Investing In Israel

Market Entry Strategy

• Identify the appropriate distribution and sales channels.
• Distribution methods vary by type of product, but typically the following arrangements apply:
  • Commissioned Agents: used mainly for industrial equipment, raw materials and commodities;
  • Non-Stocking Agents: used mainly by manufacturers;
  • Stocking Agents: used mainly for high volume items;
  • Importers/distributors: used especially for consumer goods.
• The U.S. Commercial Service at the American Embassy in Tel Aviv and its office in Jerusalem offer valuable assistance to U.S. businesses interested in selling goods and services. Its Commercial Specialists, covering both Israeli and Palestinian markets, provide expert counseling and can help American companies identify trade opportunities and find local partners. To read about our services and trade promotion activities, please visit our website.
• Franchising has significantly increased in popularity, since its introduction to the local market in the mid-1980s
  • Particularly popular in the fast food restaurant sector; the U.S. share of the Israeli fast food franchising market exceeds 50%.
  • Franchising has also penetrated other industry sectors. ACE Hardware and Office Depot opened franchises in 1993 and 1994, respectively, for example. Toys-R-Us opened its first outlet in 1995.
  • Additional franchise operations include Office Depot and Re/MAX.
• Direct marketing is fairly common.
  • Door-to-door sales are uncommon in Israel and considered a nuisance.
  • Cable and satellite TV offer shopping channels.
  • Direct marketing is common also through mail order booklets, distributed monthly by credit card companies and through the Internet.
  • Telephone marketing is increasingly common, but with mixed results.
  • Israeli consumers are relatively well off and enjoy shopping as a popular pastime.
  • The Internet is widely used in Israel, and represents an increasingly successful marketing avenue.
• The government of Israel encourages both joint ventures and licensing.
  • Joint ventures are the most popular methods of cooperation for Israeli firms, especially in technology-related industries.
    
    Israeli businesses prefer obtaining licensing agreements for a five-year period automatically renewable clause that would last for another five years.
  • Manufacturing under licensing agreements is also common in Israel.
  • Israelis generally prefer agreements in which the licensor takes equity with the licensee.
  • The norm for royalties is 4-5% of the turnover.
  • 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.
  • The licensee may repatriate royalties through an authorized bank.
  • 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 figure out tax liabilities.
  • The United States and Israel have signed a tax treaty to avoid double taxation.

Using an Agent or Distributor

Israeli industry generally prefers to purchase goods through an agent that will be able to provide after-sales service. Government entities and government-owned industries will often require an agent in the market. One of the first issues a potential agent will raise with the U.S. manufacturer is the possibility of exclusivity, and the vast majority of agencies have exclusive representation rights. Some exporters use a commission agent who conducts limited promotional campaigns and calls on potential buyers. Exporters of more expensive, heavy industrial equipment most commonly use this approach. Partnering up with a good local representative who has good contacts in the industry, proven reliability, loyalty, technical suitability and after-sales service capability is a key factor to success in selling and maintaining a continued presence in the Israeli marketplace. U.S. companies need to be aggressive in their pursuit of business opportunities and maintain an active in-country presence.

U.S. exporters can understand the cultural, economic and commercial nuances for sales bound for the Palestinian market, via the U.S. Commercial Service in Jerusalem. We encourage American exporters wishing to market their goods in the West Bank & Gaza to strongly consider using local Palestinian agents and distributors. Using Israeli agents for Palestinian markets does not utilize local, Palestinian market expertise, and does not allow U.S. firms to maximize their sales exposure to the local market.

For the Israeli market, the most common approach used by exporters of light industrial equipment and consumer goods is to obtain a local importer/distributor. Distributors will import on their own account, carry sufficient stock to satisfy ongoing demand or to use for demonstration, maintain their own sales organization, supply spare parts and maintain a service division, if applicable. The local representative often provides legal support for ongoing operations. In concluding a representation agreement U.S. companies should be sure to include the following elements:

1. Contract duration;
2. Exclusivity (if applicable);
3. Compensatory amount as a function of contract duration, in case of termination of exclusivity;
4. Promotional input by agent and volume of sales; and
5. Dispute settlement mechanism, either by arbitration, or by assigning a tribunal (preferably U.S.).

The U.S. Commercial Service (CS) and the U.S. Foreign Agricultural Service (FAS) at the U.S. Embassy in Tel Aviv provide services that help U.S. companies establish themselves in the Israeli market. Please see our website (http://www.BuyUSA.gov/israel). You may also wish to contact the Department of Commerce Trade Information Center, 800-872-8723 (800-USA-TRAD,) or see http://www.export.gov.

Establishing an Office

American firms 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. 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.

