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2009 Investment Climate Statement - Israel


2009 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
February 2009
Report
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Openness to Foreign Investment
Israel is open to foreign investment, and the government actively encourages and supports the inflow of foreign capital. There are few restrictions on foreign investors, except for parts of the defense industry that are closed to outside investors on national security grounds. There is no screening of foreign investment and no regulations regarding acquisitions, mergers, and takeovers that differ from those that Israelis must follow. Foreign investors are welcome to participate in Israel's privatization program. Investments in regulated industries (e.g. banking, insurance), however, require prior government approval. Investments in certain sectors may require a government license. Other regulations may apply, though usually on a national treatment basis.

The Investment Promotion Center of the Ministry of Industry and Trade seeks to encourage potential investors to invest in Israel. The Center stresses Israel’s developed infrastructure, educated work force, open economy, and ties to the U.S. and Europe, and provides information about investment incentives available in Israel (details are discussed in the section Performance Requirements).

Conversion and Transfer Policies
Israel’s foreign exchange liberalization process was completed on January 1, 2003, when the last restrictions placed on the ability of institutional investors to invest abroad were removed. Foreign-currency controls have been completely abolished, and the Israeli shekel has become a freely convertible currency. Israeli individuals can invest, without restriction, in foreign markets. Foreign investors can open shekel accounts that allow them to invest freely in Israeli companies and securities. These shekel accounts are fully convertible into foreign exchange.

Most transactions must be carried out through an authorized dealer. An authorized dealer is a banking institution licensed to arrange, inter alia, foreign currency transactions for its clients. The authorized dealer must report large foreign exchange transactions to the Controller of Foreign Currency. There are no limitations or significant delays in the remittance of profits, debt service and capital gains.

Expropriation and Compensation
There have been no expropriations of U.S.-owned businesses in Israel in the recent past. Israeli law requires adequate payment, with interest from day of expropriation until final payment, in cases of expropriation.

Dispute Settlement 
Israel has a written and consistently applied commercial law based on the British Companies Act of 1948 as amended. Israel's commercial law contains standard provisions governing company bankruptcy and liquidation. Personal bankruptcy is covered by a separate bankruptcy ordinance. Monetary judgments are always awarded in local currency.

The GOI accepts binding international arbitration of investment disputes between foreign investors and the state. Israel is a member of the International Center for the Settlement of Investment Disputes (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.

Performance Requirements and Incentives
There are no universal performance requirements on investments, but performance requirements, including investment requirements, are often included in sales contracts with the government. In some sectors, there is a requirement that Israelis own a percentage of a company. Israel’s visa and residency requirements are not onerous. The GOI does not impose preferential policies on exports by foreign investors. Israel complies with TRIMS.

The Israeli government offers a wide variety of investment and business incentives to both domestic and foreign investors who meet certain requirements. Among these are grants, tax incentives, marketing and training assistance, technological incubators, and incentives for investment in research and development (R&D) and in specified regions of the country. All benefits available to Israelis are also available to foreign investors, who in some cases may enjoy even more generous tax treatment than domestic investors. Some of the benefits and requirements are described below.

For complete information, potential investors should contact:

Investment Promotion Center
Ministry of Industry, Trade and Labor
5 Bank of Israel Street,
Jerusalem 91490

Tel: 972-2-666-2610
Fax: 972-2-666-2938
http://www.investinisrael.gov.il
E-Mail: infoipc@moit.gov.il

Israel Investment Center
Ministry of Industry, Trade and Labor
5 Bank of Israel Street,
Jerusalem 91490.
http://www.moital.gov.il/NR/exeres/111C2143-2296-44C0-96F9-C29C082A19CC.htm

Tel: 972-2-666.2236
Fax: 972-2-666.2905
Ministry asks that requests be in writing.

Israeli laws that authorize investment incentives include the Encouragement of Capital Investments Law, 1959 (with amendments); the Encouragement of Industry (Taxes) Law, 1969; the Encouragement of Industrial Research and Development Law, 1984; and the Law for the Encouragement of Investments (Capital Intensive Companies), 1990.

To receive certain investment incentives, an investment must receive “approved enterprise” status. To obtain this designation, an investor must apply to the Investment Center (not the same as the Investment Promotion Center), providing physical and financial details of the projected investment; background information on the investors; sources of financing; forecasts of sales, operating results, cash flow, and "break-even point"; and projected manpower requirements. Among the criteria applied by the Investment Center in deciding whether to grant approved enterprise status is a legally mandated cost-benefit test that evaluates the long-term value of the project from the point of view of the Israeli economy. Government approval for the incentives program is not given if investment in a proposed area is considered saturated. Investors may be required to disclose proprietary information in the application for approved status.

