Partnering with a local representative who has good industry contacts, proven reliability, loyalty, technical skills and after-sales service capabilities is important for selling and maintaining a continued presence in Israel. U.S. companies need to be aggressive in their pursuit of business opportunities and maintain an active in-country presence.
Israeli industry generally prefers to purchase goods through an agent that will be able to provide after-sales service. Government and government-owned buyers will often require an agent in Israel. The majority of agents have exclusive representation rights because of Israel’s small size. Most U.S. heavy industrial equipment exporters to Israel use a commission agent who conducts promotional campaigns and active buyer calls.
The most common approach used by exporters of light industrial equipment and consumer goods is to obtain a local importer/distributor. Distributors will import on their own account, and carry sufficient stock to satisfy ongoing demand or use for demonstration, maintaining their own sales organization, supplying spare parts and, if applicable, maintaining a service division. Local representatives often provide legal support for ongoing operations.
In concluding a representation agreement U.S. companies should be sure to include:
1. Contract duration;
2. Exclusivity (if applicable);
3. Compensatory amount as a function of contract duration in case of termination of exclusivity;
4. Promotional input by agent and volume of sales; and
5. Dispute settlement mechanism, either by arbitration, or by assigning a tribunal (preferably U.S.).
In January 2012 the Knesset (Israel’s parliament) passed legislation regulating the termination of supplier-agent/distributor relationships.
Advance Notice of Termination:
According to the law, the supplier must notify his agent in advance of the intended termination of the relationship between them as follows:
The compensation paid to the commercial agent upon termination must be commensurate to the size of the business developed as a result of the agency agreement. The compensation shall be in the amount of the average monthly profits resulting from sales of the supplier’s goods/services over the last three years of the agency relationship multiplied by the number of years the relationship lasted. The compensation cannot exceed 12 months of the average monthly profits. The agent shall not be entitled to compensation from the supplier if the termination is due to breach of contract by the agent. In case of legal action, the Courts have the right to reduce the amount of compensation or deny compensation entirely if the Courts find justification to do so.
For additional information about the Israel Contract Agency Law please visit the U.S. Commercial Service website at: http://export.gov/israel/doingbusinessinisrael/eg_il_058074.asp
U.S. firms can operate in Israel as a foreign company, a foreign partnership or by establishing a branch office. There are no restrictions on foreign ownership of Israeli companies or securities, however, the Israel Antitrust Authority may review and object ownerships that would result in a cartel or market monopoly. Israel allows repatriation of foreign investment capital and profits. Prior to establishing an office in Israel, U.S. firms should evaluate tax ramifications under the U.S.-Israel Agreement on the Prevention of Double Taxation. Possible higher corporate and income taxes in Israel should be weighed against other expenditures and marketing advantages.
U.S. businesses interested in establishing an office in Israel are required to register with the Registrar of Companies at the Ministry of Justice. The business must file a copy of documents certifying that it is incorporated in the United States, state its objectives and rules, and list its directors and the name of its Israeli representative. If these documents are in English, they must be accompanied by a Hebrew translation. There is no requirement for the managers or directors of the company to be Israeli citizens or residents. However, U.S. representatives assigned to manage the Israel office must first obtain work permits from the Employment Service Division of the Ministry of Industry, Trade & Labor. Authorization from the Ministry and, if applicable, the Investment Center, is necessary before the Ministry of Interior can issue a visa. U.S. businesses establishing an office in Israel are advised to consult with a local accounting or law firm.
Many well-known American brands have presence in Israel under a franchise agreement, including Payless Shoes, Forever 21, American Eagle, the Gap, Cinnabon, Subway, McDonalds, Bobby Brown, Steve Madden, Tommy Hilfiger, Ralph Lauren, Nine West, and others. Express and Urban Outfitters are expected to open their first stores in Israel during 2013. Israel’s franchise industry has been developing rapidly in recent years. The annual growth rate stands at 20% and has remained constant for the past 6 years. There are more than 100 foreign franchises currently in Israel, of which 60% are European and 30% American.
Approximately 38% of the total franchises operating in Israel operate in merchandising, 80% in the apparel/fashion industry, include many American brands that have successfully positioned themselves in the Israeli market; brands such as Tommy Hilfiger, Ralph Lauren, Nine West, Gap and others have been well recognized by Israelis.
The food industry represents 12% of foreign franchises. American popular food-chains have taken a prominent place in the Israeli market, including McDonald’s, Pizza Hut, Domino’s Pizza and others. 14% of the total franchises are gathered from general services such as, real-estate and brokerage and educational institutes. Most common are: Re/Max, Realty Executive, ERA and Century 21, Wall Street English, Berlitz and others. Israel has no official centralized legislation for franchises. The industry’s rules and regulations are primarily derived from Israeli contract law and intellectual property legislation. In 2006, the Franchise Promotion Center, a public institution that promotes franchising in Israel, published a ‘Code of Ethics’ for the franchise industry. Though not a binding law, but a voluntary code, many franchisors have already provided their support and have used it to set new standards in the franchise industry. For more information about the ‘Code of Ethics’ please visit: www.franchise.org.il
Direct marketing in Israel picked up significantly in 1992, with the introduction of cable TV and a home-shopping channel. Direct marketing is common also via mail order inserts distributed by credit card companies and through the Internet. Door-to-door sales are uncommon in Israel and considered a nuisance, while telephone marketing is rare and has had disappointing results. Israeli consumers enjoy shopping as a popular pastime; however, direct marketing and Internet sales play a small role in relation to total retail sales. Multi-level marketing (MLM) companies find prosperous grounds in Israel, mainly among Russian speaking population who help expand the brand to East Europe. Many of the local MLM leaders play key marketing roles in other Russian speaking markets.
Joint ventures are one of the most popular methods of cooperation for Israeli firms, especially in technology-related industries. Manufacturing under licensing agreements is also common in Israel. The Government of Israel encourages both methods of operation. Chapter 6 of this guide provides further information on investing in Israel. Israeli businesses strive to obtain licensing agreements for a five-year period, with an automatically renewable clause that would last for another five years. They prefer agreements in which the licensor takes equity with the licensee.
The norm for royalties is 4-5% of turnover, although higher rates are common for luxury articles, author's fees, and for specialized machinery. A 10-15% withholding tax on royalties and fees is often deducted at the source even though the actual payment of this amount of tax by the representative is not clear. The licensee may repatriate royalties through an authorized bank by producing a statement from a certified accountant. The licensee is entitled to claim an income tax deduction on royalties and fee payments. It is advisable to seek advice from a respected law firm and accounting firm when trying to calculate tax liabilities. The U.S. and Israel have signed a treaty to avoid double taxation.
Israel is a signatory to the WTO government procurement code. Under the 1993 Public Procurement Law, all Government of Israel (GOI) entities and government-owned companies are required to procure goods or services by issuing a tender. In 1995, the Knesset approved the Preference for Israeli Products regulations and the Mandatory Commercial Cooperation regulations.
The "Preference for Israeli Products" regulations stipulate that a 15% preference be given to Israeli manufacturers for certain items exempted by the WTO and for products with at least 35% Israeli content and with a value not exceeding US$500,000. Israeli manufacturers in "National Priority Zones" receive an additional 5-15% advantage. "Mandatory Commercial Cooperation" requirements are an integral part of each international tender document valued at $5,000,000 or more. The regulations require foreign companies to enter into offset agreements. For civil contracts the value of the offset commitment is 20% of the contract value for companies in countries that are signatories to the Government Procurement Agreement (GPA) of the WTO and 35 percent for other companies. The offset for defense contracts is 50% of the contract value. While the foreign firm is required to make every effort to fulfill its offset obligations, there is no penalty connected with a failure to do so. However, due to the importance the GOI attaches to commercial cooperation, failure to fulfill one's obligations may result in a lack of success in future tenders.
The Industrial Cooperation Authority (ICA), a division of the Ministry of Industry, Trade & Labor, is responsible for negotiating and monitoring the implementation of offset agreements. The agreements may be for local subcontracting, investment in Israel, technology transfer, R&D contracts, or procurement of Israeli products. The first four options are preferred because of their potential long-term impact on the Israeli economy. By court ruling, the use of industrial cooperation as a factor in the award process is not allowed. However, in the competitive Israeli market, the industrial cooperation arrangements made by foreign companies play a decisive role in the competition. U.S. companies interested in selling to the GOI are strongly advised to appoint a well-connected local agent to assist in dealing with the Israeli bureaucracy. In public tenders for large projects, in which the public entity is looking for involvement of foreign companies, the tendering party has several tender options:
As a result of this bidding process, foreign companies will not always be aware of major tenders. U.S. companies are advised to contact the U.S. Commercial Service in Tel Aviv (Tenders) to obtain information on upcoming projects and how best to position themselves.
Distribution methods vary by type of product. For industrial equipment, raw materials and commodities, manufacturers use non-stocking commissioned agents, while stocking agents represent high volume items. Agents will often insist on exclusivity due to the small size of the country. Most consumer goods are sold through importers and distributors, but increasingly large retail chains and department stores import directly without intermediaries. In most cases, distribution firms serve the entire country.
Roughly 40% of Israel's 8 million people are concentrated in the greater Tel Aviv metropolitan area, Israel's commercial and financial center. Other major concentrations of the population are the Haifa metropolitan area (15%), a major port city and center for the petrochemical and high tech industries, and Jerusalem (11%). Almost all goods are imported through Israel's two Mediterranean ports, Haifa in the north and Ashdod in the south, and through Ben Gurion International Airport. These ports have good transportation links to the rest of the country. While most companies are headquartered in the Tel Aviv or Haifa metropolitan areas, a growing number of firms maintain branches, showrooms, or service facilities in Jerusalem and Beer Sheva.
Consumer malls and shopping centers are popular in Israel. Over 200 malls and shopping centers exist and others are planned. Many American specialty shops, chain stores, and franchises have their outlets in malls and shopping centers. Key to success is offering an increasing variety of new products and services to the Israeli consumer.
For first-time exporters to the market, it is important to note that distinct cultural differences between Israel and the United States may in some cases dictate changes in selling, advertising, and marketing. Although many strategies used by firms in the United States can be equally effective in Israel, U.S. companies are advised to not automatically assume that selling in Israel is the same as selling in the domestic U.S. market. Companies should carefully research the implications of promotional activities prior to their implementation in Israel.
Internet use in Israel is widespread and increasingly used for marketing and sales. An estimated 5.2 million Israelis, or 70% of the population, regularly accesses to the Internet. Like in other developed countries, e-Commerce is represented by a balance of B2B and B2C sites. Israel has a variety of B2C online stores, banking and bill payment sites and increasingly, government services. Companies are using B2B models to exchange documents, catalogues, and even complete deals. Major e-Commerce categories include travel services (36%), entertainment electronics (30%), computers & electrical products (29%), photos, books and games (23%), and digital software and various files (19%). The Internet is also heavily used by Israelis for social networking, information gathering and news.
Aggressive product promotion and advertising are effective tools in Israel, especially for consumer goods, where brand image is important and U.S. products face fierce competition from local and European suppliers. There are several effective means of advertisement; through commercial television and radio. Channel Two is a commercial Israeli TV station broadcasting nationwide and is permitted by law to carry private TV commercials, while state-owned Channel One carries sponsored advertising by public corporations. Some Israeli and internationally broadcast cable stations also carry advertisements. The state-owned Kol Israel (the Voice of Israel) radio station broadcasts commercial ads via two of its channels. In addition, 13 privately owned and authorized regional radio station operators accept commercial ads. Digital printing and commercial graphics are widely used in Israel, including billboards that cover entire building facades.
