Israel - Market Entry and Business Opportunities

Israel is a diverse Middle Eastern nation with a population of around 9.3 million as of 2021. The capital city is Jerusalem, and the official languages are Hebrew and Arabic, with English, Russian, and other immigrant languages widely spoken. The population includes a majority of Jewish communities, alongside Arab minorities such as Palestinian Arabs, and other groups like Druze and Bedouins. The country's multicultural makeup is enriched by various immigrant communities like Ethiopians and Russians. Israel's land area covers about 20,770 sq. km. and is bordered by the Mediterranean Sea, Lebanon, Syria, Jordan, and Egypt. Its currency is the Israeli New Shekel (NIS or ILS). The population growth rate in 2021 was 1.6%.

Economic Overview

The economic outlook for Israel in 2023 and 2024 shows projected GDP growth of 2.9% and 3.3% respectively, yet challenges loom due to rising inflation impacting private consumption and export constraints. Interest rate hikes could slow investment expansion. Despite a moderate growth trend, global uncertainties and internal tensions pose downside risks. Maintaining strict monetary conditions to control inflation and targeted fiscal policies to counter rising living costs are recommended. Labour market and educational reforms are needed to address demographic and disparity challenges. Q1 2023 saw GDP growth at 2.5%, with private consumption contracting, though private investment remained resilient. Housing market deceleration and reduced capital inflow to high-tech firms were observed. Shekel depreciation and lagging stock market performance were noted, while the labour market stayed relatively balanced, with high-tech job vacancies declining but still surpassing pre-pandemic levels. Inflation exceeded the central bank's target at 5%, led by housing and service sectors, with inflation expectations for the upcoming year around 3%.

Market Overview

Israel's economy thrives on export-oriented high-tech industries and innovation, supported by technology and diamond exports. Imports encompass crude oil, grains, machinery, and raw materials. Services, including R&D and IT, are vital for foreign trade. GDP growth was strong (3.3% avg.) until a 2020 pandemic-driven recession. Despite challenges, Israel's growth, fuelled by exports and investments, is expected to rebound with a projected 6.1% real GDP growth in 2022 according to IMF. The Leviathan gas field's operational impact is foreseen to narrow the trade deficit, bolster trade balance, and enhance economic stability.

Bilateral Relations between India-Israel

• On May 9, 2023, Israel's Foreign Minister Eli Cohen held discussions with Indian Prime Minister Narendra Modi to explore avenues for strengthening the collaborative efforts between the two nations.
• A Memorandum of Understanding (MoU) has been formally established between Israel's Start-Up Nation Central and India's International Centre for Entrepreneurship and Technology (Create). This agreement aims to inaugurate a bilateral initiative aimed at expediting collaboration in innovation and technology between the two entities.
• In a significant milestone, Prime Minister Modi embarked on a historic visit to Israel from July 4 to July 6, 2017, marking the first-ever visit by an Indian Prime Minister to the nation. This visit led to the elevation of the bilateral relationship to a strategic partnership.
• On December 21, 2020, India and Israel entered into a health cooperation agreement encompassing the fields of health and medicine.
• Over the past three decades, India and Israel have forged numerous agreements aimed at enhancing their economic collaboration. These agreements encompass diverse areas, ranging from investment encouragement and protection to space cooperation. Through joint efforts, Israel and India are collaboratively advancing the interests of both nations.

Taxation

• Individual Income Tax: Progressive rates from 10% to 50% in 2021.
  - Up to 63,720 ILS: 10%
  - 63,721 - 150,000 ILS: 14%
  - 150,001 - 240,000 ILS: 20%
  - 240,001 - 540,000 ILS: 31%
  - Over 540,000 ILS: 50%
• Corporate Income Tax: Standard rate is 23%, with incentives.
  - Reduced rate of 9% for certain enterprises.
  - Gradual reduction for eligible start-ups.
• Value Added Tax (VAT): Standard rate of 17%.
  - Essential goods/services may have 0% or 10% rate.
• Capital Gains Tax: Rates vary by asset and ownership duration.
  - 25% for individuals on securities/property.
  - Corporations: 23%.
• Social Security Contributions: 2021 rates around 13.33% (employees) and 7.5% (employers).
• Dividend Tax: Individuals - 25%, reduced per treaties/exemptions.
• Real Estate Tax: Municipal tax (Arnona) based on value and location.
  - Betterment levy for increased property value due to development.
• Tax Treaties: Over 50 countries' treaties to prevent double taxation.
• Tax Incentives: Reduced corporate tax for eligible start-ups.
  - Research and development can qualify for tax benefits.
• Reporting and Compliance: Mandatory annual tax return filing for individuals and businesses, non-compliance leads to penalties.

