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Multinational Companies (MNC) –Contribution to the Israeli Tech Ecosystem

December 2019

Overview• This report relates to the activity of Multinational Technology Companies (MNCs) in Israel.

• MNC refers to a foreign corporation that controls the R&D or owns a high-tech company in Israel (some entities such as Intel and HP have in addition to R&D large manufacturing facilities in Israel).

• With the growth of M&A activity in the last two decades, the presence of MNCs is an integral part and a major contributor to the Israeli tech ecosystem.

• In addition, dozens of Israeli-based companies (both public companies and growth stage start-ups) have become multinational, operating foreign R&D centers overseas, in addition to the local centers.

• The pace of newly established MNCs in Israel decreased dramatically in 2017 while the number of tech M&As did not change significantly, correlated to the trend of new IT based MNCs.

• However, 2018 and 2019 again presented an uptrend in new MNCs.

Overview in Numbers

• 362 active multinationals in Israel in 2019.

• 132 IT & Enterprise Software active MNCs – the leading sector with the highest number of MNCs.

• Leading Clusters: Machine Vision, IoT and Cyber Security.

• Approx. 62,000 employees are employed by MNCs in Israel.

• Leading cities in Israel with MNC presence: Tel-Aviv, Herzliya, Petach Tikva.

• Based on the assumptions in this report, the estimated MNC tax payment account for 18% of the direct tax income in 2019.

• Intel is the most active corporation in Israel (2014–2019): Intel Capital participated in 52 investment deals; Intel corp. acquired 5 companies totaling $17.5B.

• Most active corporate buyers of Israeli companies in the last 5 years are Google (10, including 4 acqui-hires) and Microsoft (8).

• Foreign corporate investments in 2019 reached $983m in 196 deals.

Number of MNCs Established by Year: 2010–2019

• Number of active MNCs in Israel in 2019: 362.

• The last decade was significant for multinational corporation activity in Israel.

• The growth rate of new MNCs in Israel slowed dramatically in 2017-2018 but has recovered in 2019.

*Data for 2019 is not final and is subject to changes in the coming months as more information becomes available .

220241 250

268

301

335356 353 353 362

28 30 24 32 39 44 4014 18 199 9 15 14 6 10 19 17 18

60

50

100

150

200

250

300

350

400

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

No. of Active MNC's No. of Established MNC's No. of Closed MNC's

Source: IVC-GKH-IATI Multinationals Report, December 2019

Leading MNCs by Sector: 2010-2019

• The growth of new MNCs in 2014–2016 was led by companies in the IT & Software and Communication sectors.

• The difference in the growth rate between 2014–2016 and 2017–2019 is the aggregate number of new MNCs in these sectors.

• The number of new IT-based MNCs more than doubled in 2019, compared to 2017-2018.

* Data for 2019 is not final and is subject to change in the coming months as more information becomes available.

2019

64 5 4 4

107

3 3

22

1 2

7

2

2

4 3

5 46 10

11

12

19

6

5

111

3

42

32

1

3

43

1 2

3

1

3

1

1

0

5

10

15

20

25

30

35

40

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Communications Internet IT & Enterprise Software Life Sciences Semiconductors

(5%)

(5%)

(15%)

(7%)

(41%)

(7%)

(7%)

(32%)

(8%)

(8%)

(19%)

(27%)

(6%)

(54%)

(6%)

(20%)

(23%)

(8%)

(46%)

(15%)

(6%)

(17%)

(28%)

(22%)

(17%)

(4%)

(17%)

3

3

11

4

1

(45%)(45%)

(55%)(29%)

(14%)

(29%)

(7%)

(25%)

(10%)

(30%)

(15%)

(18%)

(18%)

(3%)

(48%)

(13%)

(13%)

(4%)

(48%)

(17%)

(13%)

(13%)

Source: IVC-GKH-IATI Multinationals Report, December 2019

(5%)

Notable MNCs - Established & Ceased in recent years51 Multinational Corporations opened new R&D activity in Israel between 2017 and

2019; 41 MNCs ceased to operate in Israel in the same period.

Source: IVC-GKH-IATI Multinationals Report, December 2019

New MNCs Ceased MNCs

Top Clusters in Active MNCs in Israel – 2019The three top technology clusters in MNCs in Israel are: Machine Vision, IoT and Cyber Security.

