This chapter discusses the Israeli law and business practice relating to agents and distributors. It is divided into two sections, the first dealing with agents and the second dealing with distributors.
Issues that are common to both distributors and agents are discussed in greater depth in the section on agents, and are only cross-referenced in the section on distributors. For convenience of reference, the term 'intermediary' is sometimes used to encompass both agents and distributors.
In 2012, the Israeli Knesset enacted a new law entitled the Agency Contract (Commercial Agent and Supplier) Law, 5772-2012, (the 'Agency Contract Law'). The Agency Contract Law applies to contracts for consideration between a supplier and a commercial agent in which a supplier authorizes a commercial agent to solicit and engage new and existing clients to purchase tangible goods marketed by the supplier, excluding real property, on an ongoing basis. A discussion of the Agency Contract Law is set forth following the section on distributors.
Law of Agency
The distribution of goods and services in Israel by means of local agents and distributors is widespread. A foreign entity wishing to market and distribute its products in Israel can choose between a number of different business arrangements, as follows:
- Doing business itself in Israel by means of a local branch or subsidiary;
- Retaining a local party to act as its legal agent, authorized to enter into transactions on behalf of the principal;
- Selecting a local party to serve as its marketing representative, with authority to find customers and negotiate transactions, but not to bind the foreign supplier; and
- Appointing a local distributor who buys and sells goods on its own account.
In all of these possible relationships the dominant view of Israeli law is one of respect for freedom of contract. Unlike the situation in some other countries, there are no statutes with detailed mandatory regulations regarding distributors or other types of intermediaries, and the Israeli government and legal system are unlikely to intervene in the contractual relationship freely agreed between the foreign manufacturer or supplier and the local agent or representative.
However, as discussed in greater detail below, to the extent that the parties do not clearly define their relationship, the laws of contract and agency may supply certain missing terms and conditions.
The Agency Law 1965 is based, in part, on English Common Law principles and, in part, on Continental law. 'Agency' is defined as 'the grant of power to an agent to do, in the name or in place of a principal, a legal act in respect of a third party'. A 'legal act' is an act intended to modify the rights of, or impose obligations on, the principal. A person's agent has the same status as that person himself, and an act of the agent binds or entitles the principal, as the case may be, and creates direct privity between the principal and the third party.
In general, the terminology used for various types of intermediaries is not rooted in any statutory definitions or criteria. Except for the word 'agent' (shaluach), which has a defined legal meaning in agency law, and the word 'broker' (metavech), which has attained a definitive legal meaning through various judicial precedents, none of the other terms used for intermediaries in Israel (for example, commission agent, franchisee, distributor, and marketing representative) provides a clear reference to the nature of legal relations between the parties.
These relations are determined by the specific contractual provisions agreed on in each case. The term used by the parties to describe the intermediary has little or no weight if it does not coincide with the nature of the contractual relationship between the parties or with their actual conduct.1 A good example is the word 'agent' itself, which is translated into Hebrew as either shaluach or sochen. The latter term is often used to mean a distributor and also sometimes to mean a representative (natzig), neither of which have definite legal definitions.
The classification of an intermediary may be important in determining the legal rights and obligations existing between the intermediary and the supplier, and between each of them and third parties. In general, the agent acts in the name or place of the supplier, within the scope of the authority given to the agent, for the purposes of the sale and marketing of the supplier's goods. The agent does not take title to the goods. Title passes directly from the supplier to the third-party customer.
General Business Climate and Trade Licensing
The Israeli business climate is full of contradictions, reflecting the underlying condition of a country that is both very Western, in terms of technology, communications, and commercial sophistication, and very much part of the Middle East, in terms of the culture, attitudes, and negotiating practices of large portions of its population. Israel has a highly educated work force, is pervasively computerized, has state-of-the-art communication technologies, and is in the process of revitalizing its transportation infrastructure.
Yet, many transactions are done in haste, and not all are fully documented. Often, transactions may be concluded on a handshake, with little thought given to the details. On the other hand, an increasing number of Israeli businesses, some managed by a new breed of 'internationalized' Israeli business persons who have been educated or trained in the United States or Europe, are indistinguishable from their counterparts in Silicon Valley or Wall Street, and are accustomed to detailed and comprehensive international commercial agreements.
All businesses require licenses from local municipal authorities, and businesses in certain industries (for example, communications, banking, insurance, medicine, media, and pharmaceuticals) are also subject to special licensing and other regulations. Agents and distributors, as such, do not require a license unless they will be acting in an industry that itself is subject to licensing requirements.
Pursuant to the Order for the Issuance of Import Licenses 1939, the Ministry of Economy issues licenses for the import of goods into Israel. Most goods can enter Israel under a general license, but certain types of products (for example, pharmaceuticals and electronics) require a special license before they can be imported and sold in Israel.
