Israel

Israel

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, Israel’s trade deficit is likely to narrow noticeably, as rising gas exports from the Leviathan field come online.

Source: Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

September 2016
The US agreed on a military aid package worth US$38 billion over next 10 years for Israel, the largest such deal in US history.

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

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

Source: BBC country profile - Timeline, Fitch Solutions

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

e = estimate, f = forecast
Source: IMF, World Bank, Fitch Solutions
Date last reviewed: August 21, 2018

4. External Trade

4.1 Merchandise Trade

Graph: Israel merchandise trade
Graph: Israel merchandise trade

Source: WTO
Date last reviewed: August 21, 2018

Graph: Israel major export commodities (2017)
Graph: Israel major export commodities (2017)
Graph: Israel major export markets (2017)
Graph: Israel major export markets (2017)
Graph: Israel major import commodities (2017)
Graph: Israel major import commodities (2017)
Graph: Israel major import markets (2017)
Graph: Israel major import markets (2017)

Source: Trade Map, Fitch Solutions
Date last reviewed: August 24, 2018

4.2 Trade in Services

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

e = estimate
Source: WTO
Date last reviewed: August 21, 2018

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 April 21, 1995 and a member of GATT since July 5, 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, Fitch Solutions

6. Trade Agreement

6.1 Trade Updates

The Israeli government is pursuing an FTA with India.

6.2 Multinational Trade Agreements

Active

  1. United States-Israel FTA: The US is Israel's single largest export partner and second-largest import partner, 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. Israel-EU FTA: Trade between the EU and Israel is substantial and some of the country's main trade partners, including Germany, Belgium and Italy, are members of the bloc.

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

  4. Israel-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. Mercosur-Israel FTA: Mercosur (Southern Common Market), consists of Argentina, Brazil, Paraguay and Uruguay. 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. Israel-Canada FTA: Canada is not a major trade partner of Israel, though this agreement does assist with trade diversification.

  7. Israel-Jordan Preferential Trade Agreement: A bilateral agreement exist between Israel and Jordan, which aims to boost economic ties between Israel and the Arab state with which it has established diplomatic relations. Nevertheless, trade flows between the two countries remain limited at present.

Under Negotiation

Israel-India FTA: An FTA with India is under discussion. In 2017, India was Israel’s seventh largest export partner and ninth largest import partner. The bulk of products traded between the two countries are natural or cultured pearls, precious or semi-precious stones and precious metals. A future FTA between the two countries is expected to boost such trade further.

Source: WTO Regional Trade Agreements database

7. Investment Policy

7.1 Foreign Direct Investment

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

Source: UNCTAD
Date last reviewed: August 21, 2018

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 US$300 million.

  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.

Source: 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 FTZThe FTZ located at the Red Sea port of Eilat offers exemption from customs duties and trade tariffs, as well as tax exemption.
Office of the Chief Scientist of the Ministry of Industry and Trade support programmesIsrael 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.

Further support programmes include:
- Reduced tax rates for investments in priority areas
- Employment grants to attract high-calibre candidates
- Funding for R&D activities

Source: Fitch Solutions

8. Taxation – 2018

  • Value Added Tax: 17%
  • Corporate Income Tax: 23%

Source: PwC Tax Summaries 2018

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 US$20,000 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 January 1, 2018)
Social security contributions for resident workers
3.45% on monthly income up to ILS5,944; 7.5% on the remainder between ILS5,944 up to the maximum monthly income of ILS43,370
Social security contributions for non-resident workers
0.49% on monthly income up to ILS5,944; 2.55% on the remainder between ILS5,944 up to the maximum monthly income of ILS43,370
Wage and Profit Tax
17% on financial institutions' profits
Value Added Tax17% on sale of goods and services

Source: PwC Tax Summaries 2018
Date last reviewed: August 27, 2018

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 two years, one year, three 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 stands at US$2,925.

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 exempt from obtaining transit and class B2 visit visas.

