August 11, 2011 Rules for classification of financial instruments as 'hybrid' for tax purposes On 11 August 2011, an amendment to the Israeli Income Tax Ordinance (ITO) was published addressing classification of hybrid financial instruments in domestic and cross border contexts. The main features of the otherwise complex and detailed amendment are: - regarding financing of related parties in a cross border context, specific conditions have been set under which a loan from a controlling non-resident shareholders is considered as "equity" and thus not subject to transfer pricing requirements of section 85 A ITO; and - regarding financing of related parties in a domestic tax context, the obligation under Section 3 ITO to report a fixed 4% interest on loans from a controlling resident corporate shareholder does not apply anymore. The changes in the ITO may apply retroactively for certain loans. Specific transitional measures have been set for certain loans issued as of 2008. Contact: Henriette Fuchs, Partner Taxation – henriette@friedman.co.il _______________________________________________________________________________ July 10, 2011 Government adjusts the exemption on gain sale residential apartments As part of the revision of all the Laws of Israel relating to taxation of real estate, in an effort to make its housing market more admissible mainly for first time buyers, it has been announced that the rights to exemption to capital gains tax for people holding more than one apartment shall be limited as per 2013. Beside this intention also real drafts of changes to legislation have been proposed as to people who during an ownership period have owned a second apartment and also with regards to apartments obtained from an inheritance.  ________________________________________________________________________________ July 2011 Second Circular on taxation benefits New Immigrants and Returning Residents In 2008 Amendment 168 to the Income Tax Ordinance tax brought far-reaching personal income tax benefits for new immigrants and returning veteran residents (re-)entering Israel from 2007 onwards. These include a 10 year tax exemption, under certain conditions, from the payment of tax on income and capital gains sourced abroad, a release from reporting obligations and a first year of choice whether to be considered already a tax resident or not.  In addition, the amendment changed the definition of a simple "returning resident" (not a resident returning veteran) and the additional tax benefits granted to them including additional tax credit points. In January 2011 the Israeli tax authorities issued a comprehensive professional circular regarding the applicability and implementation based on experience of the years that these exemptions now were in place and regarding various questions and concerns. This Circular was now followed by a second circular addressing additional issues and experiences with the attractive benefits. Contact Doron Schweppe on dorons@friedman.co.il or Henriette Fuchs henriette@friedman.co.il ________________________________________________________________________________ May 2011 Israel revokes exemptions for foreign residents on capital gains from certain securities The Finance Committee of the Israeli Knesset approved on May 12, 2011 the cancellation tax exemp- tions granted to foreign residents on capital gains derived indirectly from State loans bearing a date of maturity not exceeding 365 days from their date of issuance, that is, via mutual funds and futures transaction. These exemptions were originally to encourage foreign investor activity in the Israeli capital market by elimination of tax on any such profits which would otherwise be 15% or 20% for individuals or the normal corporate tax rates for corporate investors. Based on indications that the exemption was being used by players on the foreign exchange market mainly buying short-term debt of the Bank of Israel debt ("Makam") and short-term Government bonds, intending to make short term profits, were harming - by the resulting appreciation – the long term competitiveness of the market. The exemption will no longer apply from 7.7.2011 onwards, allowing invested investors the opportunity to consider their steps following the new regulations, after which date any gains on these financial instruments would be subject to tax. Article 97(b2) to the Income Tax Ordinance shall be amended, to revoke the existing exemption for foreign residents on direct sale of short term governmental loans and to amend the Income Tax Regulations accordingly (Tax Exemption for Interest paid on State loan). _______________________________________________________________________________ May 2011  Israel adopts petroleum profits law The Israeli Knesset by a vast majority approved, on the 30th of March 2011, the law on petroleum finds that will effectively increase the tax on profits from natural gas finds from new offshore reserves. The accompanying amendments to the Regulations on Cost Recognition which accompanying the taxation of profits from gas finds were published on May 3, 2011. A tax rate of 20% will be imposed on profits from oil and gas. The rate may rise to 50%, depending on a "levy coefficient" (the R-Factor). Tax is imposed after prior recovery of 150% of the amount invested (R-Factor is equal to 1.5) and will go up linear to 50% once 230 % shall have been recovered of the amount invested (R factor 2.3). Under the revised arrangements the present 12.5% royalty imposed on oil revenues shall remain unchanged; The actual rate on the profits from oil may be reduced when the corporate income tax rate which is expected to gradually be reduced to 18% in 2016 or 2017 will prove to be higher than this, so that total stake of the State from the oil and natural gas finds shall not exceed this. Transition clauses have been provided for.   Doron Schweppe, Partner dorons@friedman.co.il  or Henriette Fuchs, Partner henriette@friedman.co.il. ________________________________________________________ May 2011 Freeze announced of intended reduction Israel corporate and personal income taxes On the 16th of May the finance committee announced that it intends to freeze the intended lowering of tax rates for future years 2012 – 2016 to be reduced gradually from the current 24% (2011) to 18% in 2016 for companies and personal income tax from 46% in 2009 to 39% in 2016. This measure is supposed to finance the decision not to increase excise duty on gasoline in 2012. The actual proposal for amendment of the law is yet to be published in the near future.  Contact Harel@friedman.co.il or henriette@friedman.co.il _____________________________________________________________________________

