Israel: Business Exodus Coming?

Israel is in the throes of a polarizing debate over the future of its judicial system. If reforms being pursued by the current Israeli government are adopted, critics argue, the country’s very “democracy and system of checks and balances” may be at risk. In the eyes of some opponents of the proposed overhaul, its consequences may be serious enough to consider leaving Israel.

According to Prime Minister Benjamin Netanyahu, the overhaul of the judicial system is necessary, to “prevent the Supreme Court — which is unelected — from overly intervening in the cabinet and Knesset [Israel’s legislature] decision-making.” The proposed changes would allow the Knesset to override Supreme Court decisions through a simple majority, neutralizing the court’s power to declare laws unconstitutional. They would also give political leaders more power to make judicial appointments and authorize top officials to choose their own legal advisors, instead of career government lawyers.

Former prime minister Ehud Barak says the changes “will turn Israel into a dictatorship” and constitute “the worst crisis” in the history of the State of Israel, which is saying something. There are serious concerns over what the proposed reform would mean for Israel’s economy. If “Israel’s democratic institutions are undermined,” critics argue, “it will keep blue-chip customers and investors at bay. And if a company has difficulty attracting customers, it will have the same problem with talent.”

This apprehension is already having an impact. Israel’s currency has fallen, rating agencies warn of a possible “negative impact”, and there is open talk of a business exodus.

It is critical to note that the ongoing debate over the judicial system is not taking place in a vacuum. Rather, it reflects a longstanding struggle between competing visions for Israel’s future. Netanyahu secured his current term by entering into a coalition with parties at the far right of the Israeli political spectrum. Israelis of other political persuasions worry that, “without the courts to defend basic rights and the values of liberal Israel, religious-right governments will be free to tighten Israel’s hold on the West Bank, award more power and privileges to the ultra-Orthodox minority, and discriminate against the Arab minority and LGBTQ people.”

To be clear, it is up to Israelis — and not this blog — to determine if the proposed changes are good or bad, necessary or not, and to which degree, if any, the proposed overhaul would in fact harm Israel’s business climate. It is clear, however, that many Israelis are fiercely opposed to the changes being considered, as the large protests that have been taking place there show. And for some of them, concerns about what the reforms may bring will be sufficient motivation to pack up their businesses and move them elsewhere. This could include Israelis who do not have strong feelings either way about the proposed changes per se, but who worry about the possible consequences of the negativity that has been unleashed.

If an business exodus does materialize, the United States would surely be be a preferred destination for Israeli companies, especially from the country’s all-important tech sector. We could also see Israeli cannabis companies making a bet on increasing legalization in the United States. Though there is certainly room for improvement, the United States remains a relatively easy place for foreign companies to set up and do business. And of course, the fact that the United States is home to the world’s second-largest Jewish population is an important consideration for Israelis. In fact, “many Israeli-led companies … are already based in the United States and keep a subsidiary in Israel because that makes it easier to appeal to investors and employees.”

For those Israeli businesses contemplating a move to the United States (or elsewhere else, for that matter), this is the time to start laying the groundwork. They can begin by evaluating the kind of corporate entity they would need, in which state to incorporate, and in which cities to base staff. In turn, the tax implications of these choices should also be considered. Choices regarding locations will also impact banking and real estate decisions. For cannabis businesses in particular, a it is critical to ensure that their planned activities are lawful in the states they are eyeing, given the legal patchwork that exists. In addition, some businesses may need to secure visas for certain team members, a process worth starting as early as possible. Companies should also make sure that their trademarks and other intellectual property are sufficiently protected in the United States. For more on what it takes for foreign companies to form a U.S. entity and to conduct business here, check out Doing Business in the United States: The Laws You Should Know.

Given Israel’s history, it would be tragic if internal discord led some of its citizens/companies to feel compelled to seek opportunities abroad. That said, Israelis — as much as anyone — understand the need to prepare for unpleasant possibilities. For some Israeli companies, taking some preliminary steps with a view to eventually starting or expanding operations in the United States might just be good business sense.