115 companies, 32% of all MNCs active in Israel, develop technologies in at least one of the three clusters mentioned.

Source: IVC-GKH-IATI Multinationals Report, December 2019

0 10 20 30 40 50 60

Machine Vision

Cyber Security

Artificial Intelligence

FinTech

Automotive

SaaS

Digital Health

RetailTech

DevOps

5G

Top Clusters of Newly Established MNCs – 2014–2019*

* Data for 2019 is not final and is subject to changes in the coming months as more information becomes available.

42

46

5

1

31

7

1

1

3

1

5

4

2

2

1

1

1

2

2

6

4

2

3

2

1

3

5

1

2

3

7

4

2

3

1

1

4

6

1

2

1

2

2

5

1

3

1

1

4

1

2

1

1

2

201920182017201620152014

Artificial Intelligence Automotive Big Data Cloud Cyber Security FinTech

Internet of Things Machine Learning Machine Vision RetailTech Digital Health

Source: IVC-GKH-IATI Multinationals Report, December 2019

4

3

3

22

2

3

1

3

21

2019

Number of Employees in Active MNCs in Israel – 2019

• Most MNCs in Israel employ between 10 and 50 employees and serve as R&D centers for the parent company abroad.

• The largest number of employees is in a manufacturing facility (Intel Fab in Kiryat-Gat) and not an R&D center. Interestingly, no other High-Tech facility in Israel comes close to this scale, other than the Intel R&D center.

24

151

61 5539

2110 1

1. Less than 10 2. Between 10 and 50 3. Between 50 and 100 4. Between 100 and200

5. Between 200 and400

6. Between 400 and1000

7. Between 1000 and5000

8. 5000 or More

Source: IVC-GKH-IATI Multinationals Report, December 2019

Number of Active MNCs in Israel by Location – 2019

• Most MNCs in Israel are in the central region of Israel: Tel Aviv, Herzliya, and Petach Tikva.

• Of the 362 active MNCs operating in Israel in 2019, more than 44% have branches located in central Israel: Tel Aviv, Herzliya and Petah Tikva.

• However in terms of number of employees, Kiryat Gat in southern Israel, with its Intel and HP manufacturing facilities, is a much more significant location.

Haifa 13

Caesarea 12

Migdal Haemek 3

Yoqneam 3

Carmiel 3

Tirat Carmel 3

Netanya 13

Kfar Saba 11

Raanana 16

Herzliya 37

Hod Hasharon 8

Rosh Haayin 10

Petach Tikva 25

Tel Aviv 96

Ramat Gan 14

Givatayim 3

Bnei Brak 5

Or Yehuda 5

Lod 7

Airport City 4

Jerusalem 7

Holon 4

Ness Ziona 4

Rehovot 10

Yavne 4

Beer Sheva 4

Other 31

Source: IVC-GKH-IATI Multinationals Report, December 2019

Haifa

Petach Tikva \ Yehud

Kiryat Gat

Tel Aviv \ Ramat-Gan\ Bnei Brak \ Kfar Saba

Herzliya

Yoqneam

Beer Sheva

Caesarea

Rehovot / Ness Ziona

Netanya

Jerusalem

Raanana

Selected Active MNCs in Israel by Location

Source: IVC-GKH-IATI Multinationals Report, December 2019

MNC Tax Payment Estimates: 18% of direct tax income

* This estimation is based on tax payment of $142,500 per employee, see Appendix on page 23 for details.

Israeli based MNCs are about to pay nearly $8.85

billion in 2019*

This amount is equivalent to approximately 2.6% of Israel’s

estimated GDP for 2019 (in fixed prices, assuming 3.1% GDP growth this year), and

18% of the total income from direct tax, which is expected

to be $48 billion this year.

The median tax payment per MNC is expected to

be $7.125m in 2019.

$8.85B $48B $7.125M

229

2417 12 10 9 8 7 6 5 4 4 3 3 3 3 3 3 1 1 1 1 1 1 1 1 1

0

50

100

150

200

250

Number of MNCs by Country of Parent CompanyThe majority of MNCs in Israel are U.S. based corporations, accounting for 63% of the 362 companies.

The decrease in the number of new MNCs during 2017–2018 is geographically related to US corporate activity in Israel.

