THE ISRAELI ECONOMY AT A GLANCE

June 1995

State of Israel

Ministry of Industry and Trade

P.O.B. 299, Jerusalem 91002, Israel

Tel.: 972-2-220220

Fax.: 972-2-245110

POLICY FOCUS – SELECTED INDUSTRIAL POLICY

THE ISRAELI ECONOMY AND FOREIGN TRADE

FOREIGN TRADE POLICY – 1995

For half a century, Israel has been isolated from her regional environment, forging her economic alliances overseas. Therefore, in the past, Israel’s export targets and trade partners have been nearly exclusively on the European and American continents.

Currently, the main goal of Israel’s foreign trade police are:

* Promotion and expansion of Israeli exportation to all foreign markets

* Expansion of business and industrial alliances with actual trade partners while forming new alliances with potential trade partners.

W.T.0 – WORLD TRADE ORGANIZATION

Israel has been a member of GATT since 1962 and has taken an active part in the Uruguay Round negotiations. The Israeli government recently ratified the Uruguay Round Agreements, to which only 23 countries acceded, including the expanded agreement on government procurement. A special inter-ministerial committee was appointed to study the legal and economic implications of this development and to formulate recommendations for the necessary legislative and regulatory adjustments.

EUROPE

EU

In 1975, Israel reached a Free Trade Area Agreement with the European E.U. Community (today the European Union), As a result of this agreement Israel’s existing ties with Europe have expanded and strengthened. Europe has been Israel’s traditional trading partner.

New negotiations to update this Free Trade Area Agreement with the EU have been ongoing now for over a year. As a result of theses negotiations the EU has agreed to allow Israel access to its R&D programs. Progress has been made elsewhere in the negotiations as well, particularly with regard to rules of origin, agriculture and food products, and government procurement.

International political developments such as the emergence of the Eastern European countries as free market economies, a newly-unified Germany, and the recent accession of three formerly EFTA countries to the European Union have brought striking changes in Europe, Israel has had to make significant adjustments to its foreign trade policy on the continent, including negotiation with the E.U, for more advantageous agreements and the inflation of steps for new foreign economic and commercial agreements with EFTA and the Eastern, European countries.

EFTA

In 1992, Israel signed a Free Trade Area Agreement with the seven then EFTA countries. This Free Trade Area Agreement was fully implemented on January 1, 1993, and was a natural complement to the existing agreement with the European Union. Sweden, Austria and Finland acceded on 1.1.95 to the E.U. Therefore, Israel’s relations with them are now within the framework of the FTA with the European Union. Israel relations with Switzerland and Norway remain under the EFTA agreement.

EASTERN EUROPE

Israel’s diplomatic and economic relationships with the countries of Eastern Europe have changed dramatically in the past 30 years. In 1967, Israel’s only diplomatic relations in the region were with Romania. Now, after the establishment of diplomatic relations with all of the countries of Eastern Europe, Israel is participating in intense trading activity all through the region. In addition, Israel has recently signed MFN agreements with many Eastern European countries.

We are currently at various stages of negotiation for Free Trade Area Agreements with Poland, Hungary, the Czech Republic, and Slovakia. The basis of these agreements is to ensure that Israeli exports are not disadvantaged in any of the aforementioned markets as a result of an association agreement with the European Union and EFTA.

Among the countries of Eastern Europe, Israel’s export growth to Russia has been outstanding. In 1991 exports first began, and by 1992, reached $43 million. They grew to $118 million in 1993, and US $191 million in 1994. Israel’s entry into this market has been eased by the expertise of its new immigrants from this region, a great number of whom have extended knowledge and experience in handling business there.

NORTH AMERICA

USA

Israel enjoys a significant relationship with the United States of America. In addition, the United States is Israel’s prime trading partner. A Free Trade Area Agreement with the U.S. was concluded in September 1985.

Israel’s Free Trade Area Agreement with the U.S. was implemented in stages, and came fully into force on January 1, 1995. The agreement had a markedly positive effect on bilateral trade, with the volume of trade increasing by 200% between 1985 to 1995.

