Doing business in Israel 2015

Transcription

1 Doing business in Israel 2015 P R E F A C E Crowe Horwath (Israel), an independent member of Crowe Horwath International in Israel, has prepared this profile of Doing Business in Israel This profile is designed to provide information on a number of subjects important to those contemplating investing or doing business in Israel. This guide is one of a series publication issue by Crowe Horwath (Israel) to clients and professional staff, and may be obtained from by contact Crowe Horwath (Israel). Doing Business in Israel 2015 has been designed for the information of readers. Whilst every effort has been made to ensure accuracy, information contained in this booklet may not be comprehensive and recipients should not act or rely upon it without seeking professional advice. Crowe Horwath (Israel) Doing business in Israel 2014 Page 1 of 92

2 Doing business in Israel 2015 C O N T E N T S 1. I n t r o d u c t i o n 1.1 Geography Population Political System Languages Currency Economy 6 2. B u s i n e s s E n t i t i e s a n d A c c o u n t i n g 2.1 Companies Branches Partnerships Audit and Accounting Requirements F i n a n c e 3.1 Exchange Control Sources of Finance The Law to prevent Money Laundering I n v e s t m e n t I n c e n t i v e s 4.1 General Law For Encouragement Of Capital Investment Tourism Project Tax benefits for building for rents Research and Development Support E m p l o y m e n t R e g u l a t i o n s a n d S o c i a l S e c u r i t y C o n t r i b u t i o n s 5.1 Work Permits Trade Unions and Worker Councils Labor Related Costs 32 Page 2 of 92

3 Doing business in Israel T a x a t i o n 6.1 News and Updates Income Tax Capital Gains Tax Benefits and Exemptions Employee Stocks/Options Plan losses Administration International Taxation Value Added Tax (VAT) Other Taxes Real Estate Taxes A p p e n d i c e s Withholding Taxes on Dividend Payments 59 Withholding Taxes on Interest Payments 60 Withholding Taxes on Royalty Payments 61 VAT: Zero Rating and Exemptions 62 Crowe Horwath (Israel) Firm Profile 64 Crowe Horwath (Israel) International 68 Division Executive Summary 70 Approach to Audit 72 Our Tax Approach 77 Our Team Approach 79 Firm Code 84 Page 3 of 92

4 Doing business in Israel 2015 Ar t i c l e 1 : I N T R O D U C T I O N 1. I n t r o d u c t i o n 1.1 Geography Population Political System Languages Currency Economy 6 Israel-European Union Free Trade Agreement 7 Israel-USA Free Trade Agreement 7 Israel-OECD Membership 7 Labor force 7 Inflation 7 Page 4 of 92

5 Doing business in Israel G e o g r a p h y Israel, lying on the eastern seaboard of the Mediterranean Sea, bordered by Lebanon on the North, Syria and Jordan on the East and Egypt on the South. Israel also borders the areas controlled by the Palestinian Authority. Excluding the Gaza Strip and the West Bank, but including the Golan Heights, Israel has an area of approximately 22,000 square kilometers (8,500 square miles) of which two thirds is desert (the Negev). The major urban centers are Jerusalem with a population of approximately 815,000 people, the metropolitan area of Tel Aviv with 414,600 and Haifa with 272,200 people. The greater part of the country is either hilly or arid. The climate is characterized by two sharply contrasting seasons a dry hot summer from April to October followed by a wet winter from November to March. The average annual rainfall varies from barely 40 mm. (1.6 in.) in Eilat in the south to over 800 mm. (32 in.) in the Upper Galilee in the north. The coastal area has a Mediterranean type climate. Average temperature range from 5 0 C (41 0 F) in Jerusalem in the winter to over 40 0 C (104 0 F) in Eilat in midsummer P o p u l a t i o n Since the state's independence in 1948, Jewish immigrants from all over the world have been settling in Israel. Israel s population has increased from 870,000 people in 1948, to about 7.1 million today. This figure consists of approximately 75% Jews with the remaining 25% comprising Moslems, Druze, Christians and others P o l i t i c a l S ys t e m Israel is a secular democracy, where General Elections are held every four years to elect 120 Knesset (the Israeli Parliament) members. Every Israeli citizen as of age 18 is eligible to vote, and be elected as of age 21. The elections are based on a system of proportional representation of party lists. The Israeli "head of government" is the Prime Minister who is the leader of the party that holds the most seats in the Knesset L a n g u a g e s The formal languages are Hebrew and Arabic. Hebrew is the main language throughout Israel. Page 5 of 92

