitory provision for the years 2011 to 2014 determine the following tax rate as described in the following table (ordinary tax rate is being shown for convenience) : Tax Year Priority Area A Other Areas Ordinary Tax Rate % 15% 24% % 15% 25% % 12.5% 25% % 16% 26.5% % 16% 26.5% D i v i d e n d s f r o m P r e f e r r e d E n t e r p r i s e Dividend distributed from the preferred income would be taxed at 20% (Dividend distributed to Israeli corporation is exempt from taxes. Dividend distributed from exempt income would be taxed also at corporate tax rate (26.5% at 2015) T o u r i s m P r o j e c t s The law for encouragement of capital investments also applies on tourism enterprise. Nonetheless, the incentives for tourism projects remained as prior to the 68 amendment. "Tourism Enterprise" is defined as tourism facility which includes at least 11 hotel rooms, and provides sleeping arrangements service and additional services as catering, recreation and leisure. Unique Tourist attractions have also been included as Tourist Enterprise Grant Scheme Tourist Enterprise which is located in Priority Area A will be eligible for non refundable grant of up to 20% from its approved investments. Tourist Enterprise which is located in the Negev Area will be entitled for 30% grants. Page 24 of 92

25 Tourist Enterprise which is located in Priority Area B will be eligible for non refundable grant of up to 10% from approved investments. In addition to the grants, Tourism Enterprise would be eligible for the following tax benefits A c c e l e r a t e d d e p r e c i a t i o n Approved tourist enterprise may charge, at its request, accelerated depreciation on its assets (including buildings) used for the purpose of producing the approved income, as followed: machinery and equipments 200% of the ordinary percentages that could be charged; Buildings 400% of the ordinary percentages that could be charged. When proven that machinery and equipments had been used on double or more shifts or been used in extreme conditions, Approved Enterprises may charge 250% of the ordinary percentages that could be charged. Grants received for expenses made for land development would not be taxed, but, for the purpose of depreciation, the sum of the grant would be discharged from the cost of the building C o r p o r a t e i n c o m e t a x r a t e s Approved tourist enterprise located in Priority Area A would be exempt from tax (deferred) for the first two years starting the first year the enterprise realized taxable income. For the next 5 year the enterprise would be tax on the ordinary corporate tax rate (26.5% on 2015). Had the enterprise's shareholders are foreign residents the corporate tax rate would be as followed: When more than 49% but less than 74% of the enterprise's shareholders are foreign residents the corporate tax rate would not exceed 20%. When more than 74% but less than 90% of the enterprise's shareholders are foreign residents the corporate tax rate would not exceed 15%. When more than 90% of the enterprise's shareholders are foreign residents the corporate tax rate would not exceed 10%. Page 25 of 92

26 The two years tax exemption (deferred) would only be available for enterprise located in Priority Area A D i v i d e n d s Tourism Enterprise which distributes dividend from its exempted income would be charged on corporate tax regarding the exempted income. Dividend distributed from the approved income would be limited to 15% tax rate as long as the scheme approved before January 1, 2014 (unless relevant double tax convention is in force) T ax B e n e f i t S c h e m e Tourism Enterprise would be eligible for extensive tax benefits if it prefers the tax benefit scheme instead of the grant scheme. Tourist Enterprise not located on Priority Area A could only be eligible for the tax benefit scheme and not be eligible for the grant scheme. The tax benefits under this scheme are as followed: Tourist Enterprise located in Priority Area A would be exempt from tax (deferred) for 10 years starting the "Chosen Year". The enterprise may elect to be charged with flat reduced tax of 11.5% instead of the deferred exemption ("Ireland Scheme"). Tourist Enterprise located in Priority Area B would be exempt from tax (deferred) for 6 years starting the "Chosen Year". Tourist Enterprise located in Other Areas would be exempt from tax (deferred) for 2 years starting the "Chosen Year". Tourism Enterprise which distributes dividend from its exempted income would be charged on corporate tax regarding the exempted income. Dividend distributed from the approved income from January 1, 2014, would be limited to 20% tax rate as long as the scheme was approved starting from January 1, (Unless relevant double tax convention is in force). Page 26 of 92