Following a public initiative by Prime Minister Rabin and President Clinton, the Israel Science and Technology Commission was established in January 1994. The Commission operates under the joint chairmanship of the U.S. Secretary of State and Israel’s Minister of Industry and Trade.

OTHER NORTH AMERICAN COUNTRIES

With the signing of the N.A.F.T.A. agreement, and its effect of consolidating the United States, Canada, and Mexico into one entity for many trading purposes, Israel’s goal is to negotiate with the parties to the agreement so as to update and improve our trading relationships in light of the new regional situation. Negotiations with Canada for a Free Trade Area Agreement are now proceeding and considerable progress has already been made. Discussions with Mexico are still at initial stages. The conclusion of Free Trade Area Agreements with Canada and Mexico would enable Israel to trade tariff-free with all of North America.

SOUTH AMERICA

Due to restrictive trade policies in various countries in the Israel’s trade with Latin America was minimal when compared with her other trading partners. However, as the situation has improved Israel has begun to concentrate more effort into penetrating American market. Last year, exports to the South American market rose by 28%. We are studying the implications of the MERCOSUR Trade Agreement and the other regional agreements in Latin Some of the more important developments will be in the ways that the MERCOSUR Agreement will effect bilateral trade and the implications of a possible alliance between the parties to the MERCOSUR Agreement the NAFTA Agreement and/or the European Union.

ASIA AND OCEANIA

In 1985, Israel’s commercial and economic relations with Asia were still in their infancy. However, the political changes in our region enhanced the accessibility of the Asian market while increasing interest in doing business with Israel.

For example, there has been a marked improvement in Israel’s economic relationship with Japan. Numerous delegations of leading industrialists and senior Israeli and Japanese officials have met in both countries. In addition, Israel has "GSP" status on the Japanese market, implying Israel’s advantageous access to the market with reduced tariffs on many items.

Since the inception of trade agreements with China and India granting MFN status to Israel, the Asian market has emerged as a priority target for Israel’s foreign trade policy, a process fuelled by the Israeli business community’s interest in the region’s potential.

Israel has maintained good trade ties amid a favorable trade balance with Australia and New Zealand.

AFRICA AND THE MIDDLE EAST

In recent years, the diplomatic relations between Israel and most African states were resumed. The most significant diplomatic ties with regard to Israel’s potential trade are with the following countries: South Africa, Kenya, Nigeria, Ghana, Zambia, the Ivory Coast, Tanzania, Zaire, and Cameroun. We are now working towards strengthening our presence in these countries.

Israel maintains trade relations and a trade agreement with Egypt. In January 1995, trade relations with Egypt were advanced to a normalized status. Israel released Egypt from the list of countries which require a license to import to Israel, and this development will enhance future trade with Egypt. Aside from the renewal of the periodic joint committees on trade issues, we are engaged in regional multilateral discussions regarding the future development of the Middle East. Regional Trade Ministers met recently in Taba to discuss various potential cooperative efforts, including the creation of a regional infrastructure for future trade, environmental conservation, and other topics of mutual interest. Offices of "economic interest", as opposed to official diplomatic offices, are being opened in Tunisia and Morocco to explore various possibilities that can be implemented when the time is right.

Economic relations with the Palestinian Authority are conducted on the basis of the Paris Agreement of April 1994. According to this agreement, the Authority is part of a customs union with Israel. The leading principle of the agreement is harmonized customs and standards, including certain exceptions by predetermined quotas, for trade by the Palestinian Authority with Arab countries.

Israel and the Hashemite Kingdom of Jordan are presently in the midst of negotiations, whose aim is a trade agreement between the two countries. We expect this agreement to be finalized shortly. The conclusion of this agreement will contribute greatly to bilateral trade and spark business opportunities for both parties.

INVESTMENT INCENTIVES

THE ISRAEL INVESTMENT CENTER (IIC)

The Israel Investment Center (IIC) was established under the the Encouragement of Capital Investments of 1959 ("The Investment Law"). The Center’s main responsibility lies in the encourage economic initiative, industry and tourism. The Investment Center for both foreign and local Capital Investment aimed at expanding production capacity of the economy, thereby creating new employment opportunities.