Subsidies and Incentives Offered by Israel

Israel offers a range of subsidies and incentives to boost economic growth, attract investment, and foster innovation. Key measures include:

• Investment Promotion:
  - Grants, tax incentives, and subsidies for both domestic and foreign investors.
  - Capital investment grants covering up to 24% of approved investments in certain sectors.
• Research and Development (R&D) Grants:
  - Innovation Authority grants for innovative R&D projects.
  - Early-stage grants covering up to 50% of approved R&D expenses for start-ups.
• Innovation Authority Incentives:
  - R&D financing programs with grants, low-interest loans, and convertible loans.
  - Funding for high-tech companies, up to 50% of approved R&D expenses.
• Preferential Tax Rates:
  - Reduced corporate tax rates for enterprises in development areas.
• Customs Duty and VAT Exemptions:
  - Import tax benefits, including exemptions from customs duties and VAT on equipment and machinery.
• International Collaboration Programs:
  - BIRD Foundation grants for joint U.S.-Israel R&D projects.
  - Magnet Program supporting collaborations between Israeli and international companies.
• Incubators and Accelerators:
  - Incubator support providing funding, mentoring, and workspace for start-ups.
• Technology Incubators:
  - Funding, business development assistance, and infrastructure support.
• Investment Funds:
  - Israel Growth Partners Fund attracting foreign investment and supporting local expansion.
• Tourism and Export Promotion Incentives:
  - Grants for marketing and participation in international trade events.
• Employee Stock Option Plans (ESOPs):
  - Share options for employees in start-ups and high-tech companies.
• Green Technology Incentives:
  - Grants for green and sustainable technology projects.

Financing Business in Israel

Israel offers diverse financing options for businesses, supporting growth and innovation:

• Equity Funding: Venture capital firms invest in tech start-ups (e.g., Waze, Mobileye), while angel investors provide capital and mentorship (e.g., Naama Neeman).
• Debt Financing: Banks provide loans for working capital (e.g., Strauss Group), and non-bank lenders offer alternatives (e.g., Fundbox).
• Government Support: Grants (e.g., ReWalk Robotics), loan guarantees (e.g., Netafim), and incentives promote R&D and industries.
• Crowdfunding: Platforms like OurCrowd aid fundraising (e.g., Beyond Meat).
• Stock Market Listings: TASE listing provides access to public capital (e.g., Teva Pharmaceutical Industries).
• Accelerators and Incubators*: Programs aid start-ups (e.g., MassChallenge Israel for Somatix).
• Corporate Partnerships: Companies collaborate for capital and expertise (e.g., OrCam with Intel).
• Grants and Competitions: Start-ups win grants (e.g., MeMed) and compete globally.
• Peer-to-Peer Lending: Blender connects businesses with individual lenders.
• Export Financing: Support for global expansion (e.g., Israel-Asia Chamber of Commerce).

Top 10 Companies in Israel – 2022

Rank	Company	Industry	Revenue in 2022 (USD)
1	Teva Pharmaceutical Industries	Pharmaceuticals	$ 14.92 B
2	ZIM Integrated Shipping Services	Transportation	$ 12.56 B
3	Israeli Chemicals	Chemicals	$ 9.58 B
4	Elbit Systems	Aerospace	$ 5.55 B
5	Bank Hapoalim	Financial Services	$ 5.49 B
6	Bank Leumi	Financial Services	$ 5.21 B
7	Shufersal	Retail	$ 4.27 B
8	Mizrahi Tefahot	Financial Services	$ 3.91 B
9	Israel Discount Bank	Financial Services	$ 3.86 B
10	Harel Group	Insurance	$ 3.70 B

Most Popular E-Commerce Companies in Israel – 2022

RANK	COMPANY	Headquarter
1	Shufersal	Israel
2	Next	Israel
3	Shein	Singapore , China
4	KSP Express	Israel
5	Super Pharm	Israel

Top 5 Start-Ups in Israel – 2022

RANK	COMPANY	INDUSTRY	FOUNDED IN
1	Jolt	Ed-tech	2015
2	Beewise	Agri-tech	2018
3	Sentra	Cyber Security	2021
4	Bio Beat	Medical Devices	2016
5	Piiano	Cyber Security	2021

Business Clusters in Israel

Israel is home to several thriving business clusters, or economic hubs, that specialize in various industries and foster innovation and collaboration. These clusters contribute significantly to Israel's economy and technological advancements. Here are some notable business clusters in Israel:

• Silicon Wadi (Technology and Innovation): Israel's "Silicon Valley" centred in Tel Aviv area, known for start-ups, tech companies, research institutions, and expertise in cybersecurity, AI, software, and fintech.
• Haifa Hi-Tech Park (Technology and Engineering): Haifa-based cluster focused on tech, engineering, with major firms like Intel and Microsoft, excelling in semiconductor, nanotech, and marine tech.
• Medical and Biotechnology Park (Healthcare and Life Sciences): Jerusalem area hub for medical devices, biotech, healthcare innovations, housing research institutions, hospitals, and start-ups.
• Beer Sheva Cyber Park (Cybersecurity): Located in Beer Sheva, specializes in cybersecurity and houses the Cybersecurity Centre of Excellence.
• Diamond Exchange District (Diamond Industry): Global diamond hub in Ramat Gan, encompassing manufacturers, traders, and jewellers.
• Agriculture and AgriTech Centres: Negev and Arava regions excel in desert agriculture, focusing on agri-tech innovations, water management, and precision farming.
• Cleantech and Renewable Energy: Clusters dedicated to renewable energy, clean tech, and environmental innovations, contributing to solar energy, water purification, and waste management.
• Animation and Media: Hub for animation, film, and content production.
• Fashion and Design: Tel Aviv centre for fashion tech start-ups, designers, and fashion events.

How to Set Up a Business in Israel?

• Choose a Unique Name: Select an original company name in Hebrew and English.
• Meet Eligibility Criteria: Fulfil requirements, appoint directors and shareholders, provide physical address, and submit necessary documents including passport copies for non-residents.
• File Application and Documents: Apply online, submitting required documents for review.
• Certificate of Incorporation: Upon approval, receive a certificate of incorporation and verification stamp.
• Foreign Company Registration: Foreign companies can establish a branch or representative office using a similar process.
• Post-Registration Compliance:
  - Pay Corporate Tax
  - Hold Annual General Meeting
  - File Annual Tax Returns
  - Complete Business Registrations
  - Conduct Annual Board Meetings
  - File Annual Reports
  - Report Ongoing Changes
  - Appoint Corporate Secretary

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Best Locations to Set Up Business in Israel

Israel offers several attractive locations for setting up businesses, each with its own unique advantages. Some of the best locations to consider for establishing a business in Israel are:

Of course, here are the summarized points without bold formatting:

• Tel Aviv: Hub for technology start-ups with a dynamic ecosystem and research institutions.
• Herzliya: Tech centre near Tel Aviv, known for cybersecurity, software, and biotech.
• Haifa: Port city with a growing tech sector, home to Technion university and tech companies.
• Jerusalem: Capital with government institutions, research centres, and diverse sectors.
• Be'er Sheva: Tech resurgence with cybersecurity focus, centred around Gav Yam Negev Park.
• Raanana: Business-friendly city near Tel Aviv, attracting tech and software companies.
• Petah Tikva: Established industrial hub, especially in healthcare and pharmaceuticals.
• Ashdod: Strategic location for logistics, shipping, and manufacturing.
• Netanya: Emerging tech hub, especially in biotech and medical devices.
• Kfar Saba: Growing tech sector, focused on software development and IT services.
• Ness Ziona: Biotech centre with research institutions and biotech companies.
• Ashkelon: Diverse business environment, from manufacturing to start-ups.
• Eilat: Tourism-centred city, ideal for hospitality, tourism, and entertainment businesses.
• Dimona: Known for clean energy, innovation, and sustainable development efforts.
• Modi'in: Strategic location between Tel Aviv and Jerusalem, growing in residential and commercial development.

Visa and Immigration

• B/1 Work Visa: For job offers, allows legal work and income, based on employment contract validity.
• A/1 Temporary Resident Visa: Extended stay, potential for permanent residency, suitable for investors and businesspersons.
• A/2 Student Visa (with Work Rights): Students at recognized institutions, limited part-time work during studies and full-time during breaks.
• H/1 Foreign Expert Visa: Specialists in fields like technology and academia, contributes to Israel's advancement.
• B/2 Tourist Visa (with Work Rights): Primarily for tourism, may allow limited work during short-term business activities.
• A/4 Spousal Visa: For accompanying family members of visa holders, offers limited work rights.
• B/5 Investor Visa: Significant investment in businesses, comprehensive business plan required.
• Start-Up Visa: Entrepreneurs/founders of start-ups, focus on innovation and contributing to Israel's start-up ecosystem.

With its strategic location, powerful economy and advanced infrastructure, Israel has been an attracting many foreign investors and entrepreneurs. Israel's innovation focus and vibrant start-up scene enhance its allure for foreign investment. Government incentives and favourable tax policies further attract international companies. However, every market has its own challenges and therefore, it is crucial to carryout an extensive market study and build a clear entry strategy keeping in mind the regulations and cultural sensitivities.

Globally, our firm is part of various business, legal and tax networks and has forged strategic partnerships with some of the premier law firms and advisors that empower us to cater to our clients from worldwide. In Israel we have been working with various well-established law firms and professionals that specialize in wide range of business and legal matters.

If you are an Israel national or a company seeking legal assistance in India or an Indian planning to expand to the Israel market, our firm can provide the necessary guidance and support you require.


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