Foreign Direct Investments in Israel

“A small country surrounded by enemies” is a well-known Israeli proverb. This state of mind has an impact on Israeli policy regarding foreign direct investments (FDI). While FDI are encouraged by the State of Israel, significant questions arise regarding national security in its broadest definition: safeguarding vital data concerning Israel’s citizens and residents, the ability to protect security and economic interests, and ensuring the functional continuity of national infrastructures. These questions preoccupy many countries in the world. Israel is seeking to strike a balance between the constant threats it faces and its desire to enter strategic international alliances with countries in the region and other parts of the world.

In recent years, the number of foreign investments in Israel has increased significantly. Today, foreign companies build and operate important state infrastructures (ports, the light rail, etc.), and seek to invest in large and important Israeli companies. According to the Chief Economist in the Ministry of Finance, the cumulative balance of foreign investments in Israel in 2021 was approximately USD 47 billion dollars. Overall between 2012 and 2021, foreign entities invested approximately USD 246 billion in Israel.

Regulatory Framework

Against this backdrop, it is surprising to realize Israel does not have a general regulatory binding framework for the approval of such transactions as they pertain to national security, like the American Committee for the Examination of Foreign Investments in the United States (CFIUS), the recent UK National Security and Investment Act 2021, or similar bodies in developed countries. As a result, there are no broad cross-sector consolidated controls on foreign investments.

Accordingly, in general, foreign entities can freely purchase and sell assets and securities in Israel. In addition, there are currently no sectors in which FDIs are categorically prohibited. However, Israel has a series of stand-alone, sector-specific regulations and requirements restricting foreign investment:

• The Government Companies Law, 1975 establishes a special arrangement regarding the privatization of government companies according to which it can be declared that the state has essential interests in connection with the company in privatization and accordingly sets various limitations and restrictions on the privatized company, including regarding the foreign ownership thereof.
• The Land Law was amended in 2011 and currently allows, subject to special consultation and consideration, including in respect of security and international relations, non-Israeli parties to own land in Israel as an exception to the general prohibition of foreign ownership of state lands.
• Financial legislation in the banking and insurance sectors, as well as licensed fintech activities, require each person holding more than 5% of the means of control in financial service providers to obtain a holding permit or a control permit where the holdings constitute control. While there are no specific restrictions on foreign ownership, the regulators are granted broad discretion, and considerations related to foreign direct investments may be introduced.

We note that under Israel’s regulatory structure, regulators will generally have relatively wide discretion in issuing licenses, concessions, and permits within the sectors they oversee. Within this framework of discretion, regulators have the authority to impose specific conditions, restrictions, or approval requirements related to FDIs and modify them as needed.

The Committee

In October 2019, Israel took its first step toward a general and comprehensive FDI regime, when the Ministerial Committee for National Security Affairs (the Political-Security Cabinet) approved resolution B/372. The resolution established an advisory committee to examine national security aspects of foreign investments and determined its work procedures. The resolution was amended in October 2022.

Under this resolution, regulators overseeing essential infrastructure or areas vulnerable to national security concerns have the authority to refer cases to the committee. This referral occurs when they believe that approving the investment may raise national security concerns. Such concerns include the potential formation of significant influence by a foreign entity over the investment subject, which poses risks to the security of Israel or its foreign relations. Additionally, if the disclosure of information to a foreign party could harm the state’s security or its foreign relations, it may trigger an inquiry. The regulators are financial regulators as well as regulators in the fields of transportation, communication, energy, water, and gas. Some of these regulators addressed and considered FDI issues in their decision making and tendering processes prior to the resolution and the introduction of a mechanism to formalize the process. For others, this presents a first-time consideration. Since October 2022, all government tenders include a clause authorizing the regulator to refer the issue to the committee.

The committee, whose members are the Chief Economist at the Ministry of Finance, a senior representative from the National Security Council, a representative from the Ministry of Foreign Affairs, and a senior representative from the Ministry of Defense, may reply to the inquiry within 30 days of the date of receipt. The committee’s response must be accepted unanimously. In the absence of agreement among all committee members, no response will be provided. In addition, the committee is entitled to summon the relevant regulator to its deliberations, as well as other officials on behalf of the National Economic Council and the security, foreign affairs, and cyber apparatuses (the Israeli Security Agency, the Institute for Intelligence and Special Operations, the Ministry of Defense, the Ministry of Foreign Affairs, and the Israel National Cyber ​​ Directorate). The committee may consider not only the specific foreign investment, but also the share of foreign ownership of the industry as a whole.

There are several unique features to the committee that affect parties in the private market. Firstly, the committee does not act within a specific legal framework pertaining to foreign investments. Instead, its involvement arises when a regulator is require to render a decision. Secondly, the committee serves in an advisory capacity to the regulators. Thirdly, the referral of matters to the committee is voluntary.

Accountability

To ensure compliance and efficiency, parties in the private sector must carefully consider the nature of the committee and how foreign investment control is implemented. This involves anticipating potential FDI reviews, whether specific to their sector or that require consultation with the committee. When the committee was formed, it was widely believed to be specifically intended to block Chinese investments in Israel. However, it seems the committee views its role in a wider way, and will critically evaluate the effect of foreign ownership of specific branches of the Israeli economy from other countries as well. To navigate this process effectively, it is essential for these parties to proactively structure the review within the timelines of their transactions. By doing so, they can address any potential FDI concerns and meet the requirements set forth by the committee.

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Barnea Jaffa Lande’s Regulation team is able to help businesses from all sectors address questions regarding FDI and other International Law questions.

Adv. Anat Even-Chen is a partner and leads the firm’s Regulation team.

Adv. Ori Rodriguez is an associate in the department.