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Israeli Online Gaming Sector – Q&A

online gambling operators

Q: You work extensively with companies operating in the online gaming sector – what are the legal and regulatory challenges faced by firms operating in this sphere?

A: The main legal and regulatory challenges which face online gambling operators is the worldwide shift from what is known as the .com situation to the .country environment. This relates mainly to the changes facing online gambling operators that are required, due to legislative changes, to obtain online gambling licenses in numerous jurisdictions across the world in order to continue their operation in those jurisdictions. Such jurisdictions include, by way of example only, the UK, Spain, Italy, Denmark and Belgium. The most recent and substantial change has occurred in the UK where online gambling operators that wish to provide their products and services in this jurisdiction will be required to obtain an online gambling license from the local Gambling Commission.

Online gambling operators  can now be subject to regulatory regimes maintained by several gambling regulators, each one of them with different sets of requirements – in connection with the license application, but mainly with the ongoing operation, relating to issues such as player protection, responsible gambling, software testing etc. All of the above requires the online gambling operators to allocate substantial personnel, time and allocation of funds.

Adding to that is the fact that usually, with the obtaining of local online gambling license, the tax man cometh; that is, the online gambling operators, that have (or at least most of them) became accustomed to a very low tax liability in their home jurisdictions, are now required to pay substantial taxes to the jurisdiction from which they have obtained an online gambling license. Such taxes have the risk of turning their online gambling activities in that jurisdiction to unprofitable, which, in turn, could lead such online gambling operators to forfeit their licenses and exit these markets. 

 

Q: What role does regulation play for online gaming companies operating across multiple jurisdictions? What do you recommend to companies to be aware of?

A: Online gambling operators should be aware of the fact that, in the long run, it will become very difficult for them to operate in a jurisdiction with an online gambling licensing regime, without obtaining a license from the local regulator. The reasons for this conclusion include, inter alia, the preference of local customers to wager via a locally licensed operator, the difficulties and costs associated with operating without a license (e.g., higher fees and commissions paid to third party intermediaries such as payment processors and affiliates), the increased enforcement activities taken by the local regulators and the understanding that an operation without a local license carries with it a lower value to its owners / shareholders – compared to a similar operation with a local license.

It follows that the online gambling operators must get accustomed to a situation in which, in respect of a jurisdiction that offers an online gambling licensing regime, they need to decide whether to apply for a license or exit the relevant market.

 

Q: How are most companies structured in the online gaming sector? What are the problems for companies wishing to set up tax efficient structures?

A: Setting up a structure that is tax and regulatory efficient, which can provide value to the owners / shareholders, depends on the specific facts of each case including, by way of example, the main target jurisdictions, the offering of products and services in grey markets, adherence to incorporation requirements of licensing jurisdictions, what licenses are obtained, payment processing etc. Due to the numerous issues and considerations to be taken into account as well as the intricacies of the regulatory and tax considerations, it is vital that the structuring will be handled together with legal and tax counsels.

 

Q: Why to operate out of Israel?

A: Israel is considered a major power house in the online gambling industry, on the basis of, inter alia, the tech savvy Israelis that provide online gambling operators with state of the art software development and marketing strategies.  This has led several online gambling operators to set up shop in Israel (although most of them avoid placing their main operational units in Israel for the reasons described in 5 below).

 

Q: What are the legal implications if online gaming and e-commerce companies do not comply with government regulator in Israel?

A: In Israel, there is no liberal licensing regime for online gambling activities. Only the sports betting monopoly is authorized to offer online sports betting and horserace wagering, and any other online gambling activity is not licensable in Israel. The current stance of the Israeli authorities is that given this legal situation, any online gambling offering made available to Israelis, even if provided from outside of Israel and on the basis of a foreign regulatory license, is illegal; as such, the Israeli authorities take quite a harsh position in respect of such activities and use a multitude of enforcement activities, such as financial payment blocking, ISP blocking, arrests, seizing of funds and equipment, indictments etc. For the objective of combating online gambling, a special task force was created; such task force includes the Police, the Ministry of Justice, the Anti-Money Laundering Authority, the Central Bank and the Tax Authority.

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