There are many ways in which a foreign investor can establish a company and start doing business in Israel. The main types of legal entities created in Israel are:
(a) the private and public limited liability company
(b) a branch of a foreign corporation
(d) joint venture
(e) trusts and other fiduciary entities.
The most common for foreign investors in Israel are Israeli limited companies and foreign branches of the foreign entity.
Foreign companies intending to engage employees and/or service providers in Israel raises tax considerations that need to be examined, the main consideration is weather the employing entity may be treated as having a Permanent Establishment (PE) in Israel and as a consequent, the employing entity may be required to pay taxes on its income in Israel. Under Israeli law, income resulting from operations within the State of Israel (by an Israeli or foreign resident), is subject to Israeli taxation. However, under double taxation treaties, the earnings of a non-resident arising from the performance of services within Israel will be subject to Israeli income tax only if it creates a PE in Israel. The determination of what constitutes a PE in Israel is determined by the OECD Model Treaty, the specific tax treaty under which benefits are claimed, and other various court rulings. As a general rule, a permanent establishment is a local fixed place of business (branch) or a “dependent agent” (employee) of a foreign company.
The PE (branch or local subsidiary) shall be required to maintain and retain bookkeeping and accounting records and original source documentation in Israel. In addition a PE must register for corporate tax, WHTAX and VAT with the appropriate tax authorities, and will be required to file an annual Israeli corporate tax return for the branch or local subsidiary with the ITA (Israel Tax authority) and to pay Israeli corporate tax on the taxable income generated in Israel. The corporate tax return would be based on the audited financial statements of the PE with certain tax adjustments required. Israeli Corporate Law requires that the annual financial statements of all companies are audited by independent public accountants. The Israeli Tax Ordinance requires that tax returns are audited by independent public accountants.