A increasing number of Israeli digital businesses are incorporating in the United States, drawn by deep-pocketed US capital and pro-business regulations, and aided by a proposed judicial makeover in Israel, which has alarmed investors.
This is a turnaround from the previous decade, when Israel was able to persuade more of its companies to establish their legal identity locally.
It may not represent a mass exodus of workers – the IT industry employs 14% of Israelis – but registering firms or intellectual property (IP) abroad can change where taxes are paid and hence government revenue.
Entrepreneurs and investors told Reuters there were good business reasons for incorporating in the United States, and particularly Delaware, which is considered pro-business and a tax haven as it has low corporate and no state sales taxes.
But some also cited Israeli Prime Minister Benjamin Netanyahu’s judicial overhaul, which his right-wing government says is needed to tackle over-reach by the courts but which critics view as an assault on democracy.
Though the overhaul does not directly affect the tech sector, Ian Amit, a former Israeli military officer, frets about its impact and is taking his startup across the Atlantic.
“It’s just a very high level of uncertainty,” said Amit, who is registering his artificial intelligence-based cloud security firm Gomboc in Delaware.
“It mainly really revolves around corruption and uncertainty of what system is there to protect me as a business, from a tax perspective, from a legal perspective or an intellectual property perspective,” he said.
The economic risk for Israel’s government is that its plans, which have sparked unprecedented nationwide protests, scare a tech industry that accounts for almost a fifth of the country’s gross domestic product and about 30% of tax income. Some entrepreneurs already appear to be voting with their feet.
As many as 80% of new Israeli tech startups in 2023 have so far chosen to incorporate in Delaware, up from 20% in 2022, according to an Israel Innovation Authority (IIA) survey that also showed companies intend to register future IP overseas. IIA did not give the number of companies surveyed.
“The fact that you are shaking up the judicial system puts Israel in a very high level of uncertainty and investors don’t like uncertainty,” said IIA Chairman Ami Applebaum, who is also chief scientist at the Ministry of Innovation, Science and Technology.
Yair Geva, a partner who runs the tech group at law firm Herzog, Fox and Neeman, said that not only were new Israeli companies incorporating in Delaware, but some existing ones were expanding research and other operations outside of Israel.
“So, it’s somewhat of a bigger issue than just the incorporation aspect of it,” he said.
A survey of 615 firms by Startup Nation Central showed that 8% of Israeli startup/tech companies had started moving their headquarters abroad, and 29% intended to do so soon.