Israel: Israeli Hi-Tech Founders Debating: "To Be Or Not To Be An Israeli Company"

Top 10 International Tax Issues
Last Updated: 10 January 2019
Article by Oren Biran

Many entrepreneurs need to make a decision where to incorporate their company. Should the company be incorporated as an Israeli company or as a US corporation? The decision where to establish their startup can influence the future growth of the company and may be irreversible. This debate has been repeated recurrently over the years between practitioners, and no specific or final formula exists. The decision is mainly based on the international tax considerations resulting from the corporate structure. William Shakespeare's question, "To be or not to be?ˮ (spoken by Hamlet), could be rephrased in our context as, "To be or not to be (a parent) Israeli company?ˮ

In general, the founders of a company may consider, among other things, two alternative structures: an Israeli parent company with a US subsidiary or a US corporation with an Israeli subsidiary.

Below we set out certain tax aspects which need to be reviewed prior to making a decision as to the corporate structure and incorporation of a company.

Corporate Tax Perspectives

Israel Corporate Tax Rates: The tax regime in Israel provides a lot of benefits to Israeli companies. Israeli companies generally are subject to a corporate tax rate of 23% (as of 2018). US Corporate Tax Rates: Under the new "Trump Tax Reform", the rate of corporate income tax was reduced from 35% to a flat rate of 21% (effective for tax years beginning after December 31, 2017). The Trump Tax Reform also repealed the corporate alternative minimum tax (AMT) imposed under Section 55 of the Internal Revenue Code. In addition to the federal corporate tax rates, state and local taxes which are also imposed on corporations, vary by jurisdiction in the United States, and generally range between 1% and 12% (although certain states do not impose tax on income). It should be noted that under the Trump Tax Reform, domestic US corporations can claim a certain deduction of its foreign-derived intangible income, and as a result, the U.S. federal tax on foreign-derived intangible income (FDII) could be reduced to a rate of 13.125%.

Israeli Preferred Enterprise Tax Regime: The effective tax rate payable by an Israeli company that derives income from a "Preferred Enterprise" status under a special tax regime in Israel, could reduce a company's tax rate to 16% with respect to income attributable to its Preferred Enterprise (instead of a rate of 23%). In the event that the Preferred Enterprise is located in a specified development zone in Israel, known as "Development Zone A", the corporate tax rate would be reduced to 7.5%. Moreover, in the case of a technology company satisfying certain conditions pursuant to which it would qualify as a "Special Preferred Technology Enterprise", it may enjoy a reduced corporate tax rate of 6%, regardless of the company's geographic location within Israel. Being under such tax regime would also entitle the stockholders to reduced tax rates on dividend distributions.

Chief Scientist Grants: The Israel Innovation Authority (previously known as the Office of Chief Scientist), is a governmental agency providing, inter alia, funding platforms to early-stage entrepreneurs and mature companies developing new products or manufacturing processes. The funding is available for research and development undertaken in Israel. In general, a US parent corporation holding the intellectual property would not qualify for such funding.

ESOP: Our office represented Kontera in the Israeli Supreme Court in a transfer pricing dispute with the Israel Tax Authority with respect to the inclusion of the value of stock options in a transfer pricing agreement between a US corporation and its Israeli subsidiary, based on a cost plus mechanism. Unfortunately, in April of 2018, the Israeli Supreme Court ruled in favor of the Israeli Tax Authority that a stock-based compensation pursuant to an employee stock option plan (ESOP) needs to be included in the cost base of Israeli subsidiaries of multinational companies with no deduction available for such inclusions. As a result of this decision, the taxable income of an Israeli subsidiary is effectively increased by the value of the stock-based compensation plus the mark-up. Such deemed income and tax liability of an Israeli subsidiary would not be relevant in case of a different method of transfer pricing.

Investor/Founders Tax Perspectives

Israel Capital Gains Tax: Generally, pursuant to the Israel Tax Ordinance, a US investor in an Israeli company would be exempt from paying capital gains tax (assuming that such investor does not have a Permanent Establishment in Israel and is not a resident of the State of Israel). An exemption is also available for a holder of less than 10% [of the issued and outstanding shares of an Israeli company] under the terms of the income tax treaty between Israel and the United States. An individual who is an Israeli resident investor is subject to capital gains tax at the rate of 25% or 30% (in the event that the investor is considered a "Controlling Shareholder", as such term is defined in the Israeli Tax Ordinance), and Israeli corporate investors would be subject to tax on capital gains according to the Israel corporate tax rate.

