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 |