6 6 Doing business in Israel C u r r e n c y The monetary unit used throughout Israel is the New Israeli Shekel ("NIS"), divided into 100 Agorot. The average exchange rate in 2014 was USD 1 = NIS E c o n o m y A mixture of private enterprises and Government controlled enterprises characterizes the Israeli economy. Private enterprises are the largest industrial manufactures, though the public sector has, for reasons related to the history of the country, invested heavily in some of the largest enterprises in the country. State-owned corporations provide public utilities, such as electricity, water supplies, and railways. However, concurrent with international trends and local priorities the government is now committed to and is implementing a program of divestment and privatization. In the recent years the Government sold most of its interests in banks, the national telecommunications system ("Bezeq") and the national airline corporation ("El-Al"). Several government-controlled companies are quoted on the Tel Aviv Stock Exchange. Israel natural resources are limited to a few minerals such as Potash, Phosphates, Bromine and Salts, found in the Dead Sea and in the surrounding area. Most of raw materials required for industry are imported. The most important industries are Hi-Tech industries, tourism, Bio-Tec industries, and production of precision instruments, chemicals, pharmaceuticals, textiles. Israel has entered into several trade agreements in order to strengthen its position in the international markets. The most significant agreements are the Free Trade Area, with the European Union, Free Trade Area with the United States and Free Trade Area with the European Free Trade Association States (EFTA). The agreements with the European Union, the United States and the EFTA countries place Israel in the unique position of being a Free Trade Area partner with the world s main economic regions. Thus, Israel is able to bridge countries that do not have mutual agreements, provided that the products meet the rules of each agreement. In addition, Israel has signed Free Trade Area agreements with Canada and Turkey. Israel-European Union Free Trade Agreement In 1975 Israel and the EC signed an agreement providing an establishment for a Free Trade Area for industrial and some agricultural products. According to the agreement, Page 6 of 92

7 Doing business in Israel 2015 and subject to rules of origin, Israel s industrial exports to the EC are exempt from customs duties and other import restrictions. For its part, Israel has likewise eliminated all duties on industrial imports from the EC. Israel-USA Free Trade Agreement In 1985 the Governments of Israel and the U.S.A. signed a Free Trade Agreement. This agreement was fully implemented on January 1, The agreement, subject to rules of origin (which are different from those of the European agreement), eliminates all import duties and trade restrictions between the two countries. Israel-OECD Membership As from may 2010, the Organization for Economic Co-operation and Development (OECD) accepted Israel as full member in the organization. Labor force The labor force is approximately 3.6 million people, with women comprising 47% of employees. Following the economic slow-down and the waves of immigration since 1989, unemployment was at a high of approximately 10% of the labor force in December 2002, and decreasing gradually towards 6%. Inflation The rate of inflation has been in the range of 1% to 3% for the last few years. In 2014 the inflation rate was 0.5%. Page 7 of 92

8 Doing business in Israel 2015 Ar t i c l e 2 : B U S I N E S S E N T I T I E S AN D AC C O U N T I N G 2. B u s i n e s s E n t i t i e s a n d A c c o u n t i n g 2.1 Companies Private Companies Public Companies Branches Partnerships Audit and Accounting Requirements 11 Page 8 of 92

9 2. 1. C o m p a n i e s The most common form of business entity in Israel is a limited company with shared capital. The Companies Law governs the activities of the companies. A company can be either limited by shared capital or by guarantee, or unlimited, in which case its members do not have any ceiling to their liability. There are no requirements as to nationality or residency of shareholders and directors of companies. In order for a company to be considered incorporated, it should be registered with the Company Registrar at the Ministry of Justice. Apart from other requirements, an incorporated company should have Articles of Association. The Company Registrar usually accepts the English language P r i v a t e C o m p a n i e s A private company may have between 1 to 50 shareholders. A private company must file an annual report with the Registrar of Companies, which includes information regarding shareholders and directors but not financial statements. Annual financial statements, prepared according to generally accepted accounting principles and audited by professionally qualified auditors, should be presented at the shareholders annual meeting. Shares and other securities should not be offered for sale to the public. There may be restrictions, upon shareholders agreement, on the transfer of a private company s shares. Page 9 of 92

