Foreign Company Registration Options in Israel
Foreign companies wishing to setup a presence in Israel can choose to register a Branch Office, Subsidiary Company, or a Representative Office. The registration must be carried out by a professional law firm in Israel.
This guide provides an overview for each of the setup options for foreign companies in Israel. The specific option that best suits the needs of a foreign company will depend on the company’s business plan and strategic goals.
Option 1: Subsidiary Company
A subsidiary company is a locally incorporated private limited company whose majority shareholder is another local or foreign company. Israel allows 100% foreign ownership in companies. Therefore a foreign company may incorporate a local limited liability company in Israel (ie subsidiary company) and own 100% of the shareholding.
A Israel subsidiary is the most preferred registration option for small to mid-size foreign businesses interested in establishing their presence in Israel. A properly structured local subsidiary company is an excellent tax efficient corporate body. A Israel subsidiary company is considered a separate entity from the foreign company even if the foreign company is the only shareholder. The liabilities of the subsidiary company are not extended to the parent company.
The name for the subsidiary can be different from that of the parent company and is subject to approval by the Registrar of Companies. The Israel Companies Law of 1999 requires the appointment of one or more directors. The Companies Law does not require an Israeli Director, however, in order to open a file for the Company at the VAT authorities, at least one Representative must be an Israeli resident (citizen, permanent resident, or employment pass holder) person. An Israeli subsidiary must maintain a registered office in Israel and keep its statutory documents in that office. For taxation purposes, the subsidiary may be treated as a Israel resident company and as such eligible for tax exemptions and incentives available to local companies.
Option 2: Branch Office
As per Article 346(a) of the Israeli Companies Law 1999:
346(a) A foreign company shall not keep a place of business in Israel, and in particular shall not maintain an office for the transfer of shares or for the registration of shares, unless registered as a foreign company under the provisions of this section and unless it pays the registration and publication fees prescribed by the Minister under this section.
A Israel branch office like a subsidiary is a registered legal entity however unlike a subsidiary, a branch office is treated as an extension of the foreign company. This is an important point since it means that the foreign company’s head office bears the ultimate responsibility for any liabilities arising due to the acts of commission or omission of the Israel Branch Office. From a taxation point of view, a branch office is generally considered a non-resident entity and therefore not eligible for the tax exemptions and incentives available to local companies in Israel. Consequently, setting up a branch office is a less attractive option for small to mid-size businesses.
The name of the Israel branch office must be the same as that of the head office and must be approved first before branch office registration. The company registrar generally approves the proposed name unless a name is identical to an existing company name.
Israel Companies Law 1999 requires that a branch office appoint 1 agent who is ordinarily resident in Israel to accept services of process and notices. A branch office must have a registered office address in Israel.
An Israeli branch office is allowed to conduct any type of business activity that falls within the scope of its parent company and can repatriate its earnings and capital. The portion of the income of the branch office, which is derived from or attributable to the operations carried out outside Israel, will not be subject to taxes. Only the earnings derived from its operations in Israel will be subject to the prevailing local corporate tax rates.
Option 3: Representative Office
Foreign companies that are only interested in exploring the market or managing the company affairs without conducting any business activity of profit yielding nature, can setup a representative office in Israel. A representative office is a temporary setup without any legal persona. Therefore it cannot enter into any contract, engage in trading directly or on behalf of the foreign company, lease warehouse, raise invoices, open letter of credit, etc. Representative office in Israel can only undertake market research or feasibility studies on behalf of its parent company.
The foreign company bears implicit liability for the activities of the representative office in Israel. The representative office may be staffed by a representative from the foreign company’s head office or may hire a local representative who can engage a small number of local support staff.
No need to register a representative office.
Which Option to Choose?
A representative office is a short term arrangement that is advisable when a foreign company wants to gather market intelligence or coordinate activities without any profiteering motive. Since this setup does not earn any revenue, a representative office acts as a cost centre to the parent company. Foreign companies that are keen on studying the Israel business environment before committing investments or those who have considerable non-core activities to be managed should set up a representative office. In general, a representative office cannot continue its operations beyond a short period and must upgrade itself to a branch office or subsidiary.
A branch office affects unlimited liabilities for the parent foreign company. The branch office is required to submit its own audited accounts as well as that of its head office, which many foreign companies may not be comfortable with. The branch office wields a lesser commitment and is deemed to lack any long term vision. Thus securing investment and incentives will be relatively difficult. Tax considerations play a major role in deciding the form of business that is appropriate. A branch office, though registered with Company Registrar, is still treated as a foreign entity because the control and management is exercised outside Israel. Therefore a foreign company’s Israel branch will be deemed a non-resident company for tax purposes. As a non-resident entity, some of the tax exemptions available to resident companies such as subsidiary company will not be available to a branch office.
A subsidiary company is rendered a separate identity and is treated as a local Israeli company. It brings several benefits, the foremost being the limitation of liability of the foreign company in Israel. The foreign company and its assets cannot be held for the debts and liabilities of the subsidiary. Raising funds locally or availing government incentives are easier. A subsidiary company will generally enjoy a resident status and can avail the benefits of several favorable tax treaties that Israel has concluded.
Next Topic: Read side-by-side comparison of the three entity types at Israel Subsidiary vs Branch Office vs Representative Office