Israel is a highly competitive market and price is a key factor in purchasing decisions by Israeli companies and consumers. Presenting U.S. products as high quality at fair market prices is a good long-term sales strategy. Distributors prefer exclusivity and a special pricing clause should be incorporated into representation contracts. Israel’s VAT is 16%. The VAT is charged on virtually all services and products, including imports, sold in Israel (except fresh fruits and vegetables). The VAT on imports is levied on the CIF landed cost plus purchase tax. VAT is recovered by the importer upon resale of the goods and is ultimately paid by the consumer. Israel levies purchase taxes on many consumer goods. The GOI reduced or eliminated the tax on more than 600 items since 2000, including televisions, washing machines, electrical appliances and cosmetics. Rates that had ranged from 25-85% were reduced to 5-45%. Some rates were further reduced in 2003. Purchase tax on standard vehicles with combustion engines is 83%. Hybrids 30% and Electric vehicles 10%.
The Ministry of Industry, Trade & Labor requires that all businesses provide adequate after-sales service and customer support. Regulations exist that oblige local distributors to provide customers with full technical support for a period of up to ten years. To increase competitiveness in Israel, U.S. businesses should include a clause related to after-sales service and client support in their contracts with local representatives.
U.S. firms should ensure that their local representatives receive adequate and ongoing customer service training and technical support. The time between a product failure and the time to repair is one of the main issues affecting purchasing decisions by Israeli companies and government-owned entities. Providing reliable, long-term, after-sales service is the key to successful sales of most products and services.
Israel is a member of the WTO and the World Intellectual Property Organization (WIPO). It is a signatory to the Berne Convention for the Protection of Literary and Artistic Works, the Universal Copyright Convention, the Paris Convention for the Protection of Industrial Property, and the Patent Cooperation Treaty. Israel was obligated to implement the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) by January 1, 2000. The United States continues to encourage Israel to accede to the WIPO Copyright Treaty and the WIPO Performance and Phonograms Treaty (commonly known as the WIPO Internet Treaties), particularly in view of the importance of Israel's high-technology software and telecommunication industries.
In February 2010, Israel reached agreement with the U.S. to modify its Intellectual Property laws to address shortcomings in its treatment of new pharmaceutical products related to data exclusivity, patent term extension and publication of patent applications. Israel has amended its data exclusivity and patent publication laws in a manner compliant with the agreement but has yet to enact corrective legislation addressing the remaining areas of its IP laws - patent term extension. Draft legislation is before the Knesset Legal Committee. It is anticipated the law will be presented to the full Knesset in the summer of 2013.
The current patent term extension law, passed in 2005, curtailed existing pharmaceutical patent term adjustments granted to compensate for delays in obtaining regulatory approval of a drug, weakens protections for intellectual property of research-based pharmaceutical companies in Israel. The law creates numerous bureaucratic obstacles for patent holders who wish to apply for a patent term extension and also applies retroactively to all pending applications for patent term extensions and already granted patent term extensions.
As a result of Israel’s intellectual property regime deficiencies, it was on the Special 301 “Priority Watch List” from 2005 until 2012 and also for 12 of the past 16 years. The other four years - including the past year - it has been on the Watch List. Once legislation on the remaining area of Israel’s IP law which is compliant with the 2010 agreement is enacted by the Knesset, Israel will be removed from the Special 301 Watch List to the Watch List. When the subject legislation is fully implemented and passed through the Knesset, Israel will be moved off the Special 301 list altogether.
Israel has increased its budget, educational, police, and judicial resources devoted to the enforcement of the country’s copyright and trademark laws. In addition, Israel passed amendments to its copyright laws that should make it easier for law enforcement officials, prosecutors, and judges to pursue, prosecute, and punish copyright crimes. Please see the Investment Climate Statement (Chapter 6) for more up to date information, specifically on the ongoing negotiations between Israel and the USTR on patent term extension.
