Iris Stark, CPA 2012October THE ISRAELI TAX SYSTEM

Taxation in Israel is based on an individual method. Accordingly, as of 2003, all Israeli residents are liable for payment of tax in respect of their entire income worldwide. The individual method raises, in effect, the tax liability, on all income active, passive and capital gains, and therefore income generated or derived outside Israel will also be liable for tax, regardless of whether it was received abroad or in Israel. Foreign residents are also liable for tax on income generated or derived in Israel with certain exceptions and relief, subject to the Israeli Tax Law and the Double Taxation Treaties. Residents’ Test: Residents’ Test: Corporations - Corporations - The “Management and Control” test or where the company was registered. Individuals - Individuals - The “centre of life” test (183 Days Presumption). THE ISRAELI TAX SYSTEM

VATWithholding tax on payments to foreign resident Individual TaxCorporate Tax 17%25% unless reduced under an applicable tax treaty. Up to 48%25%Income tax Additional 2% From over $200,000 25% / 30%(**)25%Capital Gains tax 25% / 30%(**)0% / 25%(*)Dividend (*) upon distribution to a non-Israeli company or on dividend distribution from non-Israeli company. (**) in case an individual holds 10% or more, of any means of control of a company. There is no inheritance tax in Israel. TAX RATES (CURRENTLY)

Property in Israel- Also Applicable to Foreign Investors No ceiling Residential rental income Residential rental income is taxable at 10% of the gross income. NIS 4,910 per month ($15,425 per year) Exemption on gross income from residential rental. Depending on the sale value of the apartment and the period between sales. There are some exemptions from capital gains derived from selling a residential apartment where certain conditions are met. Foreign Individuals:

TREATY RELIEFS Israel is a signatory to a Treaty for the Prevention of Double Taxation with about 50 countries world-wide. Most of Israel’s tax treaties are based on the Model Tax Convention of the OECD (the Organization for Economic Cooperation and Development). The countries that have tax treaties with Israel include among others, The United Kingdom, The United States, Singapore, Austria, France, Denmark, India and Poland.

CountryDividends (%) Interest (%) Royalties (%) Country Dividends (%) Interest (%) Royalties (%) Austria0/1050Luxemburg5/10/155/105 Belarus105/10 Mexico5/1010 Belgium0/550Moldova5/100/55 Brazil10/151510/15Netherlands5/10/1510/155 Bulgaria10/12.55/1012.5Norway25 10 Canada15 Philippines10/151010/15 Croatia5/10/150/5/105Poland5/105 China107/10 Portugal5/10/150/1010 Czech Republic5/15105Romania155/1010 Denmark0/100/50Russia10 Ethiopia5/10/150/5/105Singapore5/1075 Estonia0/5 0Slovakia5/102/5/105 Finland5/10/1510 Slovenia5/100/55 France5/10/155/1010South Africa25 0 Georgia0/5 10Spain1055/7 Germany2500/5Sweden0250 Greece2510 Switzerland5/10/155/105 Hungary5/1500Taiwan107/1010 India10 Thailand10/15 5/15 Ireland105/1010Turkey10 Italy10/1510 Ukraine5/10/155/1010 Jamaica15/ United Kingdom0/5 0 Japan5/1510 USA12.5/15/2510/17.510/15 Korea S.5/10/157.5/102/5Uzbekistan10 5/10 Latvia5/10/155/105Vietnam100/105/15 Lithuania5/10/150/105/10 ISRAELI TAX TREATIES

Generally, according to the Israeli domestic law, capital gains derived from the sale of capital assets, based in Israel are subject to tax in Israel. Exemptions and Relief: Tax exemption for non-residents selling shares listed for trading on a stock exchange, provided that the capital gains are derived from a non-Israeli “permanent establishment” of the foreign resident in Israel. Tax exemption on capital gain derived from realization of shares of an unlisted Israeli company, purchased after January 1, 2009 and subject to certain conditions; Treaty relief. EXEMPTIONS FOR FOREIGN INVESTORS

A foreign resident who has deposits in Israeli banks, gets tax exemption on profits on interest from the deposit. It is intended to encourage the investment of foreign residents in Israeli banks. In this context, it should be noted that banks in Israel have shown their immunity over the years since the global financial crisis. Against the background of uncertainty created by this crisis since 2008, Israel is still an “island of stability” in a sea of instability.