American firms interested in establishing an office in Israel are required to register with the Registrar of Companies at the Ministry of Justice. The American company must file a copy of the document certifying that it is incorporated in the United States, stating its objectives and rules, and lists its directors and the name of its representative in Israel. 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 Israel office must first obtain work permits from the Employment Service Division of the Ministry of Industry, Trade & Labor. Authorization from the Ministry and, if applicable, the Investment Center, is necessary before the Ministry of Interior can issue a visa to begin employment in Israel. U.S. companies wishing to establish an office in Israel are advised to seek legal advice from a local accounting or law firm.

Franchising

Franchising has become increasingly popular in Israel since the introduction of this retail model to the local market in the mid-1980s. It is particularly popular in the fast food restaurant sector. Due to the strong presence of such companies as Ben & Jerry’s Ice Cream, Dominos, Kentucky Fried Chicken, McDonald's and Pizza Hut, the U.S. share of the Israeli fast food franchising market exceeds 50%. Franchising has also penetrated other industry sectors. ACE Hardware and Office Depot opened franchises in 1993 and 1994, respectively, and operate branches in the main commercial centers of the country. Toys-R-Us opened its first outlet in 1995.

The key to success in franchising in Israel lies in establishing a strong management team and good, ongoing, in-country training programs to ensure continuing high quality standards. Flexibility and adaptation to local consumer demand is important for success. Companies that continually offer a variety of products that are new and improved or specifically tailored for the Israeli market have seen long-term success in Israel.

Direct Marketing

Direct marketing in Israel picked up significantly in 1992, with the introduction of cable TV and a home-shopping channel. Direct marketing is common also via mail order inserts distributed by credit card companies and through the Internet. Door-to-door sales are uncommon in Israel and considered a nuisance, while telephone marketing is rare and has had disappointing results. Israeli consumers enjoy shopping as a popular pastime. However, direct marketing, including Internet sales, play a small role in relation to total retail sales.

Joint Ventures & Licensing

Joint ventures are one of the most popular methods of cooperation for Israeli firms, especially in technology-related industries. Manufacturing under licensing agreements is also common in Israel. The government of Israel encourages both methods of operation. Chapter 6 of this guide provides further information on investing in Israel. 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 is 4-5% of the 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 United States and Israel have signed a tax treaty to avoid double taxation.

Selling to the Government

Israel is a signatory to the WTO government procurement code. Under the 1993 Public Procurement Law, all Government of Israel (GOI) entities and government-owned companies are required to procure goods or services by issuing a tender. In 1995, the Knesset approved the Preference for Israeli Products regulations and the Mandatory Commercial Cooperation regulations. The "Preference for Israeli Products" regulations stipulate that a 15% preference may be given to Israeli manufacturers for certain items exempted by the WTO and for products with at least 35% Israeli content and with a value not exceeding 355,000SDR (approximately $500,000). Israeli manufacturers in "National Priority Zones" receive an additional 5-15% advantage.

"Mandatory Commercial Cooperation" requirements are an integral part of each international tender document valued at $500,000 or more. The regulations require foreign companies to enter into offset agreements at a negotiable 28% of the value of the contract. While the foreign firm is required to commit to make every effort to fulfill its offset obligations, there is no penalty connected with a failure to do so. However, due to the importance the GOI attaches to commercial cooperation, failure to fulfill one's obligations will almost certainly result in lack of success in future tenders. The Industrial Cooperation Authority (ICA), a division of the Ministry of Industry, Trade & Labor, is responsible for negotiating and monitoring the implementation of the offset agreements. The agreements may be for local subcontracting, investment in Israel, technology transfer, R&D contracts, or procurement of Israeli products. The first four options are preferred because of their potential long-term impact on the Israeli economy. For additional information U.S. firms are advised to consult the ICA website at http://www.tamas.gov.il/NR/exeres/B0B48981-357D-446F-AFAC-91A358E93C87.htm, or contact the ICA office in the United States:

Mr. Zuri Valenci, U.S. Director, ICA
Government of Israel Economic Mission
800 Second Ave., 17th Floor
New York, NY 10017
Tel: (212) 499-5740, fax: (212) 499-5745.
E-mail: zuri_valenci@emus.gov.il

By court ruling, the use of industrial cooperation as a factor in the award process is not allowed. However, in the competitive Israeli market, the industrial cooperation arrangements made by foreign companies play a decisive role in the competition. U.S. companies interested in selling to the GOI are strongly advised to appoint a wellconnected local agent to assist in dealing with the Israeli bureaucracy. In public tenders for large projects, in which the public entity is looking for involvement of foreign companies, the tendering party has several tender options:

• Open International Tender, requiring the foreign bidder to partner with a local firm, or use local subcontractors;
• Closed International Tender, following an open or closed pre-qualification process;
• Open or Closed National Tender, requiring Israeli bidders to team up with foreign companies.

