Using an Agent or Distributor
While the use of an agent or distributor is not legally required, partnering with a local representative who has good industry contacts, proven reliability, loyalty, technical skills, and after-sales service capabilities is important for selling and maintaining a continued presence in Israel. U.S. companies need to be aggressive in their pursuit of business opportunities and maintain an active in-country presence.
The Israeli industry generally prefers to purchase goods through a local agent that will be able to provide after-sales service. Government and government-owned buyers will often require an agent in Israel. Many agents have exclusive representation rights because of Israel’s small size. Most U.S. heavy industrial equipment exporters to Israel use a commissioned agent who conducts promotional campaigns and active buyer calls.
Using a local importer/distributor is the most common approach for U.S. manufacturers of light industrial equipment and consumer goods. Distributors will import on their own account and carry sufficient stock to satisfy ongoing demand and use for demonstration. Distributors maintain their own sales organization, supplying spare parts and, if applicable, maintain a service division. In addition, local representatives often provide legal support for ongoing operations.
When executing a representation agreement, U.S. companies should be sure to specify:
- Contract duration
- Exclusivity (if applicable)
- The amount of compensation that will be provided to the representative in case of termination of exclusivity (as per Israeli law)
- Promotional input by agent and volume of sales
- Dispute settlement mechanism, either by arbitration, or by assigning a tribunal (preferably U.S.)
Additionally, please note that the 2012 Israel Agency Contract Law regulates the termination of supplier-agent/distributor relationships in Israel. Specifically:
Advance Notice of Termination: According to the law, the supplier must notify his agent in advance of the intended termination of the relationship between them as follows:
- A two-week advance notice for a relationship that lasted up to six months
- A one-month notice for a contract signed 6-12 months earlier; or
- A two-month notice to terminate an agency contract signed 12-24 months earlier, and up to a maximum advance notice of six months for a relationship that lasted 6 years or longer.
Financial Compensation for Termination: The compensation paid to the commercial agent upon termination must be commensurate to the size of the business developed as a result of the agency agreement. The compensation shall be in the amount of the average monthly profits resulting from sales of the supplier’s goods/services over the last three years of the agency relationship multiplied by the number of years the relationship lasted. The compensation cannot exceed twelve months of the average monthly profits. The agent shall not be entitled to compensation from the supplier if the termination is due to breach of contract by the agent. In case of legal action, the Courts have the right to reduce the amount of compensation or deny compensation entirely if the Courts find justification to do so.
Establishing an Office
A U.S. firm can operate in Israel as a foreign company, a foreign partnership or by establishing a branch office. There are no restrictions on foreign ownership of Israeli companies or securities, although the Israel Antitrust Authority may review and object to foreign ownerships that would result in a cartel or market monopoly.
U.S. businesses interested in establishing an office in Israel are required to register with the Registrar of Companies at the Israel Ministry of Justice. The business must file a copy of documents certifying that it is incorporated in the United States, state its objectives and rules, and list its directors and the name of its Israeli representative. If these documents are in English, they must be accompanied by a Hebrew translation. There is no requirement for the managers or directors of the company to be Israeli citizens or residents. However, U.S. representatives assigned to manage the Israeli office must first obtain work permits from the Employment Service Division of the Ministry of Economy. Authorization from the Ministry and, if applicable, the Israel Investment Center, is necessary before the Ministry of Interior can issue a visa.
Israel allows repatriation of foreign investment capital and profits. Prior to establishing an office in Israel, U.S. firms should evaluate tax ramifications under the U.S.-Israel Agreement on the Prevention of Double Taxation. Possible higher corporate and income taxes in Israel should be weighed against other expenditures and marketing advantages. U.S. businesses establishing an office in Israel are advised to consult with local accounting and/or law firms.
For the latest Investment Climate Statement (ICS) which includes information on investment and business environments in foreign economies pertinent to establishing and operating an office and to hiring employees, visit the U.S. Department of Department of State’s Investment Climate Statements website.
The franchise industry in Israel has developed rapidly in recent years, opening new opportunities for U.S. franchise brands to enter the vibrant Israeli economy. Many well-known American brands are already present in Israel, mostly under master franchise agreements. About a third of the total franchises operating in Israel operate in merchandising, with the vast majority in the apparel and fashion industry. Popular American food chains have also taken a prominent place in the Israeli market. Other franchises focus on services such as real estate, brokerage, and educational institutes, which have attracted interest by the Israeli market.
While franchising has become a popular business model in Israel, with approximately 300 local franchise brands, the country has no official centralized legislation regarding franchises and franchisors are not required to conduct a Franchise Disclosure Document (FDD). The legal relationship between the franchisor and franchisee is bound by a commercial legal agreement between the parties, which is subject to general applicable laws in Israel. The only specific regulation of franchise agreements in Israel is the inclusion of antitrust rules, which outline certain requirements in order for a franchise agreement not to be deemed as a “restrictive arrangement,” and thereby subject to the approval of the Israeli Competition Authority. The Israel Franchise Institute is a good source to get update information on franchising in Israel and best prospects to expand to the Israeli market
Direct marketing is common via mail inserts, social media platforms and the internet. Door-to-door sales are uncommon in Israel and considered a nuisance. It is illegal to conduct unsolicited marketing via telephone, email, and text messaging. Direct marketing and internet sales play a growing role in relation to total retail sales, but Israeli consumers still enjoy shopping as a popular pastime. Multi-level marketing (MLM) companies find prosperous grounds in Israel, mainly among the Russian speaking population that can help expand their brand to Eastern Europe. Some local MLM leaders also play key marketing roles in Russian speaking markets. An “opt-in” spam law was introduced to Israel in late 2008 requiring companies to obtain permission from an individual before sending direct marketing materials. Political and charity mailings are exempt from this restriction.
Creating a joint venture with a foreign corporation is one of the most popular methods of cooperation for Israeli firms, especially in technology-related industries. Manufacturing under a licensing agreement is also common in Israel. The Government of Israel encourages both methods of operation. Israeli businesses strive to obtain licensing agreements for a five-year period, with an automatically renewable clause that would last for another five years. They prefer agreements in which the licensor takes equity with the licensee.
The norm for royalties 4-5% of turnover, although higher rates are common for luxury articles, author’s fees, and for specialized machinery. A 10-15% withholding tax on royalties and fees is often deducted at the source even though the actual payment of this amount of tax by the representative is not clear. The licensee may repatriate royalties through an authorized bank by producing a statement from a certified accountant. The licensee is entitled to claim an income tax deduction on royalties and fee payments. It is advisable to seek advice from a respected law firm and accounting firm when trying to calculate tax liabilities. The U.S. and Israel have signed a treaty to avoid double taxation.
The Investment Climate Statement section of this guide provides further information on investing in Israel.
All the major U.S. and other foreign express delivery courier companies operate in Israel on a timely basis, including Israel Post’s own express mail service (EMS), via their European hubs. Most, if not all, also provide custom clearance services. The ‘de minimis’ amounts for Israel are: $75 for private shipments and $50 for Commercial Shipments.
American firms interested in doing business in Israel are advised to perform due diligence before concluding any kind of business deal. The U.S. Commercial Service in Tel Aviv can counsel U.S. companies on potential partners and provide background information on companies and individuals via the International Company Profile (ICP) service. An ICP provides information about a local company or entity, its financial standing, reputation in the business community and includes a site visit to the local company and a confidential interview with the company management. For information, please contact the commercial specialist that covers the industry you operate in.