10 Public Companies A public company must have at least 7 shareholders, with no maximum limitations. There should not be any restrictions on the transfer of a public company s shares. If a public company s shares are traded on the Tel Aviv Stock Exchange (TASE), the company is required to: Publish annual audited financial statements and quarterly unaudited (but reviewed by a CPA) financial statements. Appoint at least two directors who do not have any business or other relationships with the company, known as Public Directors. Appoint an audit committee, comprised of at least three directors, two of whom are Public Directors. Appoint an internal auditor. File annual and quarterly reports to the Registrar of Companies, TASE and the Security Authority. Any offer to the public must be through a published prospectus Make an immediate announcement of any major event B r a n c h e s Foreign companies wishing to conduct business in Israel must be registered with the Registrar of Companies and provide the Memorandum and Articles of Association, list of directors and other required information. All documents can be in either Hebrew or English P a r t n e r s h i p s The Partnership Ordinance governs the activities of partnerships. If a partnership is established for the purpose of conducting business in Israel, it can be either registered with the Registrar of Partnerships at the Ministry of Justice or remain non registered. Registration requires, among others, furnishing the Registrar of Partnerships with the partnership s name, activities, address, partners etc. Page 10 of 92

11 A partnership cannot comprise more than 20 partners. A partnership may be general or limited. A partnership does not have to file annual reports of any kind. Profit or loss should be added to the partners financial reports or income statement Au d i t a n d Ac c o u n t i n g R e q u i r e m e n t s All companies are obligated under the Israeli Companies law to prepare audited annual financial statements, drawn up in accordance with Generally Accepted Accounting Principles (GAAP) and file them with the Companies Registrar. The financial statements have to be audited by a certified public accountant. As from 2007, the Israeli Accounting Standards Board (IsASB) has adopted the International Financial Reporting Standards ("IFRS") for public companies. Public companies, traded in the Tel-Aviv Stock Exchange are required to publish their financial statements drawn up under IFRS. Small and Medium enterprises ( SMEs ) have the option to use Israeli GAAP or apply IFRS. During July 2009, the IFRS for SMEs has been introduced by the International Accounting Standard Board. Commencing 2011, IFRS for SME's has been adopted as an alternative basis of accounting for non-public companies, targeting 2015 as the year for a final decision for this basis of accounting. As of January 2015, no decision to that effect has yet been taken by the IsASB. All businesses need to maintain proper books of accounts for taxation purposes and to retain the accounting records and associated documents for not less than 7 years. All companies must have their accounts audited by a certified accountant - statutory full scope audited financial statements). Page 11 of 92

12 Doing business in Israel 2015 Ar t i c l e 3 : F I N AN C E 3. F i n a n c e 3.1 Exchange Control Sources of Finance Banking Stock Exchanges and Trading Facilities Venture Capital Companies The Law to prevent Money Laundering No assistance to money launderers No Tipping Off Voluntary Disclosure Page 12 of 92

13 3. 1. E x c h a n g e C o n t r o l s There are no exchange controls in Israel on inward or outward investment. Foreign currencies can be bought and sold freely and there are no restrictions on the maintenance of foreign currency bank accounts in Israel. There are no limitations on the repatriation of profits from Israel S o u r c e s o f F i n a n c e Banking The Israel s central bank, the Bank of Israel, acts as banker to the Government. It is responsible, inter-alia, for setting base interest rates through its Monetary Policy Committee. Overdrafts with fluctuating interest rates are the most commonly used facility for financing working capital or for funding seasonally affected business. Technically, overdrafts are repayable on demand. Banks also offer short, medium or long-term loans. The repayment terms are negotiable and the rate of interest may be fixed or variable. To obtain bank finance, the business will normally be required to provide adequate security. Security will typically be in the form of a fixed or floating charge over the business assets, as well as, in certain circumstances, personal guarantees from the owners. In addition to these traditional services banks offer various other financing arrangements through subsidiaries or affiliates. These include installment credit, leasing, factoring and invoice discounting and mezzanines finance Stock Exchanges and Trading Facilities The Tel Aviv Stock Exchange (TASE) provides a market for shares and other securities issued by public companies and government bonds. Trading in securities and raising capital from the public are regulated by the Securities Law, under which the Security Authority was established to protect the interest of investors. Page 13 of 92

14 To become and remain listed, a company has to satisfy and abide by the extensive rules established by the TASE and the Security Authority, which is independent from the Tel Aviv Stock Exchange (TASE) Venture Ca p i t a l C o m p a n i e s For businesses that are not large enough to consider Stock Exchange entry but which require equity or mezzanine finance, Venture Capital Companies can provide equity for start-ups, for development or for management buy-outs. Venture capital companies may also be a source of finance for a business that does not have sufficient security to borrow from a bank. However, they may require a higher return than a traditional bank T h e L a w t o p r e v e n t M o n e y L a u n d e r i n g Israel has joined the fight against the Money Laundering by enacting the Money Laundering Law. This Law enables Israel to take an active role in the international fight against money laundering. On the 22 October 2014, the Israeli government confirms the conclusions of the "Loker Committee" that was established in order to reduce the use of cash in the Israeli economy. The main purpose was to fight the undeclared capital ("Black Capital"), and the laundering of money in order to enable "Real Tax" collection. The benefits driven from reduction the use in case, are as follows: 1. Expanding the tax basis. 2. Reducing the competitive advantage of business which violates the law, compared to those who follow the law. 3. Truth Tax collection. 4. Implement advanced method of payments. 5. Reduce criminal activities and laundering of money. Page 14 of 92