APPROVED ENTERPRISE

Based on the Investment Law, the Investment Center may, on application, grant the status of "Approved Enterprise" for Capital Investments in industry and tourism. Certificates of Approval a and such approval entitles the project to receive substantial from the State. The support may be in the form of reduced investment grants, loans secured by State Guarantees a benefits specifically designed to encourage Capital Investment in Israel The company can choose one of the alternatives. The company must finance, at least, 30% of the approved project with capital equity paid in cash.

PRIORITY AREAS

Approved Enterprises may be entitled to incentives dependant upon t priority of the region in which they are situated. The State of Israel has set a goal to develop peripheral regions distant from the main centers of the country, and to encourage population migration to these areas. As a result, three priority areas have been established with differing levels of preference.

INVESTMENT GRANTS

Grants expressed as a Percentage of Investment in Fixed Assets included in the Approved enterprise.

Zone A Zone B Zone C Industrial Projects 38 20 – Hotels and campgrounds 29 23 16 Other Tourism Projects 22 11 5

Approved enterprises enjoy reduced taxation in addition to investment grants. (See Rates of Taxation)

ALTERNATIVE EXEMPTION

The company receives full exemption from company tax on chargeable income. The period for which this tax exemption is given differs in accordance with the location of the enterprise, as follows:

Zone "A" 10 years Zone "B" 6 years + 4 years tax benefits* Zone "C" 2 years + 4 years tax benefits*

*(For company owned by foreign investor).

STATE GUARANTEE

The company has to invest 30% of the investment by ordinary share capital and an additional amount of at least $75,000 for projects in priority areas A and B, or $100,000 for projects in area C. (Guarantees include 25% of bank guarantees and 75% of governmental guarantees).

COMBINATION OF STATE GUARANTEE AND GRANTS

In addition to the above "State Guarantee" facility, there is a further alternative: a combination of the "State Guarantee" with investment grants as in the table below:

Grant Guarantee Industry Zone A 25 45 Zone B 10 60

Hotels Zone A 17 53 Zone B 11 59

Zone C 4 66

Other Tourism Projects Zone A 17 53 Zone B 6 64

In addition, tax benefits are granted.

RATES OF TAXATION

The tax benefits for an Approved Enterprise are granted over a period of 7 consecutive years, starting with the first year that the company earned taxable income, providing that 14 years have not passed since the enterprise began operating.

If at least 25% of an enterprise’s owners are foreign investors, the enterprise is eligible for a period of 10 years tax benefits.

TAX RATES TABLE

Company owned Company owned by Company that is by local foreign Investors not an Approved Investor Enterprise Foreign investors’

rate of rights 90% 74% 49%

to to to

100% 90% 74%

Taxable Income 100% 100% 100% 100% 100% Company tax 25% 10% 15% 20% 37% (*) Balance 75% 90% 85% 80% 63% Income tax 0% 0% 0% 0% 0% Total tax on

undistributed income 25% 10% 15% 20% 37% Dividend tax:

15% of balance (for

Approved Enterprise) 11.25% 13.5% 12.75% 12% 15.75% () Total tax on

distributed income 36.25% 23.5% 27.75% 32% 52.75%

(*) from 1996 – 36%

() in distribution to an individual or a company abroad;

in distribution to an Israeli company – O%

R & D INCENTIVES

SUPPORT CRITERIA FOR NEW PRODUCT DEVELOPMENT

(implemented by the Office of the Chief Scientist – OCS)

The Chief Scientist Office takes into account the following criteria in granting support:

1. Innovativeness in the development of new technologies.

2. Management, production and marketing capabilities of the firm, as well as a marketing strategy for the new product.

3. Support is given to products with a high added-value which can compete on international markets.

4. The introduction of new technology and expansion of scientific manpower.

SUPPORT LEVELS FOR R&D PROJECTS

Standard support – 50% of costs.

Improvements in products developed through OCS grants – 30%.

Products for the military market – 30%.

R&D in Development A zones, if researchers residents of these areas: 60%, and 45% for military products.

New startups where the only activity is R&D, and there is no source of financing other than equity provided by those performing the R&D, 66% for budgets up to $150,000. The government actively participates in new ventures through risk-sharing grants to new investors. If the investment/venture succeeds, the grant is repaid in the form of royalties.