Investors may apply for grants or tax exemptions as incentives. The extent of the benefit is determined by the geographic location of the investment. For purposes of investment support, Israel is divided into three national priority areas: A) the Negev desert and Northern Galilee, B) Western Galilee and certain areas between Jerusalem and Ashdod, and C) coastal region from Haifa to Ashkelon.Priority area A receives the most generous treatment and area C, the least.

Right to Private Ownership and Establishment 
The Israeli legal system protects the right of both foreign and domestic entities to establish and own business enterprises, as well as the right to engage in remunerative activity. Private enterprises are free to establish, acquire, and dispose of interests in business enterprises. As part of its current privatization efforts, the Israeli government actively encourages foreign investment in privatizing government‑owned entities.

Israel has a law against unfair competition. It is government policy to equalize competition between private and public enterprises, although the existence of monopolies and oligopolies in several sectors stifles competition. In the case of monopolies, defined as entities that supply more than 50% of the market, the government controls prices.

Protection of Property Rights 
Israel has a modern legal system based on British common law that provides effective means for enforcing property and contractual rights. Courts are independent. Israeli civil procedures provide that judgments of foreign courts may be accepted and enforced by local courts. Secured interests in property are recognized and enforced by the Israeli judicial system. A reliable system of recording such security interests exists.

Patent protection is provided for twenty years from filing. Both product and process patent protection for pharmaceuticals are permitted. However the Israeli patent system still allows for pre-grant opposition to patents, which may result in significant delays for some applicants. Israel employs compulsory licensing in very limited circumstances, mostly when the product is not being supplied in Israel on reasonable terms.

Israel is a Member of the WTO and the World Intellectual Property Organization (WIPO). It is a signatory to the Berne Convention for the Protection of Literary and Artistic Works, the Universal Copyright Convention, the Paris Convention for the Protection of Industrial Property, and the Patent Cooperation Treaty. Israel was obligated to implement the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) by January 1, 2000.

Of particular importance is the inadequate protection against unfair commercial use of data generated to obtain marketing approval for pharmaceuticals. Administrative delays at the Ministry of Health further erode the ability of U.S. pharmaceutical companies to obtain a fair term of protection, even if they submit registration requests in Israel immediately upon approval in the United States. Israel’s use of a pre-grant opposition system for patents impairs the ability of rights holders to protect innovation. In 2005, Israel reduced the term of extension of pharmaceutical patent protection provided to compensate for delays in obtaining regulatory approval of a drug. The 2005 legislation has discouraged U.S. companies from substantial investment in the health sector.

Investors in real property, whether personal or commercial, should note that Israel is negotiating with the Palestinian Authority to determine the final status of the Israeli-occupied West Bank. While the final status negotiations are likely to ensure adequate protection of property rights in the event of a change in sovereign authority, investors should factor possible sovereignty changes into their investment decisions.

Copyright 
Israel's present copyright law is based on the United Kingdom Copyright Act of 1911, with subsequent amendments. Protections include the exclusive right to (a) copy or reproduce the work; (b) produce, reproduce, perform or publish translations; (c) publicly perform plays or novels; and (d) make recordings of literary, dramatic or musical works. Criminal penalties are also provided for certain commercial infringing activities.

The Knesset recently passed new copyright legislation.. In general, this law is an improvement over the old Israeli law, in that is more modern its structure, terminology and scope. Temporary copies are explicitly protected and a “making available” right is explicitly provided. Under this law, a person who is a non-Israeli national has no rights in their sound recordings that were not published for the first time in Israel, unless the person is a national of country that has an agreement with Israel concerning sound recordings. In the case of the United States, the Israeli government promulgated an order which implements a 1950 bilateral agreement between Israel and the United States which does protect U.S. sound recordings.

The term of protection for sound recordings is 50 years; for other works, it is the lifetime of the author plus 70 years.

Copyright law in Israel also falls short of certain protections that have become common in the copyright laws of developed countries including, protection of “technological protection measures,” “rights management information,” provisions related to internet service provider liability and safe harbors and parallel import protection. Israel has also not acceded to the “WIPO Internet Treaties.”