15 The conclusions of the committee were as follows: 1. Limiting the cash transactions between individuals carrying on a business to 10,000 NIS (Instead of 20,000 NIS) 2. Limiting the cash transactions between individuals to 15,000 NIS (instead of unlimited amount). 3. Limiting the possibility to pay off checks that were transferable more than once, (up to 10,000 NIS). It was also recommended to prohibit transferring check without beneficiary's name. 4. Starting using debit cards that are credited immediately and debit cards that can be loaded No assistance to money launderers Anti Money Laundering Law imposes certain identification and reporting obligations on financial institutions, including banks, stock exchange members and money changers. These institutions are required to positively identify anyone, either a person or a corporation, requesting services such as opening of an account, change of ownership of an account, or execution of certain transactions No Tipping Off To prevent money laundering the aforementioned institutions are also required to report certain transactions to the authorities. These transactions fall into two categories: Transactions which exceeds defined amounts. Unusual transactions transactions which appear to be unusual in light of the information the institution possesses - for example, a transaction whose aim seems to be avoidance of the "size defined" reporting requirements or an account whose holder seems to be operating on behalf of someone else, etc Volunt a r y D i s c l o s u r e The Israeli Tax Authority (hereby - ITA ) released on 7 September 2014 a new Voluntary Disclosure Program (hereby - "The Program") for unreported income and assets, (which replaces the former 2005 and 2011 programs) and applies to all types of Page 15 of 92

16 unreported assets and income, whether offshore or domestic, passive income or income derived from a trade or business. The program consist two temporary programs in the following courses: 1. A procedure allowing anonymous applications (Hereby - "the Anonymous course ). 2. An expedited procedure for taxpayers with funds not exceeding 2,000,000 NIS provided that the estimated taxable income does not exceed 500,000 NIS. (Hereby - "The Expedited course ). This program is not available to taxpayers who are already subject to investigation by the ITA, even a confidential enquiry, when they apply for the program. Is also not available for funds derived from criminal activities. Israeli taxpayers can apply for the general voluntary disclosure procedure until 31 December The Anonymous and the Expedited courses are available until 6 September Taxpayers who wish to regularize their tax situation and apply for the program must file a request through their representative (lawyer, accountant or tax advisor). The application should contain all relevant information on all unreported assets (offshore or domestic) and their related income and gains, including passive income (capital gains, interest, dividends, etc.) or active income (derived from a trade or business) gained in the 10-year period preceding the application for the program. Unreported assets and their related income and gains will be assessed by the tax inspector who will calculate the principal amount of tax, late-payment interest and penalties. The main benefit of the program is the full relief from criminal liabilities relating to tax avoidance for taxpayers. Page 16 of 92

17 Ar t i c l e 4 : I N V E S T M E N T I N C E N T I V E S 4. I n v e s t m e n t I n c e n t i v e s 4.1 General Law For Encouragement of Capital Investment Overview Applicable of the Law Location The Grant Scheme The tax benefits scheme Preferred Corporation Preferred Enterprise Preferred Income Tax benefits Dividends from preferred enterprise Tourism Project The Grant Scheme Accelerated Depreciation Corporate Income Tax rates Dividends Tax benefit Scheme Tax benefits for building for rents Accelerated Depreciation Tax Rates Research and Development Support Overview The development of a novel product R&D Support for a start-up company R&D Support for Companies in Special Geographical 28 Areas Royalty "Engels" Law- for Investment in Research and Development Companies 29 Page 17 of 92

18 4. 1. G e n e r a l The state of Israel supports its investment initiatives by developing and granting a wide range of incentives and benefits in order to achieve a favorable balance of trade, improve revenues, maximize productivity in designated industrial sectors, ensure healthy competition in the relevant markets and facilitate overall growth. To attain these goals, Israel offers substantial benefits and concessions through a number of laws and regulations, as summarized below. Special emphasis is laid on hightech companies and R&D activities, as considerable importance is attached to these fields. Furthermore, numerous programs have been formed, starting from grass roots, to support the high-tech industry. Israeli companies may also be eligible for benefits from international funds created as a result of cooperation agreements established between the Israeli and foreign governments, including Canada, the United States, the European Union, etc. Additionally, to promote weak economic regions within Israel, differential benefits are granted (A, B and Central Israel) - being substantially higher in the designated priority regions (A, B) than in the center of the country. Enterprises are however eligible for benefits anywhere they are erected, provided they comply with the relevant criteria (see below). Additionally, Israel grants foreign investors and major investments increased tax benefits. Page 18 of 92

