Branch vs. Subsidiary: How to Enter the Israeli Market
A foreign company entering Israel can register a branch or incorporate an Israeli subsidiary. A subsidiary is a separate legal entity that shields the parent from its liabilities, is taxed as an Israeli resident on its worldwide income, and repatriates profits as dividends subject to withholding tax. A branch is not separate: the parent is directly liable, and only the branch's Israeli income is taxed.
Legal Liability (The Corporate Veil)
Subsidiary: A separate legal entity. The parent company is generally protected from the subsidiary's liabilities (lawsuits, debts).
Branch: Not a separate entity. The foreign parent company is directly liable for all actions of the Israeli branch.
Taxation Nuances
Subsidiary: As a company incorporated in Israel, it is an Israeli resident and is taxed on its worldwide income. Profits are repatriated via dividends (subject to Withholding Tax).
Branch: Taxed only on income attributable to the Israeli branch operations. Remittance of branch profits to the HQ is generally not subject to Withholding Tax (Branch Tax), unlike dividends.
Operational Perception
Israeli banks, suppliers, and government tenders often prefer dealing with a local Subsidiary (Ltd) rather than a foreign branch, due to perceived stability and ease of legal recourse.
Is the parent company liable for an Israeli subsidiary’s debts?
Generally not. A subsidiary is a separate legal entity. A branch is not, so the foreign parent is directly liable for everything the branch does.
How are profits sent back to the parent company?
A subsidiary pays dividends, which are subject to withholding tax. Remitting branch profits to headquarters is generally not subject to withholding tax.
Why do many foreign companies choose a subsidiary anyway?
Israeli banks, suppliers and government tenders often prefer dealing with a local company, which is seen as more stable and easier to pursue legally.
Should a foreign company open a branch or a subsidiary in Israel?
A branch is part of the foreign company, so the parent is directly exposed and may be taxed on Israeli profits through a permanent establishment. A subsidiary is a separate Israeli company with its own reporting and audit. The choice depends on liability, tax and how long you plan to operate in Israel.