| Criteria | Score
(4-0) | Rationale |
| Laws on VC/PE fund formation and operation | 4 | Clear, favorable laws have permitted large-scale VC/EQ industry to develop since the 1980s. The scope of venture-capital activity remains high relative to the size of the economy. (EIU, Country Finance 2006). |
| Tax treatment of VC/PE funds & investments | 3 | Companies are generally subject to corporate tax on their corporate income and dividends paid to shareholders are usually subject to dividend tax. Partnerships are treated as pass-through entities for Israeli tax purposes. Investors in a fund will generally be subject to income tax on their share of the fund's income as if such income was realized directly by the investors, regardless of whether such income is actually distributed. Profits from financial investments, whether income or capital gains, were taxed at a standard corporate rate of 34% rate in 2006. But foreign portfolio investors are exempt from capital gains tax on securities traded on the Tel Aviv Stock Exchange. Dividends and interest are subject to a withholding tax, but the terms of double taxation treaties with specific countries may affect this. Under an amendment passed in July 2005, foreign individuals or companies domiciled in a country with which Israel has a double-taxation treaty that invest in Israeli assets between July 1st 2005 and Dec. 2008 will be exempt from capital gains tax on profits from these investments, irrespective of when these profits are realized. This exemption will not apply where the investee company’s main assets are in traded real-property companies. (EIU, Country Finance 2006; Israel Venture Association) |
| Protection of minority shareholder rights | 4 | A minority exceeding 25% may block most decisions. Election of board members is by a simple majority of those attending the general shareholders meeting. Institutional investors with more than a 5% share must attend and vote. The ability of shareholders to file suit, request audits, and challenge decisions is well above the OECD average, according to World Bank in its Doing Business 2006. (EIU, Country Commerce 2006). |
| Restrictions on institutional investors (pension funds, insurance firms) investing in VC/PE | 3 | All restrictions have been lifted since 2002 for insurance companies, subject only to prudential oversight by regulators. Since a 2003 pension fund reform the same freedom is granted to pension funds established since 1995, though older funds no longer open to new enrollees and suffering from actuarial deficits are still restricted to investing in government bonds. (EIU, Country Finance 2006). |
| Protection of intellectual property rights | 2 | EIU Risk Briefing score. Patents, trademarks, copyrights and industrial designs are legally recognized in Israel, and there is adequate enforcement of property rights once secured. In 2000 the Knesset (parliament) approved a law (in effect, an amendment to the general Antitrust Law) on the protection of intellectual property rights (IPR). It is designed to improve enforcement; in extreme cases, it provides for criminal charges against offenders. But jurisdiction over the protection of IP remains problematic, the more so since responsibility for IP protection in the West Bank and Gaza was transferred to the Palestinian Authority in September 1995. Infringement of patents, trademarks and designs usually meets with civil remedies, including an injunction and damages in Israel. For flagrant infringement, a company may sue for double damages. Piracy has been a serious problem, particularly for software, entertainment products and clothing. Although piracy of entertainment material, such as videotapes and DVDs, remains widespread, Israel has made significant progress in recent years in reducing the level of software piracy. Israel has been on the US Trade Representative's "Priority Watch List" since 2005 because of its rules related to patented pharmaceuticals. |
| Bankruptcy procedures/creditors' rights/partner liability in cases of an invested company's bankruptcy | 3 | Israel scores high on creditor rights de jure and de facto in an international IDB study. Enforcing contracts can incur delays and be costly. The average recovery rate in insolvency is a modest 38 cents on the dollar. The Companies Act provides general guarantees of limited liability similar to Western countries, though courts may lift liability in cases of criminal abuse or malfeasance. (World Bank, Doing Business 2006; EIU Country Commerce 2006). |
| Capital markets development and feasibility of exits (ie, local IPOs) | 4 | Average of three EIU Risk Briefing scores. The Tel Aviv Stock Exchange (TASE), a private member-owned company, is Israel's only securities exchange. Equities, government and corporate debt, and derivatives are all traded on the TASE, which is open to foreign investment and financing. Israel's financial sector has undergone tremendous change in recent years. The high-tech boom of the later 1990s spurred the sector as Internet, telecommunications and other innovative companies listed their shares on both local and foreign stockmarkets. In 2000, however, the industry suffered a global slump, a more general economic downturn and renewed Israeli-Palestinian unrest. Global technology demand has since picked up and improved security environment and government reforms have generated new opportunities. |
| Registration/reserve requirements on inward investments | 3 | There is registration for monitoring purposes, but no reserve requirements or exchange controls (EIU, Country Finance 2006). |
| Corporate governance requirements | 4 | There are well developed requirements on information disclosure, reporting of audited statements, quarterly statements and reports on material developments. Listed companies may not issue non-voting shares. Israel scores well above the OECD average on disclosure, director liability, power of shareholders to challenge decisions, and investor protection (World Bank, Doing Business 2006; EIU, Country Commerce 2006). |
| Strength of the judicial system | 3 | EIU Risk Briefing score. The country’s legal system is widely perceived to be independent, fair and honest. The quality of the judges is considered to be high. The legal framework is largely based British law but is increasingly influenced by US attitudes and trends. The judiciary and civil service are on a par with most Western countries. Contractual arrangements in Israel are generally secure. |
| Perceived corruption | 2 | EIU Risk Briefing score. Corruption has been frequent revealed in top political circles, but has generally had little impact on business. In early 2007 the police and the state comptroller, a government watchdog, were investigating a variety of corruption allegations against a wide range of leading politicians. The prime minister, Ehud Olmert, the finance minister, Avraham Hirchson, and the strategic threats minister, Avigdor Lieberman, were all under police investigations for different reasons. Several members of the Knesset (parliament) also faced legal investigations. Some of the politicians under investigation contended that the allegations against them are politically motivated. The head of the tax authority resigned and could face trial over corruption allegations. |
| Quality of local accounting industry/use of international standards | 3 | International financial reporting standards are permitted but not required for listed companies, but not for non-listed firms. Inflation-adjusted accounting is still in use for tax purposes though not for financial reporting. Standards are generally converging on global norms with large accounting firms present. (IASPLUS; EIU, Country Commerce 2006). |