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ISRAEL: An Introduction

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Contributed by Michael Barnea (Managing Partner), Barnea

Israel Overview 

For over 20 years, Israel’s economy has demonstrated continued strength, growth, and stability. Despite many internal and external challenges emanating from its unique position, Israel has evolved into “the Start-Up Nation” of technological innovation, with a strong local currency, an active local economy, and robust export industries.

Innovation and Technology 

In the innovation and technology spheres, “Start-Up Nation” remains active and growing. Indeed, Israel is widely celebrated as a centre of technological excellence. As a result, during the last decade Israel has been on the radar of many leading international companies who closely track trends evolving in Israel with an eye to investing in and acquiring innovative technology. Companies working in cyber security; automotive technology (aimed at autonomous driving solutions); artificial intelligence (AI), including big data, deep learning, and Internet of Things (IOT); and fintech are expected to continue to attract significant non-Israeli investment well into 2019.

The local hi-tech economy is greatly influenced by global trends. In 2017, international interest in Israeli technology remained strong, as reflected by the volume of international investments and acquisitions of Israeli-based tech companies. Such international interest is also reflected in the continued presence of more than 200 development centres of multinational top-tier corporations.

Traditionally, it was US companies that led the way in making investments in Israel. Though US interest remains strong, in recent years, Europe, China, and Japan have begun to catch up, a trend that will most likely continue throughout 2019.

The local technology ecosystem continues to expand, branching out from the traditional centres in Tel Aviv, Haifa, and Herzliya to Jerusalem, the Galilee and Be’er Sheva. This has led to the creation of numerous working spaces, accelerators, incubators, and early-stage funds. Many international companies have decided to invest in incubators and accelerators as a way of spotting future stars with original ideas and technology. Major financial institutions and strategic players sponsor such developments, recognising the potential opportunities for their own businesses.

The Israeli government endeavours to support the technology ecosystem, including through the National Authority for Technological Innovation (NATI), which replaced the Office of the Chief Scientist (OCS). Following the 2016 introduction of an important amendment to the R&D Law, the limitations on the transfer of OCS-sponsored technology were eased. In 2017, new relevant tax rules came into effect. These rules provide benefits to multinational companies holding their intellectual property in Israel, regulate the taxation of online-based businesses and employee incentives, and expand the scope of tax deferrals for corporate restructuring.

Furthermore, Israel encourages individuals, partnerships and certain corporations to invest in Israeli early-stage start-up companies (usually hi-tech), by providing tax benefits to these investors. Such benefits allow for the recognition of equity investments as a tax expense.

Infrastructure – Electricity, Gas and Transportation 

In September 2017 the Israeli government published a five-year development plan, intended to modernise Israeli infrastructure. This plan led to the initiation by government offices of a large number of infrastructure projects, relating to transportation, electricity, water, gas, road and waste treatment.

The government of Israel has started taking measures towards reducing emissions and achieving by 2020 the target of energy produced from renewable sources representing at least 10% of total energy consumption. As part of these measures, the Electricity Authority advertised its intention to issue a series of tenders, over the next couple of years, for the construction of photovoltaic power stations, with a total capacity of 1,200 MW.

The commercialisation of the Israeli offshore gas fields has seen some recent significant developments. In 2016, the Israeli government adopted an amended regulatory framework for the exploitation of offshore gas fields, breaking the impasse that held back the commercialisation of Israel’s natural gas resources.

To generate more competition and enable the supply of gas from the various fields, the government is tendering new Mediterranean oil and gas exploration concessions. It is also making significant efforts to encourage new international players to submit bids for the exploration of Israel’s rich offshore subsoil. This subsoil remains for the most part still unexplored, despite the highly encouraging findings of an international study.

On the development side, Greek-headquartered company Energean acquired the concessions for the Karish and Tanin fields which, once developed will introduce competition to the Tamar and Leviathan fields. The Israeli government’s decision to allow the construction of an offshore open access pipeline, as part of the Karish infrastructure, is also aimed at boosting competition.

The investment in transportation infrastructure is focused on rail projects. These include extension of the current Jerusalem Light Rail, construction of the Tel Aviv Light Rail and extending and modernising Israeli railroads.

Investments and Capital Markets 

Israeli hi-tech and low-tech companies continue to attract local and international investors, ranging from early-stage angel investors through to venture capital and private equity funds.

In contrast to 2016, and in light of the high US IPO activity in 2017, Israeli companies seeking an exit have also set their sights on IPOs, in addition to M&A and private equity transactions. With stock exchanges in Australia and Canada attracting Israeli early-stage technology companies, new IPO markets have opened up for Israeli companies in 2018.

The efforts of the Tel Aviv Stock Exchange (TASE), and the easing of certain requirements introduced by the Israel Securities Authority (ISA), have begun to bear fruit. In 2018 (through to the end of September), 20 new companies (either local or foreign) joined TASE and the trading volumes on TASE rose.

Domestic Market 

The housing market remains a contentious topic, on the public, political, and economic fronts. In 2018, the government continued to promote various solutions aimed at cooling the housing market. These solutions include government-sponsored construction, legislative amendments regarding urban renewal, low rent housing projects, opening of the market to non-Israeli construction companies and new taxation for investors in residential projects. After years of sharp uptrends in housing prices, there has been a decline in the number of transactions and prices in most regions have either stabilised or dipped slightly. The rental market remains bullish, with record demand and prices in greater Tel Aviv. It is yet to be seen if a recent decision by an Israeli court, imposing restrictions on short term rentals (e.g. Airbnb), will impact the rental market in 2019.

Another issue on the local economic agenda for 2018 is the still awaited implementation of the measures to increase competition. These measures were brought into legislation in 2013, through the Law for Promotion of Competition and Reduction of Concentration, which was adopted following the 2011 “social protest”. Though the final target date for diversification has been set for 2019, in 2018 several of Israel’s holding companies started the disposition of certain financial and non-financial assets, to conform to the requirements to eliminate concentration of assets and to break down pyramid holding structures. These disposals have generated interest from foreign buyers, particularly the sell-off of certain financial businesses.

Local Legal Environment 

The strong economic conditions and vibrant business climate continue to affect the local legal environment. The ongoing international interest in Israeli companies, assets, and technologies, the complex infrastructure projects in planning and under construction, and the ever complicated regulatory environment require local law firms to continue to broaden their capabilities. Although Israel has a large per-capita concentration of legal professionals, the competence required to service cross-border clients is reserved to a smaller circle of law firms, namely those with an international mindset.