In order to start a business in Israel there exist multiple possibilities depending on your circumstances. We will compare hereunder two common alternatives that may be relevant for foreign companies looking to operate in Israel.
Firstly, the foreign company could incorporate a subsidiary in Israel by establishing a new limited liability company with the Israeli company Registrar (called Rasham Hachaverot – רשם החברות). The legal form of the company is known in Hebrew as a “Chevra Be’eravon Mugbal” (חברה בערבון מוגבל), with the acronym Ba”m – בע”מ, added to the name of the company.
This is broadly similar to a Limited Company (Ltd.) in the United Kingdom, the SARL – Société à Responsabilité Limitée in France and other francophone countries, the Besloten Vennootschap (BV) in the Netherlands or Belgium, or the Gesellschaft mit beschränkter Haftung (GmbH) in Germany or Austria.
The main advantage of incorporating a company is the limited liability it confers, i.e. the assets of the foreign company will normally be shielded from any claims against the subsidiary in Israel. It would also make it easier to sell the Israeli subsidiary to potential buyers should the foreign company wish to do so.
The main disadvantage of incorporating a company in Israel is the two-tiered taxation that would be applied if any profits are repatriated to the foreign company. This means that the Israeli subsidiary would first be subject to Israeli corporate tax and then to a withholding tax for the distribution of dividends.
For smaller companies it may be relevant to note that the Registrar fees are higher for incorporated companies and that there would be more paperwork and expenses associated with closing an incorporated subsidiary as opposed to merely closing a branch.
Secondly, the foreign company could open an Israeli branch without formally incorporating an entity in Israel. As a result, the foreign company would be operating in Israel without intermediary and in its own name.
The advantages and disadvantages for a branch are the mirror image of those outlined above for the incorporated subsidiary. This means that on the one hand the tax burden could potentially be lighter. In effect, the branch would only be subject to corporate taxes in Israel, but no further withholding tax on the distribution of dividends. On the other hand, any claim against the Israeli branch would be normally directed against the foreign company, thereby exposing the latter to claims originating in the Israeli company.
In addition to the considerations mentioned above, there are generally other considerations to be taken into account. These could be reputational ones, the ability to enter into joint ventures etc. Therefore, every case of a foreign company looking to start operations in Israel needs to be examined separately.