Source: IVC-GKH-IATI Multinationals Report, December 2019

1 12

12

2

13 1

1

11

2

1

15

1

21

2 1

1

1

1

2 1 11

1

1

1

1

2

1

1

1

1

1

31

1

20

2321

7

13

12

0

5

10

15

20

25

30

35

40

2014 2015 2016 2017 2018 2019

United States

United Kingdom

The Netherlands

Taiwan

Switzerland

Sweden

Spain

Singapore

Russia

Panama

Luxembourg

Japan

Ireland

India

Hong Kong

Germany

France

The presence of US tech companies was trending historically around 50% of newly established MNCs per year .While there was a noticeable German presence in 2016 and Chinese presence during 2017, currently there is no other country with any significant

presence other than US, yet.

Newly Established MNCs by Country of Parent Company

*Data for 2019 is not final and is subject to changes in the coming months as more information becomes available.

Source: IVC-GKH-IATI Multinationals Report, December 2019

Most Active Foreign Corporations in 2014-2019# of investment

deals

Intel 52

Samsung 36

Qualcomm 28

EMC* 26

Cisco 22

Mitsui & Co. 21

• The most active foreign corporate investors in Israeli tech companies are somewhat correlated with the scale of activity of the large MNCs.

• Samsung and Mitsui are relatively new to the Israeli ecosystem and we may see expansion of their MNC activity in the following years.

*Merged with Dell Capital in 2017.

*Each funding deal contains one or more investments, accordingto the number of investors that took part in this transaction

MNC Corporate VC Investments*: 2014–2019

-

200

400

600

800

1,000

1,200

2014 2015 2016 2017 2018 2019

Foreign Corporate VC Foreign Corporates All Corporate Investments

Foreign Corporate Investments* in Israeli High-Tech 2014–2019CVC investment amounts in 2014–2018 more than doubled

• Each funding deal contains one or more investments according to the number of investors that took part in this transaction.

$318$396

$456

$584

$745

$884

$106

$209 $201 $177

$270

$99

$451

$630

$692

$821

$1,108

$1,023

No. of DealsAmount $m

83

117

145

185

216

170

31

48 48 45

65

26

146

198

216

271

324

221

Foreign Corporate VC

Foreign Corporates

All Corporate Investments

• Data for 2019 is not final and is subject to changes in the coming months as more information becomes available.

Source: IVC-GKH-IATI Multinationals Report, December 2019

4654 55 56 55 55

35

43 40 40

2723

7

95 3

44

4

8

8 8

810

12

69 14

8 9

3

22

2

3 3

1

31

4

0

20

40

60

80

100

120

140

2014 2015 2016 2017 2018 2019

MNCs M&A Activity in Israel: 2014–2019• Most global companies acquiring Israeli startups are from the US, with a steady number of more than 50 exit deals each year.• Most active corporate buyers of Israeli companies in the last 5 years are Google (10, including 4 acqui-hires) and Microsoft (8).• 70% of all M&As between 2014 and 2019 were by foreign companies.

$2,849 $3,476

$2,540 $2,606

$7,297 $7,848

$1,064 $570

$1,040 $537

$558

$2,779

$50 $247

$114

$1

$3

$135

$1,074 $335

$4,688

$1,399

$487

$357

$638

$265

$370

$895

$577

$212

$106 $1,400

$16

$80

$29

$1,014

$16 $233

$1

$830

$51

$1

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

2014 2015 2016 2017 2018 2019

# of deals Amount ($m)

m

Source: IVC-GKH-IATI Multinationals Report, December 2019

0

11

4

1417

6 7

18

11

23

23

15

0

5

10

15

20

25

30

35

40

45

AfricaAsiaCentral & South AmericaEuropeNorth AmericaOceania

# of Private Companies # of Public Companies

Number of Israeli High-Tech Companies with Overseas Activity

42active Israeli high-tech companies in growth stage (with over 300 employees) have opened several branches overseas, most of them in North America and Europe.

Source: IVC-GKH-IATI Multinationals Report, December 2019

Number of Israeli Tech Companies with Overseas Activity

Source: IVC-GKH-IATI Multinationals Report, December 2019

024681012141618

London

Tokyo

New York

Singapore

Beijing

Sao Paulo

Shanghai

Sydney, NSW

Paris

San Francisco and the Bay Area

Moscow

Melbourne, Victoria

Seoul

Bangalore

Bangkok

Madrid

Mumbai

Appendix: Tax Revenue Impact of MultinationalsThe activities of multinationals generate the following tax revenues:

Direct corporate tax;Taxation of employee’s compensation;Taxation of third parties servicing the multinationals.

