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ISRAEL: An Introduction

Contributors:
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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, the “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; artificial intelligence (AI), including big data and deep learning; fintech; foodtech; femtech and automotive technology are expected to continue to attract significant non-Israeli investment well into 2020.

The local high-tech economy is greatly influenced by global trends. In 2019, 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 250 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 into the new decade.

The local technology ecosystem is now fully expanded, 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. International companies continue 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 Israeli Innovation Authority (IIA), which in 2016 replaced the Office of the Chief Scientist (OCS). As part of the 2016 overhaul to the R&D Law, IIA-sponsored technology may now be transferred outside of Israel. Israeli taxation rules provide benefits to multinational companies holding their intellectual property in Israel, offer capital gains exemptions to foreign investors and provide tax benefits for corporate restructuring.

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

Infrastructure – Electricity, Gas and Transportation

The Israeli government continues to take measures towards reducing CO2 emissions. It has set a new target that, within the next 10 years, 30% of the total energy production in Israel will be produced from renewable sources. As part of this policy, the Electricity Authority has been regularly issuing a series of tenders for the construction of photovoltaic power stations. More notably, the government launched a major reform in the electricity sector, deeply changing the Israel Electric Corporation (IEC), initiating the construction of combined-cycle power plants, and offering for sale five of the IEC's most aged gas power plants. In 2019, a Sino-Israeli consortium acquired the first power station Alon Tavor for EUR 490 million.

In the gas sector, the Israeli government continues its efforts to bring new international operators and launched a second bidding round for Mediterranean exploration concessions. These efforts paid off and led to the entry of British companies Pharos and Cairn, in addition to the Greek company Energean.

Energean is continuing its efforts, supported by the State, to introduce competition in a market long dominated by the Delek - Noble Energy consortium. In June 2019, Energean signed with Israel Natural Gas Lines an agreement for the construction of an offshore open access pipeline, to which small and medium gas fields will be able to connect.

In the transportation sector, after the withdrawal of several world industry leaders (Alstom, Bombardier, Siemens) from a project found to be politically sensitive, the PPP for the Jerusalem Light Rail’s new Green Line, valued at EUR 2.6 billion, was finally awarded to Spanish contractor CAF and Israeli company Shapir. In Tel Aviv, giant PPP tenders for the construction of the Light Rail’s Green and Purple Lines were also published, with a value estimated at EUR 3.7 billion.

In the water sector, 2019 saw the publication of another PPP tender for the construction of Sorek B, valued at EUR 650 million and planned to be the world’s largest water desalination plant. The awarding of the project to IDE and Hutchinson was ultimately denied by the courts following the discovery of certain failures relating to the quality of water produced at the Sorek A plant.

Investments and Capital Markets 

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

Strategic mergers and acquisition and private equity transactions continue to dominate the local exit market. Certain Israeli companies seeking an exit also continue to set their sights to an IPO, with the US markets being most attractive. The trading volumes and the number of new IPOs on the Tel Aviv Stock Exchange (TASE) remained relatively low through 2019, despite the easing of certain regulatory requirements introduced by the Israel Securities Authority (ISA).

However, 2019 saw the completion of the privatisation of the TASE. This process started in 2018, when a number of foreign investors acquired a majority stake in the TASE, and was followed in July 2019 with the international IPO of TASE. It is expected that with the transformation of the TASE into a publicly traded company, and its introduction to varied international institutional investors, starting in 2020 it could take a position as a favoured venue for Israeli high-tech companies seeking access to the international markets.

Regulatory Landscape 

The Israeli regulatory landscape remains challenging for local and international businesses. Despite the Israeli Government's initiatives to ease the regulatory burden, multiple governmental agencies and offices continue to require licences, approvals and certifications to set up and operate new and existing ventures. Securities, banking, competition, environment, public procurement, consumer protection, communications, health, importation and standards are only some of the areas covered by the regulatory agencies. Recent years have also seen the introduction of new regulatory requirements covering the areas of privacy and data protection and certain capital market niches, including crypto currencies and crowd funding.

Local Legal Environment 

The strong economic conditions and vibrant business climate continue to affect the local legal environment. The strong 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 mind-set.