Setting up a limited company in Israel

A foreigner who is not an Israeli citizen can carry out business activity in Israel by the simple process of setting up a limited company. A limited company's activity is also taken more seriously by Israelis and big customers tend to prefer cooperation with companies rather than with licensed businesses. There are further advantages to setting up a limited company in Israel, as detailed below.

What is a limited company?

A limited company is a corporation of a person or a number of persons for the purpose of carrying out business activity for profit. Such a company is managed by means of shares and the owners of the shares are called the company's shareholders.

Who can set up a limited company in Israel?

The Israeli Companies Law says that anyone, including a corporation, may set up a company, as long as the company's aims are not illegal, immoral or contradictory to public regulations, i.e. a single person can be the only shareholder in a company in Israel.

The Law for Encouragement of Capital Investment

In Israel there is a law for encouragement of capital investment, i.e. manufacturing companies (which can also be manufacturers of software/applications) operating in Israel are entitled to significant benefits (a reduced rate of tax on the company's income and also on withdrawing a dividend and investment grants) on condition that they fulfill the criteria required by the Law for Encouragement of Capital Investment.

How do you set up a company in Israel?

To set up a private company in Israel it is necessary to provide the Registrar of Companies with the following documents:

• • Request to Register a Company form – in which the main information for setting up a company must be filled in. For example, its aims, its address, the company's initial capital, and so on.

  • The company's articles – in which the company's name, its aims, the initial capital listed, details of the share allocation to the initial shareholders, general instructions about the maximum number of shareholders, the maximum number of directors etc. must be filled in.

  • A declaration by the initial directors – a company has to appoint at least one director. The directors have to sign a declaration at the time of the company's establishment, according to which each one of them is fit and able to serve as a director.

  • A declaration by the initial shareholders – each of the initial shareholders has to sign a declaration according to which s/he is fit to hold the company's shares.

  • Document Presentation form – including contact details for the company's owners and also three additional alternative names for the company in the event that the chosen name is not approved by the Registrar of Companies.

  • An Israeli representative for VAT purposes – for purposes of the company's activity in Israel, there has to be an Israeli representative to represent the company to the various government ministries including VAT. This representative can be the company's lawyer, accountant or another authorized person who is chosen for this purpose and is responsible to act opposite the various government ministries.

  • Address – an Israeli company needs an address in Israel.

Advantages of setting up a limited company in Israel

Advantage in taxation

The fixed rate of company tax that applies to taxable income from the first shekel is 26.5% as of 2014 and the rate of tax on the surplus income distributed as a dividend is 30%. Therefore, the main advantage of being incorporated as a company compared to independent activity, from the point of view of income tax considerations, is that the company's shareholders can postpone paying tax on the dividend by postponing distribution of the profits, while leveraging the public profits in the company to carry out activities or for further investment. In addition, a company owned by another company can distribute its profits to companies it owns as a dividend without tax liability for the dividend, and thereby utilize the money to carry out new investments in other companies in the group and not just in the company in which the original profits were generated.

The advantage of a separate legal entity and limited liability

Another advantage in setting up a limited company is the principle of the separate legal entity of a company. When setting up a limited company and registering it as required by law with the Israeli Registrar of Companies, a new, independent legal entity is created, with a separate legal existence, in which the company is separate from the its shareholders. Likewise, the shareholders' liability for the company's debts is limited to the level of the unrealized share capital of each one of them. That means that when the company is insolvent the creditors, including the tax authorities, cannot demand that the shareholders pay from their private pockets except in exceptional cases such as malice. Even in those exceptional cases the creditors have to receive permission from the court to demand payments from the shareholders.

Other advantages

The possibility of paying severance compensation exempt from tax to a holder of a controlling interest, ability to transfer the shares to another person, etc.

Costs of setting up a limited company

Payment of an annual fee to the Israeli Registrar of Companies.

One-time payment to the lawyer who deals with setting up the company.

Monthly or bi-monthly payment for bookkeeping depending on the annual turnover.

Cost of an accountant.

In conclusion, carrying out business activity by means of a limited company in Israel has many advantages, both from a legal point of view and from the tax viewpoint. In order to investigate the feasibility of carrying out activity by means of a limited company, various parameters need to be taken into account such as the expected turnover, the level of activity necessary for the company to succeed, the existence of available financial resources for the company's sound management, etc. We in Conbiz can set up a company for you in Israel and thus you can begin your business activity in Israel legally and in an orderly manner. Contact us in order to receive a price quote for setting up an Israeli limited company.