Investment in R&D by an outside investor may be recognised by the tax authorities.

OTHER MODES OF ENCOURAGEMENT

The OCS encourages companies with a turnover of $5 million or more and/or holding companies with capital of $7.5 million, experienced in R&D, to adopt groups with new R&D initiative. The OCS will support such R&D programs with a 66% grant of up to a budget of $300,000 a year for two years. The adopted group must receive at least 30% of the new venture.

The OCS encourages the development of highly advanced generic technologies, which enable the industry to maintain its competitiveness. The level of support is 66% of the approved programs. The application and management of the said programs will be carried out by groups of industrial companies in conjunction with research institutions.

OCS supports R&D subcontracting with 20% grants to companies with a turnover of less than $6 million and whose salaries are 70% or more of the approved program.

BETA SITES

The OCS offers further aid to industries at the stage between R&D marketing when they are ready to establish "Beta sites". Studies by OCS showed that this stage-the manufacture of "industrial prototypes’ at a customer site-was often critical in the success or failure of a product. The OCS is offering aid up to 50% of approved expenses to companies with a turnover of up to $6 million for the past 3 years and 30% to, companies with a turnover up to – $30 million.

ECONOMIC FEASIBILITY STUDIES

The OCS contributes up to 50% of a $25,000 maximum budget for marketing feasibility studies surveys, and up to $30,000 to surveys of two continents and more.

THE UNIVERSITY-INDUSTRY CONNECTION

The Office of the Chief Scientist supports research in six of Israel’s institutes of higher education through the "Joint Funds," administered jointly by the Chief Scientist and the university research organizations. Approximately 50 projects a year are supported in this manner. The initial stages of research are financed by the Chief Scientist and the university research authority on a 50:50 basis. It is expected that within two or three years the project will become economically viable,

INTERNATIONAL INDUSTRIAL COOPERATION – BINATIONAL RESEARCH FUNDS

Israeli and foreign firms have much to offer one another in terms of joint ventures. Israel can offer state-of-the-art technologies, as well as favorable trade relationships with both Europe and the US. The country enjoys the advantages of Free Trade Area Agreements (FTA) with the US, the EEC and EFTA.

Israel has established binational research agreements with a number of foreign countries. These, administered through offices both in Israel and in the cooperating country, not only help from a financial point of view, but also serve as "match-making" offices, helping local firms to find suitable industrial partners abroad. Among the binational agreements ‘in effect are those between Israel and the US (BIRD-F), Canada, France and The Netherlands.

RESEARCH INSTITUTES

The OCS is associated with seven research institutes in Israel which are. involved in industrial R&D and provide industrial services-.

The Metals Institute The Plastics Laboratory The Institute for Ceramics and Silicates The Rubber Research Association The Fiber Institute The Applied Research Institute of the Ben-Gurion University The Toxicology Institute

BUSINESS PROMOTION

WELCOMING THE INVESTOR TO ISRAEL

The Government of Israel offers a wide range of free services to the foreign entrepreneur through its Center for Business Promotion, providing maximum information and assistance, including:

* a data base of over 1,000 profiles of Israeli companies looking for various joint ventures with foreign partners;

* written material on the advantages of and incentives for doing business in Israel and how to go about it;

* assistance to the individual businessman in presenting the opportunities available in Israel, arranging meetings with potential partners, existing relevant industries, optional industrial sites, additional professional services and government officials;

* ongoing follow-up during initial stages of program implementation;

* regular update to all interested parties via a quarterly newsletter.

The Ministry of Industry and Trade’s Center for Business Promotion has a multi-faceted mission which includes the following points designed to assist potential investors in Israel:

– Increase awareness among the international business community of Israel’s economic advantages;

– Identify potential foreign investors;

– Locate strategic partners for local companies;

– Provide individualized service to investors visiting from abroad.

Globalization of the world’s economy means international strategic alliances are becoming more important. The emergence of peace in the Middle East makes Israel a gateway to the region. Economic growth means finding the best partners

in the global marketplace. Much of the best is waiting for the investor in Israel!