As a result of this bidding process, foreign companies will not always be aware of major tenders. Interested U.S. companies are advised to contact the U.S. Commercial Service in Tel Aviv (CS Tel Aviv) to obtain information on upcoming projects. CS Tel Aviv regularly receives requests from Israeli firms looking for U.S. partners.

Distribution & Sales Channels

Distribution methods vary by type of product. For industrial equipment, raw materials and commodities manufacturers use non-stocking commissioned agents, while stocking agents represent high volume items. Agents will often insist on exclusivity due to the small size of the country. Most consumer goods are sold through importers and distributors, but increasingly large retail chains and department stores import directly without intermediaries. In most cases, distribution firms serve the entire country. Almost 20% of Israel's 7.1 million people are concentrated in the Tel Aviv District, Israel's commercial and financial center. Other major concentrations of the population are the Haifa area (15%), a major port city and center for the petrochemical and high tech industries, and Jerusalem (12%). Almost all goods are imported through Israel's two Mediterranean ports, Haifa in the north and Ashdod in the south, and through Ben Gurion International Airport. These ports have good transportation links to the rest of the country. While most companies are headquartered in the Tel Aviv or Haifa metropolitan areas, a growing number of firms maintain branches, showrooms, or service facilities in Jerusalem and Beer Sheva.

Consumer malls and shopping centers are popular in Israel. Over 200 malls exist and others are planned. Many American specialty shops, chain stores, and franchises have their outlets in malls and shopping centers. The key to success is offering an increasing variety of new products and services to the Israeli consumer.

Israel's food market is valued at an estimated $12 billion. The institutional market, including the army, hospitals, hotels, restaurants and places of employment, occupies 30% of the total. Over 60% of the total food supply directed at non-institutional consumers is sold through supermarkets and retail chains. Two major supermarket chains with hundreds of outlets throughout the country dominate the retail food market. The average floor size of a supermarket is 600 square meters. Some of the larger stores have areas of 1,000 - 2,000 square meters. Typical Middle Eastern-style open-air markets and small groceries serve the remaining part of the food market. In recent years specialty food stores have developed in all of the main metropolitan centers, as well as more than 150 convenient stores opened in gasoline stations and are open 24 hours 7 days a week.

Electronic Commerce

According to a 2003 report in the Israeli daily Ha'aretz, the total volume of online trade in Israel in 2003 was estimated at approximately NIS 1.4 billion (approx. 334 million), compared to about NIS 1 billion ($238 m) in 2002. The report cited a study conducted by the TASC research company. Four or five main players control the market, accounting for approximately 60% of sales, mostly electrical appliances and computer products. The majority of the remaining online trade is divided among niche sites, which focus on various areas: books, tourism, food, tickets for entertainment events and flowers.

Trade Promotion & Advertising

Aggressive product promotion and advertising are effective tools in Israel, especially for consumer goods, where brand image is important and U.S. products face fierce competition from local and European suppliers. There are several effective means of advertisement including through commercial television and radio. Channel Two is a commercial Israeli TV station broadcasting nationwide and is permitted by law to carry private TV commercials, while state-owned Channel One carries sponsored advertising by public corporations. Some Israeli and internationally broadcast cable stations also carry advertisements. The state-owned Kol Israel (the Voice of Israel) radio station broadcasts commercial ads via two of its several channels. In addition, 13 privately owned and authorized regional radio station operators accept commercial ads.

Pricing

Israel is a highly competitive market, and price is a key factor in purchasing decisions by Israeli companies and consumers. Presenting U.S. products as good quality at fair market prices maybe a better marketing strategy to capture long-term sales. Distributors prefer exclusivity and a special pricing clause should be incorporated into representation contracts. In July 2006, Israel’s VAT was reduced to 15.5%. The VAT is charged on virtually all services and products sold in Israel (except fresh fruits and vegetables), including imports. The VAT on imports is levied on the CIF landed cost plus purchase tax. VAT is recovered by the importer upon resale of the goods and is ultimately paid by the consumer. Israel levies purchase taxes on many consumer goods. The GOI reduced or eliminated the tax on more than 600 items in 2000, including televisions, washing machines, electrical appliances and cosmetics. Rates that had ranged from 25-85% were reduced to 5-45%. Some rates were further reduced in 2003. Purchase taxes of up to 90% on motor vehicles, fuel, tobacco and liquor were left unchanged.