27 4. 4. T a x b e n e f i t s f o r b u i l d i n g f o r r e n t s In order to encourage building apartments for rent the law for encouragement of capital investments determine several tax incentives for "building for rent". "Building for rent" includes at least 16 apartments used for living, and at least 70% of the approved building is being rented for living A c c e l e r a t e d D e p r e c i a t i o n The deductible depreciation rate allowed is 20% as long as the building uses as a "building for rent". (10 times the ordinary percentages charged for apartments) Tax rates The rate of the taxable income from rent or disposal of approved apartments would be as follow: The owner of the approved building is an Israeli Company 11%. The owner of the approved building is an Israeli Company whose shareholders are mainly foreign residents 18% or less 4. The owner of the approved building is an Israeli individual 20%. 4 For the tax rate regarding Israeli approved company whose shareholders are foreign residents see in chapter 4.3 regarding Tourism project. Page 27 of 92

28 4. 5. R e s e a r c h a n d D e v e l o p m e n t S u p p o r t O v e r v i e w The Office of the Chief Scientist (OCS) of the Ministry of Industry and Trade is responsible for implementing government policy regarding the support and encouragement of industrial research and development in Israel. The variety of support programs provided by the OCS, have played a major role in enabling Israel to become one of the most important centers for high-tech entrepreneurship outside of the United-States T h e d e v e l o p m e n t o f a n o v e l p r o d u c t A single or multi-year program that will provide know-how, processes or methods for the manufacture of a new product or the major improvement in an existing one or a new process or a major improvement in an existing process. The product must have a 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 b y G r a n t s f o r R&D of S t a r t - U p C o m p a n y A start-up company is defined as one whose R&D program is its first and only activity and where 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 for up to two years. Any approved R&D expenditure above $250,000 may receive a conditional grant of 50%. The R&D support includes beta-site testing as well as patent registration R&D Support for companies i n special geographical a reas Any approved R&D program-taking place in Development Area A is entitled to a conditional grant of 60% of the approved budget. Page 28 of 92

29 In any area delineated as Front Line the conditional grant amounts to 70-75% of the approved budget with the higher figure for companies that also manufacture in that area R o y a l t y Any income derive from an R&D program that has enjoyed government support is liable for the payment of royalties to the OCS. The royalty payments are based upon a percentage of sales up to the repayment of the grant " E ngels " L a w - for I n v e s t m e n t i n R e s e a r c h a n d D e v e l o p m e n t C o m p a n i e s Investments in Israelis Research and Development companies (hereby:"r&d companies"), that are in the first stages of research and development activity (the "seed stage") represent a very high risk investment for the investors. These companies which represent a significant part of Israeli industry, have difficulties finding investors, and have difficulties finding alternative funding solution. In order to increase the funding of these companies, Israeli equity investors in these companies are entitled to expense their investment. The Engel Law establishes that Israeli individuals that purchase stocks of qualified companies will be eligible to expense the investment. The law is in effect for eligible investments made beginning in 2011 until 2015 and the maximum amount of the benefit is 5 million NIS for an individual investor in qualified Company. The law establishes that the eligible investments must meet three criteria in clause 20A: 1. Eligible investment 2. Period of benefit 3. Target company Eligible investment An eligible investment is an individual investment in a target company, in any tax year, in which the stock of a target company has been allocated in that year. The expensing of the eligible investment will be allowed only for the investment of the individual in an eligible company and not for funds that were transferred by a corporation. These criteria is based on 2 conditions: Page 29 of 92

30 1. the payment for the investment was transferred to the company 2. The stock purchase by the investor in the target company, relates to the same year of which the investment took place. Period of benefit The benefit period is a period of three tax years beginning in the tax year in which the fund for the eligible investments, were paid. The exact date during the tax year in which the funds were transferred, is not relevant. The benefit period relates to a specific investor with regards to a specific eligible investment in the company. In case there are number of investors, each one of them will have a personal investments period. Target Company The criteria for recognition as a Target Company are: 1. An Israeli company. 2. The Target Company has received approval by the Israeli Office of the Chief Scientist of the Ministry of Industry and Trade for it's in Research and Development activities. 3. The Target Company shares are not registered for trade on Stock Exchange. 4. At least 75% of the investment in the Target Company is utilized to fund its research and development activities. 5. At least 75% of the research and development expenses of the Target Company during the benefit period were spent in Israel. 6. In the first year of investment and in the succeeding year, the revenues of the Target Company were not in excess of 50% of its research and development costs. 7. The research and development cost incurred by the target Company were spent for the promotion or development of its subsidiary. 8. The research and development costs of the Target Company comprise at least 70% of its company's costs. Page 30 of 92

