With the help of wealthy American investors, pro-business regulations, and an additional impetus from a planned judicial reform at home that has alarmed investors, an increasing number of Tech Startups from Israel are incorporated in the United States.
This represents a turnabout as Israel had been successful in getting more of its entrepreneurs to establish their legal identities domestically over the previous ten years.
Although registering companies or intellectual property (IP) abroad can alter where taxes are paid and hence have an impact on government revenue, it may not mean that jobs are being moved offshore in large numbers. The tech sector accounts for 14% of Israeli jobs.
Entrepreneurs and investors told Reuters there were excellent business reasons for incorporating in the United States, particularly Delaware, which is seen as pro-business and a tax haven since it has low corporate and no state sales taxes.
However, several also referenced Israeli Prime Minister Benjamin Netanyahu’s reform of the judiciary, which his right-wing government claimed was necessary to address court overreach but was viewed as an attack on democracy by detractors.
Ian Amit, a former Israeli military officer, is moving his startup across the Atlantic despite the fact that the reform does not directly influence the IT industry. He is concerned about its effects.
Amit, who is registering his artificial intelligence-based cloud security company Gomboc in Delaware, said, “It’s just a very high level of uncertainty.”
According to him, the key issues are corruption and the lack of clarity regarding the systems in place to defend his company’s interests in terms of taxes, the law, and intellectual property.
Israel’s government runs the risk of losing money if its proposals, which have triggered unprecedented statewide protests, scare off the IT sector, which contributes about 5% of the nation’s GDP and 30% of tax revenue. Some business owners appear to be voting with their feet already.
According to a poll by the Israel Innovation Authority (IIA), up from 20% in 2022, 80% of new Israeli tech startups in 2023 have already decided to incorporate in Delaware. The survey also revealed that businesses plan to register future intellectual property abroad. The number of businesses questioned was not disclosed by IIA.
Investors don’t like ambiguity, according to IIA Chairman Ami Applebaum, who is also the ministry of Innovation, science, and Technology’s chief scientist. “The fact that you are shaking up the judicial system puts Israel in a very high level of uncertainty,” Applebaum said.
In addition to established Israeli businesses expanding their research and other operations outside of Israel, some of them are forming in Delaware, according to Yair Geva, a partner who oversees the tech practice at the law firm Herzog, Fox, and Neeman.
According to a Startup Nation Central poll of 615 businesses, 29% of Israeli startup/tech companies planned to relocate their headquarters over the next six months, while 8% had already started the process.
Since the tech industry in Israel is so largely dependent on foreign investment, a decrease in startup funding as a result of interest rate increases and the failure of major tech investor Silicon Valley Bank may be motivating businesses to follow the money.