Licenses are obtained in some cases from the Ministry of Economy, and in other cases from the relevant ministry, such as the Ministry of Communications, in the case of telephones, answering machines, and facsimile machines; or the Ministry of Health, in the case of pharmaceuticals and medical devices. Goods requiring specific licenses include medicines,2 meat,3 poisons and harmful chemicals,4 and weapons.5
Import Regime, Customs, and Duties
The primary legislation dealing with the importation of goods into Israel comprises the Customs Ordinance (New Version) 1957 ('the Customs Ordinance') and the Import and Export Ordinance (New Version) 1979 ('the Import Ordinance'). The Customs Ordinance deals principally with the payment of customs duties, and authorizes the government to prohibit, limit, or regulate the import of goods. The Import Ordinance authorizes the Minister of Economy to issue orders for the prohibition or regulation of the importation and exportation of goods. Restrictions on the import of goods into Israel can be categorized as follows:
- Restrictions on importing goods from certain designated countries (such as those countries that restrict the importation of Israeli goods or those specified in the Trading with the Enemy Ordinance 1939);
- Restrictions on the goods themselves (to protect locally produced goods or to regulate potentially dangerous goods, such as drugs and firearms); and
- Restrictions concerning the importers themselves.
Israel has signed free trade agreements with the United States, the European Union (EU), the European Free Trade Association, and additional countries6 and is thus unique in having essentially duty-free access to and from some of the most important markets in the world.
Unless exempt, due to the provisions of one of these agreements, goods imported to Israel are usually subject both to a customs duty, as set forth annually in the Compilation of Regulations, and to a purchase tax, which is imposed by the Ministry of Finance.
While the customs duty discriminates between local and foreign goods, the purchase tax is imposed on all goods of a given category (even if no such goods are manufactured locally in Israel), and Israel's position has been that the purchase tax is not a customs duty for purposes of the various free trade arrangements.
Israel also has laws protecting local products against unfair competition resulting from the dumping or subsidizing of foreign goods, including the Trade Levies Law 1991. Other statutes and regulations concerning the import of goods to Israel can be found scattered through various other laws, including the Trade Marks Ordinance 1979; the Consumer Protection Law 1981; and the Stabilization of the Prices of Commodities and Service Law 1985.
In addition, pursuant to the Commodities and Services (Control) Law 1957, many administrative orders have been issued concerning the maximum permissible prices for goods, and preconditions required for obtaining import licenses for various products (such as conforming with Israeli standards; the obligation to mark products in a certain manner; and the maintenance of spare parts inventory).
No permit is necessary for transactions in foreign currency in Israel, whether for the performance of a distribution or agency agreement or otherwise.
Under Israeli contract law, an obligation to make a payment in foreign currency in Israel, the making of which, in that currency, is prohibited by law, shall be fulfilled by making payment in Israeli currency at the official rate of exchange on the date of payment.7
Companies and other entities resident in Israel are subject to tax on a personal basis, ie, on their income whether derived in Israel or abroad, regardless of the place of receipt of that income. Companies are subject to a corporate tax of 23 per cent, together with an additional 25 or 30 per cent withholding tax on distributed dividends. Non-residents are taxable in Israel only to the extent that income is derived in Israel.
Foreign residents are also generally liable to pay capital gains on the sale or other disposition of an asset located in Israel. However, foreign residents, particularly if they do not maintain a permanent establishment in Israel, or conduct a business or trade in Israel, will likely be entitled to an exemption with respect to the tax on their capital gains, subject to the applicability of the exemptions set forth in the Income Tax Ordinance (New Version) 5721-1961 (the 'Income Tax Ordinance') or in a double-taxation treaty, in so far as such treaty exists. Israel also imposes value-added tax (VAT), currently at 17 per cent, on transactions conducted in Israel, as well as transactions involving assets or activities in Israel or imports into Israel.
Israel has entered into a large number of double-taxation treaties with other countries which deal with the taxation of capital gains, dividends, interest, and royalty payments.8 Generally, a foreign supplier has no obligation to report to the Israeli authorities the remuneration paid to an agent in Israel who is not an employee, nor does the supplier have any obligation to withhold tax at source from the remuneration paid to such agent.
1. Civ File 819/64, Itzhar Oil Factory v Moshavei Hatzafon Aguda Haklait Mercazit Shiptuphit (Tel Aviv Dist Ct 1966), 50 PM 82.
2. Pharmacists Ordinance (New Version) 1981.
3. Livestock Disease (Importation of Meat) Regulations 1974.
4. Dangerous Substances Law 1993.
5. Firearms Law 1949.
6. See http://www.tamas.gov.il/NR/exeres/BB135FF8-8A82-4D4E-B88AC71EC661527A.htm.
7. Contracts (General Part) Law 1973 (the 'Contract Law'), s 47.
8. For a list of doubletaxation agreements to which Israel is a signatory, see: https://mof.gov.il/en/InternationalAffairs/InternationalTaxation/Pages/AvoidanceDoubleTaxationTreaties.aspx.
Originally published by Juris Publishing, Inc.
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.