Sales Service & Customer Support

The Ministry of Industry, Trade & Labor requires that all businesses provide adequate after-sales service and customer support. Regulations exist that oblige local distributors to provide customers with full technical support for a period of up to ten years. U.S. firms must include a clause related to after-sales service and client support in their contracts with the local agent, to ensure competitiveness in the Israeli market. U.S. firms should also ensure that their local representatives receive adequate and ongoing customer service training and technical support. The “time between a product failure and the time to repair” is one of the main issues affecting purchasing decisions by Israeli companies and government-owned entities. Providing reliable, long-term, aftersales service is the key to successful sales of most products and services.

Protecting Intellectual Property

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. The United States continues to encourage Israel to accede to the WIPO Copyright Treaty and the WIPO Performance and Phonograms Treaty (commonly known as the WIPO Internet Treaties), particularly in view of the importance of Israel's high-technology software and telecommunication industries.

In April 2005, Israel adopted limited data exclusivity legislation that provided some new protection from unfair commercial use of the confidential test data of pharmaceutical firms. However, these data exclusivity provisions provide data protection periods that fall far short of the periods provided in OECD-level economies, as well as other countries in the Middle East. Furthermore, even during these truncated periods of protection, generic companies are not prohibited from relying on the undisclosed test data of U.S. companies to get approvals for the export of the generic product. Research and development, as well as clinical trial expenditures made by international pharmaceutical companies, have fallen in recent years as these companies have moved these activities to countries with more favorable data protection regimes.

In December 2005, the Israeli government passed legislation that curtailed existing pharmaceutical patent term adjustments granted to compensate for delays in obtaining regulatory approval of a drug. This legislation further weakened the protection for intellectual property of research-based pharmaceutical companies in Israel. The new legislation references a group of 31 countries (Australia, the United States, Iceland, Japan, Norway, Switzerland and the countries of the EU) in determining the length of patent term extension. In addition, the legislation creates numerous bureaucratic obstacles for patent holders who wish to apply for a patent term extension. The legislation also applies retroactively to all pending applications for patent term extensions and already granted patent term extensions.

As a result of the deficiencies of the data exclusivity legislation and the prospect of passage of the patent term extension legislation, Israel was placed in April 2005 on the Special 301 “Priority Watch List” and to this date remains there. The U.S. Government continues to urge the Israeli government and the Knesset to take steps that will provide a reasonable period of non-reliance on confidential data and periods of patent term extension similar to that granted in OECD countries.

Israel has increased its budgetary, educational, police, and judicial resources devoted to the enforcement of the country’s copyright and trademark laws. In addition, Israel passed amendments to its copyright laws that should make it easier for law enforcement officials, prosecutors, and judges to pursue, prosecute, and punish copyright crimes. In 2005, U.S. industry estimated the loss due to inadequate intellectual property protection for motion pictures, records and music, business software, entertainment software and books to be $154 million.

In 2005, the Government of Israel introduced in the Knesset new draft legislation to update and consolidate the country’s copyright laws. If passed in its current form, this legislation will result in the exclusion of end-user piracy from criminal liability, a step that may lead to weaker protection for business software. The legislation also explicitly permits the parallel importation of copyrighted works, which may harm right holders. In October 2004, the Government of Israel assured the United States that it would continue to provide U.S. music rights-holders' with national treatment protection. However, the language of the 2005 copyright legislation does not explicitly state that U.S. right holders will be compensated for the public performance of phonographic recordings. In follow-up consultations with the Israeli government throughout 2006 the U.S. again received assurances that under existing Israeli law, this protection would continue to be seamlessly afforded U.S. right holders with the passage of the legislation. The United States is closely tracking these developments and working to assure that Israel fulfills its commitment to accord national treatment to U.S. music rights-holders consistent with a 1953 U.S.-Israel bilateral treaty and Israel’s repeated assurances.

Due Diligence

American firms interested in doing business in Israel are advised to perform due diligence before concluding any kind of business deal in the market. Due diligence can include, but is not limited to, checking if the company or contact is listed on the internet. Several marketing firms in Israel publish lists of companies and contacts. The U.S. Commercial Service in Tel Aviv also provides a list of local business service providers on their website. Many Israeli companies are increasingly developing their own websites and this information can be very useful to an American company’s research.

The U.S. Commercial Service in Tel Aviv can provide basic information on companies and individuals via the International Company Profile (ICP) service. An ICP provides standard 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. The ICP has a 15 workday turnaround time. There are also several firms in Israel that can provide comprehensive, in depth, due diligence reports, which relate to the bona fides and financial stability of companies or individuals (CS Tel Aviv can provide a list of such companies).

Most American banks correspond with the leading Israeli banks, such as Bank Leumi and Bank Hapoalim, and can provide due diligence information. It is advisable, especially when working with new clients, to seek verification from a corresponding U.S. bank on the authenticity of documents stemming from the Israeli banking system.