31 Ar t i c l e 5 : E M P L O Y M E N T R E G U L AT I O N S AN D S O C I AL S E C U R I T Y C O N T R I B U T I O N S 5. E m p l o y m e n t R e g u l a t i o n s a n d S o c i a l S e c u r i t y C o n t r i b u t i o n s 5.1 Work Permits Trade Unions and Worker Councils Labor Related Costs National Insurance (Social Security) Paid Vacation Severance Pay and Pension Funds Sick Leave Education Fund Reserve Military Duty 33 Page 31 of 92

32 5. 1. W o r k P e r m i t s In order for non-resident to work in Israel, a work permit or a status other than tourist is required. Under the Law of Return, immigrants are entitled to permanent residence status or an A-1 visa, which entitles the immigrant to a temporary resident status. It is a prerequisite for other non-residents who wish to work in Israel to apply for a work permit (usually B-1 visa). In order to obtain a work permit, Israeli employers must apply to the Ministry of Labor, and where applicable, also to the Investment Center T r a d e U n i o n s a n d W o r k e r C o u n c i l s There is no legal requirement for employers to recognize any trade union unless a majority of the work force votes in favor of such recognition. Agreements between employers and trade unions over pay and conditions are not binding by law and unions may not take industrial action without first securing a majority vote in a secret ballot of their members. There is no legal requirement for employees to be represented on the board of directors of companies L a b o r R e l a t e d C o s t s The Israeli employees' labor and social security costs include the following: National Insurance (Social S e c u r i t y ) Employees pay up to 12% and employers 6.75% for a total of 18.75% of employees salaries monthly. Cover includes unemployment insurance, maternity benefits, work injury, child allowances, old age pensions, medical care costs and reserve military duty compensation Paid Vacation Employees are entitled to yearly paid vacations of from 2 to 4 weeks depending on length of employment. They are also entitled to a recreational allowance based on length of service. Page 32 of 92

33 S e v e r a n c e P a y a n d P e n s i o n F u n d s Employees are entitled to severance pay on dismissal or reaching retirement age (67 for men and 64 for women) but not on voluntary resignation. However some employers are required to pay severance pay on resignation under terms of specific labor agreements. Severance pay amounts to one month s salary for every year of employment based on the last month s salary received. Many employers provide for this by monthly payments to a provident fund. In addition, most employers are required by labor agreements to make monthly payments to pension funds, at the rate of 6% of the average salary published by Social Insurance Authority, for employees pension on retirement Sick Leave Employees are entitled to payment of sick leave as follows: The 1 st day 0% The 2 nd and 3 rd day 50% The 4 th onwards- 100% Education Fund Some employers elect to make payment to recognized funds for the ongoing education of senior and academic employees by monthly payments, at the rate of % - the employer and 2.5% the employee, from the employees salaries, to a provident fund R e s e r v e M i l i t a r y D u t y It is customary, though not required by law, that employers pay the difference between compensation received by employees for periods of reserve duty from the National Insurance Institute and the regular salary they would otherwise have received. Page 33 of 92

34 Ar t i c l e 6 : T AX AT I O N 6. T a x a t i o n 6.1 News and Updates Income Tax Overview Corporations Residence Tax Rates Special entities Family Company / Transparent 38 Company Land Company Partnerships Controlled Foreign Occupational 38 Company Controlled foreign corporation (CFC) Dividends Received by a Corporation Domiciled 40 in Israel Individuals Residence Tax rates Special Tax Rates for Individuals 43 A Rental 43 B Rental derived from Real estate 43 Located outside Israel C Interest 43 D Dividend 43 E Gambling Capital Gains Tax General Tax Rates Benefits And Exemptions Tax incentive for foreign residents Deductions for Expatriate Employees Benefits to New Immigrants and Returning 46 Residents General Definitions The benefits Employee Stocks/Options Plan Losses Administration Filing Tax Return Collection of Taxes Withholding Taxes Advance Tax Payments Balance of tax 49 Page 34 of 92

35 6.8 International Taxation Double Taxation Relief Transfer Pricing Transfer Pricing Regulations Setting 50 an Arm Length Price Reporting Requirements and 51 Documentation Coming Into Effect and Transitional 51 Regulations Taxation of Trusts Participation Exemption for Israeli Holding 53 Company Overview Definitions Dividends distributed by the holding 54 company 6.9 Value Added Tax (VAT) Other Taxes Custom Duties Purchase Tax Stamp Tax Estate Tax Gifts Real Estate Taxes Acquisition Tax Betterment Levy Land Appreciation Tax Sales Tax Municipal tax 58 Page 35 of 92