Source: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
A1 (Positive)20/07/2018
S&P GlobalAA- (Stable)03/08/2018
Fitch RatingsA+ (Stable)17/04/2018

Source: Moody's, S&P Global, 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/A37/160
Corruption Perception Index
28/176
32/180N/A
IMD World Competitiveness21/6322/6321/63

Source: World Bank, IMD, Transparency International

10.3 Fitch Solutions Risk Indices


World ranking
201620172018
Economic Risk Index Rank5/202
Short-Term Economic Risk Score 79.6 80.480
Long-Term Economic Risk Score 76.1 78.478.5
Political Risk Index Rank75/202
Short-Term Political Risk Score 67.5 67.565.8
Long-Term Political Risk Score 71.3 70.769.2
Operational Risk Index Rank34/201
Operational Risk Score 62.464.4
66.7

Source: Fitch Solutions
Date last reviewed: August 27, 2018

10.4 Fitch Solutions Risk Summary

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.

Source: Fitch Solutions
Date last reviewed: August 27, 2018

10.5 Fitch Solutions Political & Economic Risk Indices 

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

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Economic and Political Risk Indices
Date last reviewed: August 21, 2018

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Israel Score66.7
72.4
 63.069.1
62.4
Developed States Average 72.9 63.3 70.9 75.8 81.8
Developed States Position (out of 27) 23 6 24 22 27
Developed States Average 72.9 63.3 70.9 75.8 81.8
Developed States Position (out of 27) 23 6 24 22 27
Global Average 49.7 49.8 50.0 49.3 49.9
Global Position (out of 201) 34 7 503556

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions 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
Trade and Investment Risk IndexLogistics Risk IndexCrime and Secruity Risk Index
Switzerland
79.9 76.577.6
73.991.8
Denmark79.675.475.8
83.384.0
Netherlands
79.1 64.577.985.588.4
Sweden
78.7 67.677.885.583.8
US78.2 79.075.288.070.5
New Zealand
78.073.0 75.773.889.4
Canada
77.575.271.8
 80.782.1
UK
77.3 72.178.177.981.3
Norway
77.3 62.772.681.592.3
Finland
75.2 53.073.583.291.2
Japan74.968.864.981.484.7
Luxembourg
74.452.177.778.988.9
Ireland
74.165.077.871.282.5
Austria74.158.671.677.988.3
Australia
73.5 68.071.470.384.3
Germany73.063.469.577.481.7
Spain72.159.067.480.981.3
Belgium
 72.155.376.581.475.3
France71.560.270.379.975.5
Portugal70.650.866.580.285.0
Iceland70.459.966.269.186.6
Liechtenstein69.554.779.561.182.6
Israel66.772.463.069.162.4
Malta65.252.469.658.580.1
Isle of Man65.062.061.853.982.3
Italy63.153.957.672.368.7
Greece58.253.147.868.863.2
Developed Markets Averages 72.9 63.3 70.975.8 81.8
Global Markets Averages49.749.850.049.3
 49.9

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: August 21, 2018

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Israel

Graph: Major export commodities to Israel (2017)
Graph: Major export commodities to Israel (2017)
Graph: Major import commodities from Israel (2017)
Graph: Major import commodities from Israel (2017)
Graph: Merchandise exports to Israel
Graph: Merchandise exports to Israel
Graph: Merchandise imports from Israel
Graph: Merchandise imports from Israel

Official Exchange Rate HK$/US$, average
7.76 (2012)
7.76 (2013)
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
Source: Hong Kong Census and Statistics Department, Fitch Solutions
Date last reviewed: August 21, 2018


2017
Growth rate (%)
Number of Israeli residents visiting Hong Kong74,943N/A

Source: Hong Kong Tourism Board


2017
Growth rate (%)
Number of Middle East residents visiting Hong Kong129,816-0.2
Number of developed state citizens residing in Hong Kong65,6801.5

Source: Hong Kong Tourism Board, United Nations Department of Economic and Social Affairs - Population Division, Fitch Solutions
Date last reviewed: August 21, 2018

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 concluded a double taxation agreement (DTA) with mainland China, which was signed on October 13, 2016
  • Hong Kong has concluded airline income treaties with Israel
  • Israel has a Bilateral Investment Treaty with mainland China that entered into force on January 13, 2009

Source: Fitch Solutions

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

Consulate General of Israel in Hong Kong
Address: Room 701, Tower 2, Admiralty Centre, 18 Harcourt Road, Hong Kong
Email: info@hongkong.mfa.gov.il
Tel: (852) 2821 7500
Fax: (852) 2865 0220

Source: embassies.gov.il


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