Transparency of Regulatory System 
It is government policy to encourage increased competition through market liberalization and deregulation, but tax, labor, health, and safety laws can be impediments to the foreign investor. Although the current trend is towards deregulation, Israel's bureaucracy can still be difficult to navigate, especially for the foreign investor unfamiliar with the system. It is important that potential investors get approvals or other commitments made by regulatory officials in writing before proceeding, rather than relying on unofficial oral promises.

Israel is a signatory to the WTO Agreement on Government Procurement (GPA), which covers most Israeli government entities and government-owned corporations. Most of the country’s open international public tenders are published in the local press. However, government-owned corporations make extensive use of selective tendering procedures. In addition, the lack of transparency in the public procurement process discourages U.S. companies from participating in major projects and disadvantages those that choose to compete. Enforcement of the public procurement laws and regulations is not consistent.

Efficient Capital Markets and Portfolio Investment

Credit is allocated on market terms. Various credit instruments are available to the private sector, and foreign investors can receive credit on the local market. Legal, regulatory, and accounting systems are transparent and conform to international norms, although the prevalence of inflation-adjusted accounting means that there are differences from U.S. accounting principles.

Three large banks - Bank Hapoalim, Bank Leumi, and Israel Discount Bank - dominate Israel's banking sector. Bank Hapoalim and Bank Leumi each had assets of approximately USD 85 billion as of September 30, 2007. Discount had assets of almost USD $49 billion. Bank Hapoalim was fully privatized in 2000. A little more than 10% of the shares of Leumi remain in the hands of the State of Israel, and the bank remains on the agenda of the Government of Israel to complete privatization. A group led by Matthew Bronfman purchased 26% of the shares of Discount in 2005. The group has the right to purchase an additional 25%, which remains in the hands of the government.

Many Israeli firms are not publicly traded or are controlled through integrated holding companies. In the case of publicly traded firms where ownership is widely dispersed, the practice of "cross-shareholding" and "stable shareholder" arrangements to prevent mergers and acquisitions is common, but not directed in particular at preventing potential foreign investment. Hostile takeovers are a virtually unknown phenomenon in Israel, given the high concentration of ownership of most firms.

Israel has no laws or regulations regarding the adoption by private firms of articles of incorporation or association that limit or prohibit foreign investment, participation, or control.

Political Violence 
Israel is a parliamentary democracy with a stable domestic environment. Nonetheless, the unresolved conflict between Israel and the Palestinians means that the potential for politically inspired violence and terrorism exists. The State Department web site provides updated information on travel advisories: http://travel.state.gov

Israel signed peace treaties with Egypt (1979) and Jordan (1994), and its borders with them are open. The borders with Lebanon and Syria are closed, and the potential for violent incidents remains, the most recent example being the 2007 conflict with Hizbullah.

Corruption 
Bribery and other forms of corruption are illegal under several Israeli laws and Civil Service regulations. Israel became a signatory to the OECD Bribery convention in November 2008. There are several NGOs that focus on public sector ethics. Transparency International has a local chapter in Israel.

Bilateral Investment Agreements 
Israel has protection of investment agreements with Albania, Argentina, Armenia, Bulgaria, Croatia, Cyprus, Czech Republic, El Salvador, Estonia, Ethiopia, Georgia, Germany, Hungary, India, Kazakhstan, Latvia, Lithuania, Moldova, Poland, Romania, Serbia-Montenegro, Slovakia, Slovenia, South Korea, Thailand, Turkey, Turkmenistan, Ukraine, Uruguay, Uzbekistan. Agreements are waiting to be ratified with China, Guatemala, South Africa, and Azerbaijan.

OPIC and Other Investment Insurance Programs 
OPIC is involved in several projects in Israel and also finances projects sponsored by U.S. investors in Israel, but not in the Golan Heights. Israel is a member of the Multilateral Investment Guarantee Agency (MIGA).

Labor Trade Zones 
Israel's civilian labor force numbers approximately 2.9 million people.Highly skilled and well educated, the Israeli labor force is the economy’s major asset. More than 40% of the work force has more than 13 years of education and over 22% have 16 or more years of education. More than 30% of university students specialize in fields with high industrial R&D potential, including engineering, mathematics, physical sciences, and medicine. According to the Investment Promotion Center, there are more than 135 scientists out of every 100,000 workers, the highest in the world. The rapid growth of Israel's high-tech industries in the late 1990s increased the demand for workers with specialized skills. However, media coverage of a nationwide secondary teachers’ strike often cited declining test scores by Israeli students in comparison to students from other countries, and raised fears that reduced budgets and low teacher salaries were affecting the quality of the Israeli education system.