US Capital Gains Tax: In general, the US capital gains tax rate is up to 20% for most assets held for more than a year (Long Term Capital Gains), plus state tax and Medicare tax. Capital gains tax rates on assets held for less than a year correspond to ordinary income tax brackets (Short Term Capital Gains).

QSBS – $10M Exemption from Capital Gains Tax: A US investor and /or US founder investing in a US corporation could benefit from tax exemption in the US on his/her capital gains upon selling his/her stock. This exemption does not apply to an investment in an Israeli startup company. Under the US Tax Code (IRC Section 1202), 100% of gain on the sale of Qualified Small Business Stock ("QSBSˮ) could be excluded from tax for US tax purposes for an amount of up to $10 million. The amount of gain excluded is not subject to the 3.8% Medicare tax, and is not subject to the alternative minimum tax rates. In addition, the gain may also be excluded from state and local taxes where such country follows the federal income tax laws. There are a few rules and conditions enabling such tax exemptions, for example: shares of QSBS must be acquired directly from the US corporation in exchange for money (or other property (other than stock)); QSBS must be held for more than five years; active business requirements and the corporation must be qualified as a small business (i.e. must not have aggregate gross assets in excess of $50 million). There is no doubt that this tax regime in the US is an incentive to US investors to invest in startups that were incorporated as US corporations rather than in an Israeli company.

First Year Claiming Tax Deduction for Investment Amount – Israeli Angel Tax Laws Incentives Israeli Investors: Investors in an Israeli R&D company can take an ordinary income deduction against any Israeli source of income (including compensation income) of up to approximately $1.4 million (5 million NIS). The taxpayer can claim such deduction in a year of investment. The "Angel Tax" laws provide certain conditions that the company needs to meet. US investors can also claim such deductions in Israel against other Israeli sources' taxable income (if any). This benefit does not apply to an investment in a US corporation.

Reclassification of Capital Loss Investments to Ordinary Tax Deduction – US Tax Code Incentives US Investors: On the other hand, the US Tax Code "Section 1244ˮ gives US investors (investing in a US corporation) also the ability to take an ordinary income deduction on losses (up to $50,000 or $100,000 on a joint return) rather than the standard capital loss deductions. In general, a US corporation shall be treated as a small business corporation if the aggregate amount of money received by the corporation for stock, as a contribution to capital and as paid-in surplus, does not exceed $1,000,000.

GILTI: As detailed and presented in the 2018 GKH October Newsletter discussing the impact of the GILTI rules on the High-Tech industry, in the event that 50% or more of rights or value are held by US persons in an Israeli company, each 10% US shareholder would be subject to tax in the US on the Israeli subsidiary taxable income. On the other hand, if a US investor invests in a US corporation, the GILTI issue would not have any impact assuming the Israeli company is subject to tax in Israel at the rate of 23% or a reduced tax rate of 16% (i.e. a Preferred Enterprise). If the founders incorporated an Israeli parent company holding a US subsidiary on day one, an inversion procedure may be required, with all tax implications involved in reorganizing a group of companies, taking into account that the intellectual property would continue to be owned by the Israeli company and any transfer of such intellectual property from Israel to the US may trigger an Israeli tax event.

Estate Tax: An Israeli investor holding shares in an Israeli company will not be subject to Israeli Estate Tax, as Israeli law presently does not impose estate or gift taxes. However, in case of an Israeli individual investor holding (directly or indirectly through pass-through entities) stock in a US corporation, and is neither a US citizen nor has a US 'domicile' for Estate and Gift tax purposes, the exclusion amount is usually limited to $60,000, and therefore all such investor value allocations in stock of US corporation (higher than $60,000) would be subject to US estate tax at the rate of approximately up to 40%, and executors for non US residents must file an estate tax return with the IRS. It should be noted that Israel and the US are signed on a Tax Treaty, however no provisions of estate tax exist to provide relief.

Summary: As can be inferred from the above, each structure has its pros and cons for the company, the investors and the founders, and in some cases such factors can influence each of the above players differently and adversely. Additional tax matters should be analyzed, such as the location of intellectual property in each structure, transfer pricing, Base Erosion and Profit Shifting (BEPS) rules, tax treaties, withholding tax considerations, management and control, tax treatment of losses, and more. Aside for taxation, further insights should be made as for the corporate governance, place of business, attractiveness to potential investors, location of customers, sector of operation and more. The QSBS tax benefit to US investors and the GILTI rules may change the balance scale in favor of incorporating a US corporation as a parent company. However, the analysis should be conducted on a case-by-case basis, taking into account that the taxation issue is a major factor to consider, but is not the only parameter to take into account as for the decision whether to be or not to be (a parent) Israeli company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions