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Israel: Market Profile

Picture: Israel factsheet
Picture: Israel factsheet

1. Overview

Israel is considered one of the most advanced countries in the Middle East in economic and industrial development. In the past two decades, the Israeli economy has changed radically, moving away from agricultural industries to become a high-tech powerhouse. Economic growth in the medium term will receive support from strong domestic demand and an export rebound. Israel’s consumer price inflation rate remained low in 2017, partly because of the Israeli government measures to reduce cost of living. Israel’s current account surplus will remain steady in 2018, as rising services exports offset a brief deterioration in the goods trade position. Over the long term, we anticipate Israel’s trade deficit to narrow noticeably, as rising gas exports from the Leviathan field come online.

Source: BMI

2. Major Economic/Political Events and Upcoming Elections

Summer - Autumn 2011
Rising prices prompt major protests. Government improves competition in food market and makes cheaper housing more available.

November 2011
Israel launches week-long military campaign against Gaza-based armed groups following months of escalating rocket attacks on Israeli towns.

July to August 2014
Israel responds to attacks by armed groups in Gaza with a military campaign by air and land to knock out missile launching sites and attack tunnels. Clashes end in uneasy Egyptian-brokered ceasefire in August.

May 2015
Prime Minister Netanyahu forms a new coalition government after March elections with right-wing Bayit Yehudi (Jewish Home) party. Another right-wing party, Yisrael Beitenu, joins the following year.

November 2015
Israel suspends contact with European Union officials in talks with Palestinians over EU decision to label goods from Jewish settlements in the West Bank as coming not from Israel but from settlements.

June 2016
Israel and Turkey reach agreement over 2010 Gaza flotilla raid and normalise relations.

September 2016
US agrees military aid package worth USD38 billion over next 10 years for Israel, largest such deal in US history. Previous pact, set to expire in 2018, saw Israel get USD3.1 billion annually.

December 2016
Israel suspends working ties with 12 countries that voted for a Security Council resolution condemning settlement building, after the US for the first time abstained from the vote rather than using its veto.

February 2017
Parliament passes a law which retroactively legalises dozens of Jewish settlements built on private Palestinian land in the West Bank.

June 2017
Work begins on the first new Jewish settlement in the West Bank for 25 years.

December 2017
US President Donald Trump recognizes Jerusalem as the capital of Israel, upsetting the Arab world and some Western allies.

February 2018
Prosecutors investigate allegations that Prime Minister Benjamin Netanyahu pressed regulators to help the Bezeq telecoms company in return for favourable news coverage from one of its websites.

May 2018
Protests by Palestinian factions in Gaza on the border lead to clashes with Israeli troops in which at least 40 Palestinians die and thousands are injured.

Source: BBC country profile

3. Major Economic Indicators

Graph: Israel real GDP and inflation
Graph: Israel real GDP and inflation
Graph: Israel GDP by sector (2016)
Graph: Israel GDP by sector (2016)
Graph: Israel unemployment rate
Graph: Israel unemployment rate
Graph: Israel current account balance
Graph: Israel current account balance

Note: (e) estimate, (f) forecast
Source: IMF, World Bank

4. External Trade

4.1 Merchandise Trade

Graph: Israel merchandise trade
Graph: Israel merchandise trade
Graph: Israel major export commodities (2016)
Graph: Israel major export commodities (2016)
Graph: Israel major export markets (2016)
Graph: Israel major export markets (2016)
Graph: Israel major import commodities (2016)
Graph: Israel major import commodities (2016)
Graph: Israel major import markets (2016)
Graph: Israel major import markets (2016)

Source: WTO, World Bank WITS database

4.2 Trade in Services

Graph: Israel trade in services
Graph: Israel trade in services

5. Trade Policies

  • The slow European recovery has somewhat weighed on export growth, but this is now picking up pace. There are concerns that the imposition of EU labelling requirements for Israeli products made in settlements in the West Bank, as well as a growing support for the boycott, divestment and sanctions (BDS) movement against Israel across the bloc, will weigh on trade, but this has had negligible effects on trade flows thus far. In the US, the Trump administration has signalled that it will use protectionist measures to tackle real or perceived trade imbalances and support domestic industries. These measures are unlikely to target Israel, however, as the two countries have cemented bilateral trade relations through an FTA, and the administration is likely to focus on those countries with which the US has a trade deficit, while it has a trade surplus with Israel.
  • Israel has been a member of WTO since 21 April 1995 and a member of GATT since 5 July 1962.
  • The average import tariff rate in Israel is 1.0%, among the lowest in the world and indicative of the country's welcoming environment for international trade.
  • Israel's WTO tariff schedule indicates higher rates for agricultural products but relatively low rates for intermediate inputs. Most of Israel's main trade partners, including the US and the EU, are covered by FTAs which have eliminated the vast majority of tariffs.
  • Trade relationships with major partners are reinforced by Israel's wide range of FTAs, with agreements in place with the EU, US, EFTA, Mexico, Turkey, Canada, Jordan, Egypt, Colombia and the Mercosur bloc of South American countries. These agreements assist with the diversification of trade partners, which is also being pioneered by the Israeli government through the opening of new trade offices in Chile and Peru and visits by Prime Minister Benjamin Netanyahu to a number of East African and Central Asian countries.
  • As a result of its commitment to free trade, and its relative isolation within the MENA region, tariff and non-tariff trade barriers are consequently low in Israel. The average tariff rate is the lowest regionally, at 1.0%, while other non-tariff barriers are minimal, indicating the country's openness to international trade.

  • Most goods can be freely imported into Israel, though licences are required for defence-related items. When applying for an import licence, the importer must either be an Israeli resident, a corporation, or a non-profit organisation registered in Israel.

    Israel's import tariffs are classified under the Harmonised System codes (HS). Ad valorem duties are imposed on imports transaction value (declared by importers). On top of custom duties, a value-added tax (VAT) is applied to almost all imported and domestically produced goods and services. For imports, VAT is levied based on the CIF value plus custom duties. The Minister of Finance has increased the VAT to 18% since June 2013.
  • Israel maintains strict regulations on product labelling and country of origin marking. All imports into Israel must bear a label showing the country of origin, the name and address of the manufacturer, the name and address of the Israeli importer and the contents, weight and volume in metric units. All labels must be in Hebrew. English may be added and the printed letters are not larger than those in Hebrew.
  • Customs procedures are streamlined and do not require excessive documentation or lengthy delays, while the risk of businesses being solicited for bribes by customs officials is low. There are few additional non-tariff trade barriers as the government is committed to supporting free trade.

Source: WTO – Trade Policy Review

6. Trade Agreement

6.1 Trade Updates

The Israeli government is also pursuing an FTA with India.

6.2 Multinational Trade Agreements

Active

  1. United States - The US is Israel's single largest trade partner, as both a destination for exports and a source for imports, a situation which has been encouraged by the FTA between the two countries. This confers major advantages on Israeli businesses, which are able to access the US market with negligible tariff or non-tariff barriers.

  2. Trade between the EU and Israel is substantial and some of the country's main trade partners, including the UK, Germany and Belgium, are members of the bloc.

  3. Israel has an FTA with members of the European Free Trade Association-EFTA (that includes Iceland, Liechtenstein, Norway and Switzerland).

  4. Turkey FTA - Turkey is an important trade partner and the two countries are seeking to boost economic ties. Sometimes fractious relations between the two countries have limited potential trade, but energy links are being mooted as Israel plans to exploit its offshore natural gas fields.

  5. FTA with Mercosur; Mexico, Colombia - The Israeli government is attempting to boost trade ties with Latin America as part of its diversification efforts to reduce reliance on the US and EU markets. However, trade between Israel and Latin American countries remains relatively low at present.

  6. FTA with Canada - Canada is not a major trade partner of Israel, though this agreement will assist with trade diversification efforts.

  7. Bilateral agreements exist between Israel and Jordan, aiming to boost economic ties between Israel and the two Arab states with which it has established diplomatic relations. Nevertheless, trade flows with both countries remain limited at present.

Source: WTO Regional Trade Agreements

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Israel FDI stock
Graph: Israel FDI stock
Graph: Israel FDI flow
Graph: Israel FDI flow

7.2 Foreign Direct Investment Policy

  1. The Israeli authority aims to foster supportive conditions for companies looking for business opportunities in the country. To promote foreign direct investment (FDI), the government has set up Invest in Israel, an investment promotion centre under the Ministry of Economy to aid investment growth across Israel's industries. A wide range of incentives and benefits are offered to investors in industry, tourism and real estate, while special focus is given to high-tech companies and R&D activities. Investment incentives, outlined under the Law for the Encouragement of Capital Investment, are divided into two main parts: the Grants programme and the automatic tax benefits programme. Details of the schemes as well as information on Israel’s investment climate can be found on the Invest in Israel website.

  2. To qualify for benefits, the company has to be an “industrial company” registered in Israel and has to be “internationally competitive” (i.e. with export capability). Biotechnology and Nanotechnology companies are exempt from the "export" requirement to qualify. Recognised investment in the Priority Area, however, will be treated as an Approved Investment and the company will be designated as an Approved Enterprise.

  3. Israel is actively promoting cooperation with China and other parties under the Belt and Road Initiative, welcoming Chinese enterprises to participate in various infrastructure projects in Israel, as the latter is attempting to add sea ports and new railroad networks. China Harbour is building a new port next to Ashdod’s existing one, and the Shanghai International Port Group (SIPG) has won a 25-year licence to operate another deep-sea private port planned in Haifa. It is reported that Israel would like China to participate in the building of a railroad connection between the ports in Eilat and Ashdod, connecting the Red Sea to the Mediterranean Sea.

  4. Government procurement laws require foreign companies to offset any foreign goods or services provided by investing in local production, entering partnerships with local companies, or sourcing goods and services from domestic firms. Offset requirements can vary from 20%-50% of the value of the contract. This can raise the costs associated with participating in government contracts, and deter foreign firms from applying for tenders.

  5. The Israeli government encourages investment by offering a wide range of incentives to investors under The Law for the Encouragement of Capital Investment. To meet the qualifying standard for these incentives a company must be internationally competitive, although the scheme favours high-tech and R&D industries. These incentives include grants for industrial enterprises with export capabilities and operating in a designated National Priority Region (mostly in Israel's north and south). Simultaneously, Priority Enterprises and Special Priority Enterprises established in the same National Priority Regions can avail themselves of reduced corporate tax rates of 9% and 5% respectively. In addition, the Office of the Chief Scientist of the Ministry of Industry and Trade operates a range of support programmes, on a yearly budget of USD300 million. There is also an FTZ located at the Red Sea port of Eilat, offering exemption from customs duties and trade tariffs, while Israel operates around 30 industrial parks and areas, as well as a cross-border zone with Jordan. This is a novel enterprise and aims to fulfil Jordan's requirements for Qualified Industrial Zones (QIZ). The QIZ scheme is a US initiative, whereby goods exported from certain areas in Jordan and Egypt are exempt from US tariffs, provided they contain at least 8% Israeli input.

  6. There are generally few regulatory barriers to investment in Israel and the government adopts a consistently welcoming approach to FDI in almost all sectors of the economy. Among the few existing restrictions is foreign investment in parts of the defence industry, which is off-limits for national security reasons, while FDI in regulated industries such as banking and insurance require government approval. In addition, some key industries including transport and utilities remain dominated by state-owned enterprises (SOEs), which hold monopolies in electricity generation and distribution, port operation, aerospace, railways and energy.

Sources: WTO – Trade Policy Review, The International Trade Administration (ITA), U.S. Department of Commerce

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
Port of Eilat FTZ-Tax exemption
-Customs duties exemption
-Trade tariff exemption
Office of the Chief Scientist of the Ministry of Industry and Trade support programmes-Reduced tax rates for investments in priority areas
-Employment grants to attract high-calibre candidates, Funding for R&D activities


8. Taxation – 2017

  • Value added tax: 17%
  • Corporate income tax: 23%

8.1 Important Updates to Taxation Information

  • As of January 1 2018, the standard corporate income tax rate was lowered from 24% to 23%, following a reduction the previous year which has brought it down from 25%. This lower tax rate reduces operational costs for businesses and aims to encourage growth and competitiveness in Israeli industry. Nevertheless, the tax burden on businesses remains higher than in Gulf Cooperation Council (GCC) states, where no corporate income tax is charged and these regional peers therefore continue to offer a competitive edge on Israel in this respect.
  • VAT is added to the payments on most goods and services including imports. VAT is charged at a flat rate of 17%, having been reduced from 18% in 2015, but certain items are zero-rated including exported goods, provision of tourist services, the sale of fruit and vegetables, and on cargo transport to and from Israel. VAT is also zero-rated on the sale of goods and services to the Eilat free-trade zone in the south of the country. Lastly, businesses with annual revenues of less than USD20,000 are usually exempt from VAT, meaning that they don't need to charge their customers any VAT and cannot recover VAT on their expenses.

8.2 Business Taxes

Type of TaxTax Rate and Base
Corporate Income Tax
23% on profits (as of Jan 1 2018)
Social security contributions for resident workers
3.45% on monthly income up to ILS5,678; 7.5% on the remainder up to ILS43,240
Social security contributions for non-resident workers
0.49% on monthly income up to ILS5,678; 2.55% on the remainder up to ILS43,240
Wage and Profit Tax
17% on financial institutions profits
Value Added Tax17% on sale of goods and services


9. Foreign Worker Requirements

9.1 Localisation Requirements

A notable risk to businesses in Israel that need to employ foreign staff is the difficulty of obtaining foreign worker visas. Although any Jewish person wishing to live and work in Israel is eligible to apply for a right of return visa; all other foreign workers must apply for a B-1 Visa and are subject to the provisions laid out by the ministry.

The candidate must be sponsored by a business and can only work for that organisation while domiciled in Israel. An applicant and his or her employer can apply for a work permit valid for 2 years, 1 year, 3 months or 45 days. As part of the process a candidate must first receive a recommendation from the Ministry of Interior to work in Israel. This requires convincing the ministry that the employee is an expert in their field, earning more than twice the average salary in the market and proving no available Israeli citizen can perform the same task.

The application process usually takes up to 90 days, and the cost is considerable at USD2,925. This creates difficulties for businesses needing to import specific experienced personnel, significantly increasing the cost and time barriers associated with employing foreign workers.

9.2 Visa/Travel Restrictions

Most business travellers can enter Israel visa-free with a right to stay in the country for three months. Nationals of some Muslim-majority countries in the Middle East, North Africa and Asia require confirmation from the Israeli government before travel, but this should not cause major delays. Israel has visa exemption agreements with many jurisdictions. Tourist visa exemption applies to national and official passports only, and not to other travel documents. Citizens of some jurisdictions, including Hong Kong are are exempt from obtaining transit and class B2 visit visas.

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
 A111/08/2016
Standard & Poor's A+ 02/05/2013
Fitch A+ 17/04/2018

Source: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201620172018
Ease of Doing Business Index
53/189
52/190
54/190
Ease of Paying Taxes Index
78/189
72/19099/190
Logistics Performance Index
28/160
N/AN/A
Corruption Perception Index
28/176
32/180N/A
IMD World Competitiveness21/6322/63N/A

Source: World Bank, IMD, Transparency International

10.3 BMI Risk Indices


World ranking
201620172018
Economic Risk Index Rank4/202
Short-Term Economic Risk Score 79.6 80.480.4
Long-Term Economic Risk Score 76.1 78.4 79.3
Political Risk Index Rank67/202
Short-Term Political Risk Score 67.5 67.567.5
Long-Term Political Risk Score 71.3 70.7 70.7
Operational Risk Index Rank35/201
Operational Risk Score 62.464.4
65.5

Source: BMI Research

10.4 BMI Political and Economic Risk Indices

BMI Risk Summary - Q2 2018

POLITICAL RISK
The wave of violence between Israelis and Palestinians could regain traction and lead to a conflict between Israel and Hamas, or to a full-scale armed insurrection similar to the first and second intifadas, as signalled by the crisis at the al-Aqsa compound in July 2017. Political instability will remain a key concern in Israel and violence with the Palestinians may continue over the coming years. In addition, the rightward shift of the coalition government, and the adoption of a bill legalising retroactively settlements in the West Bank, will further fuel Palestinian grievances and we therefore reaffirm our view that a longer-term agreement is unlikely to be reached anytime soon. Meanwhile, we see rising risks of confrontation with Lebanese Hizbullah over the coming years, as the militant group is emboldened by its military successes in Syria and as Israel feels it still has a score to settle following the 2006 war. The one positive is improved relations with Egypt and Turkey, as well as unofficial rapprochement with the Gulf monarchies as the countries' interests have aligned on regional security matters, and in particular surrounding Iran's re-emergence. Improved relations with the US following Donald Trump's election to the presidency should also mitigate these risks.

ECONOMIC RISK
The export sector in Israel amounts to more than 30% of GDP; a further strengthening of the shekel can thus impact the country's economic output significantly. So far, the Bank of Israel has mitigated appreciatory pressures on the shekel by strongly intervening on the foreign exchange markets. A faster-than-expected appreciation of the shekel would delay the recovery of the exports sector.

OPERATIONAL RISK
Israel possesses many qualities which make it an attractive destination for investment, particularly among its direct neighbours in the Middle East. The country's open market, few investment restrictions, well-educated labour force and developed logistics network create the necessary conditions for private enterprises to thrive. The primary concern for investors is the security situation, which poses risks to the safety of personnel and assets, but the development of a comprehensive defence apparatus has made the country one of the more secure in the Middle East.

Graph: Israel short term political risk index
Graph: Israel short term political risk index
Graph: Israel long term political risk index
Graph: Israel long term political risk index
Graph: Israel short term economic risk index
Graph: Israel short term economic risk index
Graph: Israel long term economic risk index
Graph: Israel long term economic risk index

10.5 BMI Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Israel Score65.5
72.4
63.069.1
57.6
Developed States Average72.963.370.975.881.5
Developed States Position (out of 27)23.06.024.022.027.0
Developed States Average72.963.370.975.881.5
Developed States Position (out of 27) 23.06.024.022.027.0
Global Average49.849.850.049.349.9
Global Position (out of 201)35.07.050.035.078.0

100 = Lowest risk; 0 = Highest risk
Source: BMI Operational Risk Index

Graph: Israel vs global and regional averages
Graph: Israel vs global and regional averages
Country
Operational Risk Index
Labour Market Risk Index
Logistics Risk IndexTrade and Investment Risk IndexCrime and Secruity Risk Index
Denmark
 80.1 75.483.3
 75.8 85.7
Switzerland
 79.7 76.573.9
 77.6 90.8
Netherlands
 79.1 64.5 85.5 77.9 88.3
Sweden
 78.9 67.6 85.5 77.8 84.5
New Zealand
 78.1 73.0 73.8 75.7 90.0
US
 77.8 79.0 88.0 75.2 68.9
Canada
 77.6 75.2 80.7 71.8 82.7
UK
 77.5 72.1 77.9 78.1 81.8
Norway
 77.0 62.7 81.5 72.6 91.1
Finland
 75.2 53.0 83.2 73.5 91.0
Ireland
 74.8 65.0 71.2 77.8 85.2
Austria
 74.4 58.6 77.9 71.6 89.5
Japan
 74.4 68.8 81.4 64.9 82.5
Luxembourg
 74.1 52.1 78.9 77.7 87.8
Australia
 73.5 68.0 70.3 71.4 84.2
Belgium
 73.0 55.3 81.4 76.5 78.9
Germany
 72.8 63.4 77.4 69.5 81.0
Spain
 71.9 59.0 80.9 67.480.3
France70.960.279.970.373.3
Portugal70.950.880.266.585.9
Iceland70.459.969.166.286.5
Liechtenstein69.254.761.179.581.5
Israel65.572.469.163.057.6
Malta65.052.458.569.679.6
Isle of Man64.862.053.961.881.3
Italy63.053.972.357.668.3
Greece58.453.168.847.863.8
Developed Markets Averages 72.9 63.3 75.8 70.9 81.5
Emerging Markets Averages 46.8 48.0 45.8 47.5 46.1
Global Markets Averages 49.849.8
 49.350.0
 49.9

Note: Higher score = Lower risk
Source: BMI Operational Risk Index

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Israel

Graph: Israel major export commodities to Hong Kong (2017)
Graph: Israel major export commodities to Hong Kong (2017)
Graph: Israel major import commodities from Hong Kong (2017)
Graph: Israel major import commodities from Hong Kong (2017)
Graph: Israel merchandise exports to Hong Kong
Graph: Israel merchandise exports to Hong Kong
Graph: Israel merchandise imports from Hong Kong
Graph: Israel merchandise imports from Hong Kong

2016
Growth rate(%)
Number of Israeli residents visiting Hong Kong64,4030.71
Number of Israelis residents in Hong KongN/A
N/A

Source: Hong Kong Immigration Department, UN

11.2 Commercial Presence in Hong Kong


2017
Growth rate(%)
Number of Israeli companies in Hong Kong32N/A
- Regional headquarters11
- Regional offices10
- Local offices11

Source: Hong Kong Census & Statistics Department

11.3 Treaties and agreements between Hong Kong and Israel

  • Israel has also concluded double taxation agreements (DTAs) with a number of countries including the US, the EU and China.
  • Hong Kong has concluded airline income treaties with Israel.

Note: China (mainland) and Israel signed an Agreement for the Avoidance of Double Taxation (DTA) on 13 October 2016 and Investment Promotion and Protection Agreements which came into effect on 12 February 2000.

11.4 Chamber of Commerce (or Related Organisations) in Hong Kong

Israeli Chamber of Commerce in Hong Kong
Address: JCC Tower One, One Robinson Place, 70 Robinson Place, Mid-Levels, Central, Hong Kong
Email: contact@israel-asia.org
Tel: (852) 2857 4107

Source: AsiaXPAT

Israeln Consulate General in Hong Kong
Address: Room 701, Tower 2, Admiralty Centre, 18 Harcourt Road, Hong Kong
Email: info@hongkong.mfa.gov.il
Hours of Business: Monday - Friday 9:30 am - 12:30 pm
Consul General: Amikam Levy
Tel: (852) 2821 7500
Fax: (852) 2865 0220

Source: www.embassypages.com

11.5 Visa Requirements for Hong Kong Residents

People travelling on a Hong Kong passport need a visa to visit Israel.

Source: Visa on Demand

Content provided by Picture: BMI Research