Protecting Your Intellectual Property in Israel:
Several general principles are important for effective management of intellectual property (“IP”) rights in Israel. First, it is important to have an overall strategy to protect your IP. Second, IP is protected differently in Israel than in the U.S. Third, rights must be registered and enforced in Israel, under local laws. Your U.S. trademark and patent registrations will not protect you in Israel. There is no such thing as an “international copyright” that will automatically protect an author’s writings throughout the entire world. Protection against unauthorized use in a particular country depends, basically, on the national laws of that country. However, most countries do offer copyright protection to foreign works under certain conditions, and these conditions have been greatly simplified by international copyright treaties and conventions.
Registration of patents and trademarks is on a first-in-time, first-in-right basis, so you should consider applying for trademark and patent protection even before selling your products or services in the Israeli market. It is vital that companies understand that intellectual property is primarily a private right and that the US government generally cannot enforce rights for private individuals in Israel. It is the responsibility of the rights' holders to register, protect, and enforce their rights where relevant, retaining their own counsel and advisors. Companies may wish to seek advice from local attorneys or IP consultants who are experts in Israeli law. The U.S. Commercial Service can provide a list of local lawyers upon request.
While the U.S. Government stands ready to assist, there is little we can do if the rights holders have not taken these fundamental steps necessary to securing and enforcing their IP in a timely fashion. Moreover, in many countries, rights holders who delay enforcing their rights on a mistaken belief that the USG can provide a political resolution to a legal problem may find that their rights have been eroded or abrogated due to legal doctrines such as statutes of limitations, laches, estoppel, or unreasonable delay in prosecuting a law suit. In no instance should U.S. Government advice be seen as a substitute for the obligation of a rights holder to promptly pursue its case.
It is always advisable to conduct due diligence on potential partners. Negotiate from the position of your partner and give your partner clear incentives to honor the contract. A good partner is an important ally in protecting IP rights. Consider carefully, however, whether to permit your partner to register your IP rights on your behalf. Doing so may create a risk that your partner will list itself as the IP owner and fail to transfer the rights should the partnership end. Keep an eye on your cost structure and reduce the margins (and the incentive) of would-be bad actors. Projects and sales in Israel require constant attention. Work with legal counsel familiar with Israeli laws to create a solid contract that includes non-compete clauses, and confidentiality/non-disclosure provisions.
It is also recommended that small and medium-size companies understand the importance of working together with trade associations and organizations to support efforts to protect IP and stop counterfeiting. There are a number of these organizations, both Israel or U.S.-based. These include:
A wealth of information on protecting IP is freely available to U.S. rights holders. Some excellent resources for companies regarding intellectual property include the following:
Trade and Economic Officer
U.S. Embassy Tel Aviv
Office: +972- 3-519-7547
American firms interested in doing business in Israel are advised to perform due diligence before concluding any kind of business deal in the market. Due diligence can include, but is not limited to, checking if the company or contact is listed on the Internet. Several marketing firms in Israel publish lists of companies and contacts. The U.S. Commercial Service in Tel Aviv also provides a list of local business service providers on their website. Many Israeli companies are increasingly developing their own websites and this information can be very useful to an American company’s research.
The U.S. Commercial Service in Tel Aviv can provide background information on companies and individuals via the International Company Profile (ICP) service. An ICP provides information about a local company or entity, its financial standing, reputation in the business community and includes a site visit to the local company and a confidential interview with the company management.
Most American banks correspond with the leading Israeli banks, such as Bank Leumi and Bank Hapoalim, and can provide due diligence information. It is advisable, especially when working with new clients, to seek verification from a corresponding U.S. bank on the authenticity of documents stemming from the Israeli banking system.
Please see the list of local “Business Service Providers” on CS Israel’s website: http://export.gov/israel/businessserviceproviders/index.asp