Direct Taxes:

Direct corporate tax paid by the multinational (16% of net profits if approved enterprise, or 23% otherwise).Taxation on value of 102 options (following the Kontera Supreme Court decision).Taxation of dividend distributions.Due to BEPS (Base erosion and profit shifting – tax planning strategy) regime, the net income of Israeli based R&D centers is expected to grow significantly compared to cost plus model currently in use. Before BEPS the direct corporate tax was estimated to be 2–3% of total costs of the multinational (3.5% after dividend tax). Applying the OECD BEPS regime the direct corporate tax can be doubled and increased to 5–10% of total multinational costs (6–12% after dividend tax).

Employee Related Taxes:Income tax and social security taxes on compensation income (approximately 50% of cost of employee).

Taxation of Third Parties:Taxation of third parties providing services to the multinationals such as outsourcing services, professional services, rent, municipal taxes, travel, events, food ("third-party expenses").Assuming a 20%–40% profit margin and a tax rate of 23%, this results in tax of about 5%–10% of third-party expenses.

The cost per employee (cost to employer) is estimated to be approximately $220K per annum. The third-party expenses are assumed to be $70–$100K per annum.

Cumulatively, total tax per employee is estimated to range from $125,000 to $160,000 (corporate tax, employee tax and third-party taxes).

Founded in 1997, IVC is the leading data source and business information company in Israel's high-tech industry.We help our clients understand the market, make connections and identify opportunities with access to thelatest news, trends and developments. From venture capital and private equity funds to industry leadingcompanies and emerging startups across Israel's varied high-tech sectors, we cater to the varied businessinformation needs that make up the Israeli high-tech ecosystem. We bring more than 20 years of experience ofgathering and analyzing data, serving the IVC community. Our dedicated team of industry researchers andanalysts has deep knowledge and hands-on experience working with Israel’s high-tech sector. Our management,professional sales and marketing teams drive IVC’s commitment to excellence and client service. We enable awide range of local and global clients, including entrepreneurs, local and foreign investors of all types and serviceproviders such as lawyers and accountants, to get to know the Israeli high-tech ecosystem better.(Registered Database #366723)

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Gross, Kleinhendler, Hodak, Halevy, Greenberg, Shenhav & Co. (GKH) is one of the largest and most influential law firms inIsrael, particularly in the fields of securities, mergers and acquisitions (M&A), hi-tech, corporate law and cross borderactivity. Combining profound legal understanding, academic depth and an innovative approach, the firm is widely recognizedfor its local and global transactional experience and is ranked as one of the top law firms in Israel, Legal 500 and ChambersGlobal. The firm’s professional staff consists well over 170 professionals, including more than 60 partners, and a large groupof experienced licensed attorneys in Europe, USA, Brazil and more.

GKH has a unique place in the Israeli tech ecosystem and over the past decades our professionals have worked with the topmultinational corporations, hottest startups, the most active venture capital funds, corporate VCs, private equity funds andstrategic investors – giving GKH a cutting hedge experience of legal and business developments.

The firm has a true tech power house with technology transactions being the main firms business for more than 40 yearswith an incredible collegial team and top-notch professionals specializing in complementary fields, such as intellectualproperty, cyber, privacy, tax, labor, litigation, crypto and other specific specialists that can attend to any tech client need.

The pillars of Hi-Tech & Investment Funds at GKH are (a) extensive start-up work with some of the leaders in the industry, (b)merger and acquisition, (c) fund formation, (d) venture capital investments and (e) ongoing representation of multinationaltechnology companies.

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IATI is Israel’s umbrella organization of the high-tech, life science and other advanced technologyindustries, with hundreds of paying members from every level and aspect of the ecosystem - includingVenture Capital Funds, R&D Centers, Multinational Companies, Israeli Start-Ups and Large Companies,Incubators, Workspaces, Tech Transfer Organization, Academic Institutions, Innovation Centers, Hospitals,Municipalities, Leading Stock Exchanges, Service Providers and more. Through this broad range ofmembers, IATI connects Israel’s tech ecosystem, provides solutions and support at all levels, and integratesthe various sectors of the industry with strategic and ongoing governmental goals.

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