The two basic corporate forms are private and public limited companies. There is no official minimum capital requirement for setting up a company. Also there are no minimum requirements for the number of founders or shareholders and on the nationality or residence of shareholders. Israeli limited company Foreign companies may operate in Israel through a branch, but most prefer to establish a local subsidiary mainly in order to create a "wall" between the Israeli activity and the foreign company. Only companies registered in Israel are eligible for approved status (which qualifies a project for special incentives and assistance). Branch managers are personally liable for certain company obligations, such as money owed to workers. It should be noted that distributions from the Israeli branch to the foreign company, are not subject to tax in Israel (i.e. there is no "branch tax" in Israel). The branch will be liable to pay Israeli Tax upon its local activity. Branch of foreign company A limited partnership must have at least one general partner and one limited partner. The general partner, as in a general partnership, has unlimited liability for the obligations of the partnership. The liability of a limited partner is limited to the sum invested in the partnership. The limited partner may not participate in the management of the partnership and does not have the power to bind the partnership. Partnerships BUSINESS FORMS AND STRUCTURES

The Israeli transfer pricing rules, which are based on the OECD guidelines, apply to transactions between an Israeli resident and its related non-resident. A hierarchy of transfer pricing methodologies applies, with preference given to transaction-based methods over profit-based methods. Documentation requirements mandate, that the taxpayer will attach a statement to the annual tax return, and provide a detailed transfer pricing study upon the request of the tax authorities. Advance pricing agreements may be obtained. Transfer pricing rules Under the Israeli CFC regime, if a foreign company is “controlled” by Israeli shareholders (more than 50% of its “means of control” are held by Israeli shareholders) and has accumulated undistributed passive profits, taxed at a rate lower than 20%, it will be considered a CFC. In such a case, the Israeli controlling member, will be treated as if it had received its proportionate share of those profits as dividend income (deemed dividend), even though not actually distributed. The deemed dividend will be taxed in the hands of the Israeli resident at a rate of 25%. Simultaneously, a tax credit (a deemed credit) will be granted to the Israeli controlling shareholder in the amount of the foreign tax that would have been paid if the undistributed passive profits had been distributed as a dividend. Controlled Foreign Corporation (CFC) Israel does not have thin capitalisation rules. But the ITO could restrict the deduction of financial expenses by virtue of the circumstances. Thin Capitalization Rules ANTI AVOIDANCE RULES

Investment Incentives The State of Israel encourages both local and foreign investment by offering a wide range of incentives and tax benefits to investors in industry, tourism and real estate. Special emphasis is given to hi-tech companies and R&D activities. The purpose of the Law for the Encouragement of Capital Investments is to strengthen the industrial capability of the country. The law focuses on achieving growth in the business sector, improving Israel’s industrial competitiveness in international markets, and creating employment and promoting development. Below is a short summary of the main points of the new law. Qualification requirements To qualify for benefits under the law, the company has to be an industrial company, registered in Israel and has to be internationally competitive i.e. have export capability. However, Biotechnology and Nanotechnology companies do not have to meet the "export" requirement to qualify. An investment in the “Priority Area” recognized by the law, could be recognized as an “Approved Investment”. TAX INCENTIVES

Location For the purposes of the law the country is divided into two areas: Priority Area A - Mainly the Galilee in the north, the Negev in the south and Jerusalem. The Center of the country – all areas not specified in item 1. Investment Incentives according to the Law Companies that qualify will be entitled to reduced tax rates as detailed in the next slide, and might be eligible to receive capital grants. TAX INCENTIVES

Special tax rates Center of the CountryPriority Area Company Tax rates Years: 2011 & % 10% Years: 2013 & % 7% 2015 onwards12% 6% Dividend Tax rate15% 15% There is no termination period regarding the tax benefit. As long as the company remains internationally competitive, it is eligible for the tax benefit as prescribed by the law. Grants track Investors seeking cash incentives must file an application before investing in a project. Applications are filed on official forms with the Investment Centre. TAX INCENTIVES

RELIEF FROM TAX AND REPORT OBLIGATIONS TO NEW RESIDENTS AND SENIOR RETURNING RESIDENTS The main principles of the program: The program applies to new residents (“olim”) and returning residents who arrived in Israel after a 10-year absence, and became Israeli residents from 2007 onwards. The program grants exemption from tax and report obligations for a period of ten years on foreign-sourced income i.e. income derived outside of Israel. The relief applies to all income including active income (business, labor etc.) passive income (interest, dividends, rent etc.) and capital gains. A complete exemption is granted from the mandatory report obligation with regard to income, bank accounts or assets located out of Israel, regardless of their value, purchase date or location worldwide.

THANK YOU Iris Stark, CPA 2012October