15 INTERNATIONAL TECH HUB | BDO LLP
A key reason why so many of the world’s global tech players and Fortune500 companies have established operations in Israel is to have direct access to this cutting-edge talent and the vibrant culture of innovation that goes with it. Companies want to reach these people at the source, not wait till they’ve travelled aboard and become even more expensive. It’s very common for big global players to set up an R&D centre in Israel and recruit local talent to help them develop their next innovation. Global tech companies are looking for dynamic, experienced people with a positive attitude, and a proactive mindset operating in innovative areas. In Israel there are about 220 R&D centres owned and operated by international technology players – not just the real tech giants, who are of course also present here, but also the second-tier players, who all have a footprint in Israel, where they’re driving future innovations. Every Fortune 500 company is here, whether it’s a pure tech player or just tech-enabled, from Ford to Cisco. Typically they come to Israel, take over a local entity, transform it into their R&D centre, and look to develop a new technology or create a relationship with other players. The tight-knit nature of the tech community is another asset. Most of the local talent comes from just a handful of institutions and universities, and with that shared military experience, there is a strong sense in the tech community that everyone knows everyone. These powerful relationships and networks naturally support the sort of sophisticated collaboration and ideation that drives a true culture of innovation. TAX BREAKS, R&D GRANTS Because of the limited geographical footprint of the country, the state is keen to expand the scope of tech activity, and so offers a range of incentives to reward startups and tech companies, either homegrown or international, that establish themselves in areas beyond the traditional Tel Aviv area. There are a lot of tax advantages and government grants for businesses taking on new employees outside of the Tel Aviv area.
The Israeli government has a very positive attitude to encouraging international investment and companies from overseas to expand in the tech space, and there are a range of tax breaks and R&D grants to incentivise that movement. For example, an overseas company that invests in an Israeli entity will pay zero tax on gains made in Israel. Once that entity starts to make money, it will only be liable for corporation tax. This arrangement, which has been in place now for over 15 years, really kickstarted the boom in international investment into Israel that continues to this day. In addition, there are numerous benefits for any business that sets up as an Israeli legal entity, whether homegrown or from overseas. Thanks to a generous Capital Grant, the state will match between 40-85% of any R&D investment made by a creative or tech business on a 1:1 basis. In other words, for every dollar you invest, you can claim a further dollar as an incentive. The grant does not have to be repaid either – the only condition is that the state will be entitled to 3.5-4.5% of any eventual revenues. The range of variance relates to where your entity or R&D centre is located – there is greater reward for businesses that look to extend beyond Tel Aviv and its environs. So if you set up in the north of the country, for example, your percentage will be higher. Also, if you join a specific incubator or increase your workforce for at least 7%, or if you employ people from a specific background, such as religious people or Arabs, the percentage of the benefit will be higher too. Support can also be available to help fund marketing and promotional activities too. In addition, every Israeli entity with at least 25% of revenues coming from overseas – and this will be a very significant proportion of them – pays a maximum 16% corporate tax instead of 23%, and that figure can go as low as 6% depending on various criteria such as the makeup of the shareholders. External shareholders and the right location can bring the percentage down. This makes Israel a very attractive proposition for overseas companies who are eyeing up international expansion.
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