Many non-Israeli corporations are active in Israel but are not registered in Israel, thus not only creating criminal liability to their officers and agents but also lose an important tax benefit.
The Israeli Companies Law, 1999, demands that any non-Israeli corporation (other than a partnership) that has a place of business in Israel must be registered in Israel as a foreign corporation within one month. The law, in fact, sets the non-registration as a criminal offence not only of the corporation but also of any officer or agent of the company that was a party to such offence.
Even if we set aside the criminal issue, in Israeli businesses effectively do not pay VAT (currently set at 18%) for purchase of goods and services in Israel. This is because a business is entitled to reimbursement from the state for VAT paid by it (either by set-off of VAT collected by it from clients or by filing a claim for reimbursement). However, in order to enjoy such tax benefit, a VAT file must be opened b such business. To do so, the business must first be registered in Israel and open a bank account in Israel. Generally, there are two main routed to do so:
The first option would be the establishment of an Israeli wholly owned subsidiary. Such option does not only create a legal barrier (from claims against the mother company) but will make it relatively easy to open a bank account in Israel and then open tax files. Note, that the VAT authorities will demand at least one Israeli director for the corporation. If no such Israeli director is appointed, the corporation will need to appoint a tax representative to personally guarantee all VAT obligations of the corporation. As we supply both services to clients, we note that a tax representative is a very expensive solution and will require many protections for the representative, while appointing a member of our firm as a local director will be much less costly and will only require a D&O insurance. Lack of an Israeli director will also complicate issues with the bank and with corporate procedures that will require execution of documents in Hebrew.
The second option will be to register the corporation in Israel as a foreign corporation. To mitigate the legal risks to the mother company, it may incorporate a wholly owned subsidiary in its jurisdiction of incorporation and then register such subsidiary in Israel as a foreign corporation. This will not only require a high cost VAT representative in Israel but will also make it very difficult to open and manage a bank account. This option will usually be used when tax planning so dictate.
Naturally the whole issue of incorporation of a company in Israel or registration of a foreign corporation in Israel are complex issues that should be reviewed on a case-by-case basis both by an Israel attorney expertizing in international transactions and an accounting with similar expertise.