Israel Innovation Authority: Startups shifting overseas

The Israel Innovation Authority, an independent statutory authority attached to the Ministry of Economy and Industry, published an extraordinary position paper this morning in which it sets out the consequences of the government’s judicial reform legislation for the technology sector in Israel.

Some of the prophecies of doom heard at the beginning of the process have materialized: according to the Innovation Authority’s assessment, between 50% and 80% of startups founded by Israeli entrepreneurs have incorporated overseas. Even if these companies have branches in Israel, these serve as development centers, and their contribution to the Israeli economy is lower.

“Until January, about 80% of startup companies opened in Israel had the corporate structure of an Israeli company, both because of tax considerations and because of the Israeli entrepreneurial-business environment, which were a main reason for the decision,” the position paper states. “Because of the uncertainty and the risks involved for the business environment in Israel, a trend began of opening startup companies through incorporation as a foreign company, a trend that strengthened in March. The assessment is that within a very short time, we are liable to reach a situation in which the vast majority of companies founded will be through incorporation overseas, amounting to over 80%.”

Far-reaching consequences for Israel’s economy

According to the Innovation Authority, the location in which companies choose to set up their headquarters will have a far-reaching effect on the continued growth of the Israeli technology industry and the Israeli economy, through a hit to the government’s tax base, to which the industry is a main contributor. The Innovation Authority fears that this could be the beginning of a process in which a series of decisions by entrepreneurs, investors and companies will turn into a trend at the end of which most of the intellectual property and the taxable income of the companies will be outside Israel, as will the location from which the company and its finances are managed, and further down the track the location where the business development, marketing, sales, operations and production functions are managed.

“Continued uncertainty will lead to a situation in which many decisions that have been delayed in the expectation that the uncertainty will be dispelled and matters will become clear will reach a point at which they have to be made, and then we can expect to see non-linear behavior, meaning that the changes in the nature of the high-tech companies’ activity will be rapid and will encompass most of the companies in the field.”

In March, the Ministry of Finance Budgets Division released a position paper in which it presented a simulation that it carried out with the aid of the Innovation Authority to measure the rise in risk attributed to investment in Israel as a result of the judicial overhaul proposals. According to the simulation, the effect will be a decline of between 8% and 25% in the number of people employed in the sector.

Published by Globes, Israel business news – en.globes.co.il – on May 1, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.