January 2011 Changes Encouragement Capital Investments - Budget  2011-2012 Significant changes in the Law for the Encouragement of Capital Investment 1959 were accepted which ought to make benefits more admissible to investors, building an infrastructure for the creation of jobs and the improvement of the export position of the Israeli market place. The ('old') tax benefit tracks (interchangeable route, the green route and the strategic route applicable from 2005 onwards have been cancelled and new benefits have been unified into a set of beneficial tax rates for companies which qualify based on the nature of their profits and the percentage of export sales from these profits.  The beneficial tax rates for qualifying companies in 2011 and 2012 shall be 10% in 2011 and 2012 development zone A and 15% for all other zones. For the years 2013 and 2014 the rates shall be 7% and 12,5% for all other zones.  From 2015 on the rates shall be respectively 6% and 12% in all other areas. For qualifying giant enterprises turnover 1,5 billion New Israeli Shekels) tax rates as low as 5-8% may apply. For details contact Henriette Fuchs, Partner on henriette@friedman.co.il __________________________________________________________________________

December 20, 2010, Proposal Reporting Obligation Income on Intercompany Loans The Knesset passed for reading proposed changes to the Income Tax Ordinance ("ITO") number 180, including tax treatment of intercompany loans and capital notes. Assessment of realistic interest on international related party loans as a common practice in accordance with transfer pricing requirements of the ITO was already set abandoning the determinations of article 3 ITO for interest income determination on domestic related party loans (4%). The proposal contains conditions for classification as a "loan" or as "capital" when assessing, whether and to what extent interest should be reported on For details contact Henriette Fuchs on henriette@friedman.co.il ______________________________________________________ 2010 New guidelines tax consequences of certain business re-structurings.

New Guidelines were issued pinpointing re-organizations lacking a substantial change in the activities of the business after the restructuring, allowing for re-assessment of tax avoidance. The revised guidelines adhere to OECD guidelines as to business restructuring and aim for an at arms' length assessment of all the elements, whether they were reported as such or not. The assessing officer must establish which assets were actually effectively transferred, and to analyze the assets, functions, and risks that belonged to the Israeli business both before and after the internal restructuring while investigating "substance" rather than "form". The tax authorities may ignore the restructuring, in extreme cases, as an artificial transaction when its main purpose was to reduce the Israeli taxpayer's tax liability. It has not been decided yet whether a business restructuring should be separately reported as a "transaction" on a separate form as part of the taxpayer's tax return.

For details contact Henriette Fuchs on henriette@friedman.co.il ___________________________________________________________________________

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