November 15, 2017
Spain-Israel: A business opportunity
The visit by the president of Israel, Reuven Rivlin, has highlighted the strength of two economies with GDP growth rates in excess of 3 per cent per annum. In particular, the Israeli economy has an unemployment rate of 4.4 per cent, inflation at -0.3 per cent and sustained economic growth of 4 per cent per annum and, with a population of more than 8 million, is the world’s third-largest investor in innovation on a per capita basis and holds more patents per capita and venture capital investment per capita than any other country. It is a country that, despite its size, creates more than 5,000 companies a year and where a business plan is created every 8 hours.
Spain, one of the fastest-growing economies in Europe, is a strategic partner that can pride itself on the positive effect of more than 2,200 million euros on the trade balance and the award of projects and bids worth more than 700 million euros to Spanish companies in 2016. Following the recent history of our economies the future is bright, business opportunities are real, bridges of collaboration continue to exist and we share resources and technologies in important sectors such as infrastructure, transport, renewable energies, water, the environment and biotechnology.
In this article, we aim to represent some legal and fiscal aspects to be considered when assessing the creation of business ties with Israel or setting up businesses there.
When it comes to establishing a physical presence in Israel, there are no major differences for Spanish companies when it comes to the legal structures under which companies operate; the most common structures are the branch, companies with no legal personality of their own and the subsidiary owned by foreign capital, which is recommended if one wishes to benefit from limited liability. All are liable for taxation on profits generated within Israel, with the unique characteristic that no tax is withheld on said profits generated by branches, which can pay taxes in Israel to the extent that these profits can be attributed to the activities of the branch, something that, given the absence of a distinctive legal personality, can be difficult to determine. It should be noted that Spain and Israel have had a treaty to avoid double taxation and prevent tax evasion since 1999.
All companies must submit audited accounts within five months after the end of the financial year. Spain is unique in that annual accounts are not accessible to the public. In Israel, the equivalent of our corporation tax is a general tax levied at 24 per cent, while general VAT is levied at 17 per cent. To register for VAT with local authorities, a business must have an appointed representative resident in Israel and a bank account denominated in the local currency (shekels). They may also have accounts denominated in other currencies.
As is the case in Spain, property sales are subject to capital gains tax, as are property transfers (for the acquirer) levied at a general rate of 6 per cent and at between 0 and 10 per cent on transfers of residential property, depending on the characteristics of the property. Spain’s property tax (IBI) has an equivalent in Israel, which is calculated based on the surface area of a property (in metres squared) and irrespective of the purpose for which the property is used.
The tax withholding system is unique: under local regulations, the buyer of goods or services must withhold between 20 and 30 per cent of the amount payable, unless a total exemption or reduction is obtained from the authorities for certain payments. As a rule, the withholding is applied at 24 per cent; however, financial institutions in practice retain 25 per cent. In the case of purchases from non-residents, 30 per cent is withheld. For the repatriation of earnings of the Israeli subsidiary to its Spanish parent, the double taxation treaty sets out a withholding rate of 10 per cent. For all other requirements, it should be remembered that Israel is a member of the OECD and that it is subject to rules on transfer prices between related parties.
Workers are entitled to receive a minimum wage, which is set on a per hour basis and which was around 6.60 euros/hour in 2017. A full-time employee works 186 hours per month, and employees are entitled to receive a 25 per cent loading on income for their first 2 hours of overtime, with this loading increasing to 50 per cent from the third hour of overtime. Employees must have at least 36 hours’ rest time a week. Holiday leave can range from 14 to 28 days, depending on the years’ service provided by the employee for a given employer.
Israel can be recognised for a number of achievements: it has created a close relationship between business, the army and university, and its formulae for financing have given private initiative a boost. The success of the most recent reforms in its tertiary, energy and property sectors and its investment in innovation and knowledge allow its products and services to compete globally in sectors with the most technological content, creating real business opportunities for its Spanish partner.