As a result of the difficult security situation, global slowdown, and slowdown in the high tech sector, unemployment l reached a level of 10.7% in 2003, and has subsequently declined since then, reaching a level of 7.4% in 2007.

The number of Palestinian workers has declined drastically due to security concerns, though some of that ground has been regained in 2008. The number of legal foreign workers has significantly declined in the last few years as a result of government policies to reduce the number of foreign workers in order to encourage employment of Israelis. There are currently around 95,000 non-Israeli workers legally employed in Israel. The government estimated in November 2008 that there were between 80,000 and 150,000 illegal foreign workers in Israel .

The national labor federation, the Histadrut, organizes about one-third of Israeli workers. Collective bargaining negotiations in the public sector take place between the Histadrut and government entities. In the private sector, negotiations at the national level between the Histadrut and the employers association are supplemented by local negotiations to finalize details. The number of strikes has declined significantly as the public sector has gotten smaller. However, strikes remain a viable negotiating vehicle in many difficult wage negotiations.

Israel strictly observes the Friday afternoon to Saturday afternoon Sabbath and special permits must be obtained from the government authorizing Sabbath employment. At the age of 18, most Israelis are required to perform 2‑3 years of national service. Until age 50, Israeli males are required to perform 30‑50 days of military reserve duty annually, during which time they receive compensation from National Insurance companies.

Foreign-Trade Zones/Free Ports 
Israel has one free trade zone, the Red Sea port city of Eilat. In addition to the Eilat Free Trade Zone, there are three ports that offer free trade: Haifa Port (including Kishon), the Port of Ashdod and the Port of Eilat.

The GOI has plans to expand and upgrade the major ports of Haifa (in the north) and Ashdod (in the center). There is good quality warehousing including cold storage in all of the major ports and trade zones, but current capacity may become inadequate in the face of growing demand

Benefits available under the grants option include both direct government subsidization of the investment (detailed below) and reduced tax rates. The amount of the grant is based on planned investment in fixed assets, such as buildings and equipment. The GOI usually requires that at least 30% of the investment be financed by the investor's own equity. Under the provisions of the grants scheme, 20% of the approved program for industrial projects should be completed within 24 months of the date of approval. The investment program should be completed within 5 years of the date of approval.

The investment incentives provided under the grant option include:
  • tax benefits and accelerated depreciation, and
  • direct grants, which depend on the type of project and its location in the country.

Grants available as a percentage of investment value in Areas A and B

Type of Investment
Priority Area A
Priority Area B
Industrial Projects up to NIS 140 million (took out $ as it will vary depending on when they do deal)
24%
10%
Industrial Projects above NIS 140 million
20%
10%
Hotels and Accommodations
24%
10%
Other Tourism Enterprises15%0%

Approved industrial investments in Area A are eligible under the grants option for tax exemptions for the first two years and five additional years of reduced taxes.

Companies choosing the grant program receive tax benefits as well for a period of seven consecutive years, starting with the first year in which the company earns taxable income (grants are not considered income). Tax benefits are determined by the percentage of foreign control: the more foreign control in the enterprise, the higher the benefits. If at least 25% of an Approved Enterprise's owners are foreign investors, the enterprise is eligible for a 10 year period of tax benefits

In addition to the benefits noted above, investments in certain industries in the Negev region may be eligible for an additional 8% grant, under the “Negev Law.”

Foreign Direct Investment
Foreign Direct Investment in Israel totaled USD 14.3 billion in 2006, an increase of almost 200% compared with FDI of USD 4.8 billion in 2005. The sharp increase is due in large part to Berkshire Hathaway’s purchase of 80% of Iscar Metals for USD 4.4 billion and HP’s (Hewlett Packard)’s purchase of Mercury Interactive for USD 4.5 billion.

Foreign Direct Investments for the first 9 months of 2008 totaled about USD 8.6 billion. Source: Bank of Israel

Web Resources
Ministry of Industry & Trade
Investment Promotion Center
State Department Website
Multilateral Investment Guarantee Agency
The Overseas Private Investment Corporation
The National Committee for Labor Israel
Bank of Israel



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