19 4. 2. L a w F o r E n c o u r a g e m e n t o f C a p i t a l I n v e s t m e n t s (See "Doing business in Israel " to learn more about the Law prior the amendment No 68) O v e r v i e w The Law for Encouragement of Capital Investments (on this chapter will be referred by "the Law") was originally introduced in 1959, in order to boost the Israeli economy by attracting local and foreign investors to contribute capital investments to the Israeli industry. The Law's main goal is to amplify the attractiveness of the Israeli economy in the international competition over local and foreign capital for investment and development. Likewise, through the set of incentives prescribed by it, the Law promotes a more geographically balanced distribution of the population across the country and strengthening of the peripheral regions. Traditionally, the law includes two main schemes of government incentives: the grant scheme which allows up to 24% government's grant on qualified investments for establishing or expending industrial enterprise at preferred areas; and the tax incentive scheme. At the end of 2010, the Knesset (the Israeli parliament) had decided on the 68 amendment of the Law, which concludes an extensive reform of the Law, which would be applied on income attributed starting January 1, 2011 (hereinafter will referred as "68 Amendment"). As studies have indicated inefficiency in the allocation of resources according to the Law's provisions, and based on the conclusions of the professional public committee appointed by the ministry of finance, government announced extensive amendments in the Law. Outline below are some of the main changes: Updating the Law's objectives in line with the changes that have taken place in the Israeli economy characteristics, placing emphasis on encouraging investments, generating added value in innovation and heightened competitiveness of Israeli industry; Allowing the Israel Investment Center flexibility to establish other support schemes besides the existing schemes, for a range of investments, focusing on Page 19 of 92

20 investments in human capital, and in line with industry characteristics at any given time; Prioritizing the peripheral regions through the grants scheme; Simplifying the tax benefits scheme, establishing flat tax rates on all income of "preferred companies" and giving preference to the peripheral regions by lowering the reduced tax rate for companies in those regions; Eliminating the distortions created through the concentration of resource allocation in the tax benefits scheme, by preventing the grant of greater tax benefits to foreign investors, and by excluding companies based on the exploitation of natural resources, including petroleum and natural gas, and other companies for which there is no room for granting incentives through tax breaks, such as state-owned companies. Customizing a dedicated tax track aimed at promoting the operation of huge companies in Israel A p p l i c a b l e o f t h e L a w The Law applies to industrial enterprises which qualify as "International Competitive Enterprise". The definition of industrial enterprise includes enterprises who own Productive activities as textiles, food, electronics, chemicals, pharmaceuticals, computer software, biotechnology, nanotechnologies, etc. The High-Tech industry, being a major growth engine of the Israeli economy, had been promoted to the Law. In accordance, the definition of productive activity had also been applied to developing of software programs and Research and Develop industrial centers located in Israel. Industrial R&D for a foreign resident will be recognized as industrial enterprise once approved by the Head of Industrial R&D Administration. The Amendment No 68 excluded companies based on the exploitation of natural resources as petroleum and natural gas from obtaining incentives under the Law. Stateowned companies had also been excluded from obtaining benefits under the Law. Industrial enterprise could be approved either by the investment center or by the Israeli Tax Authority. In order to meet the International Competitive Enterprise rule, 25% of the enterprise's revenues should be driven from exporting to large international markets. Page 20 of 92

21 Location The government grants scheme is affected by the location of the company's activities. Several regions in Israel have been declared National Priority Regions (Priority Area A), among them: The Galilee Jordan Valley The Negev Jerusalem (for hi-tech enterprises) Areas which do not include in the Priority Area A are considered under the Law "Other Areas" The Grant Scheme An industrial enterprise located in "Priority Area A" fulfilling the terms of the Law, may be eligible for grants to be calculated as percentage of the approved investment. The grants may be 20% of the actual investments of the enterprise on the follow assets: Buildings, machinery and other equipments (not including private vehicles) owned by the enterprise and used according to the approved program (by the Incentive Center). Expenses made for land developing. Expenses made for renovation of the building. The grant scheme would only be applicable for enterprises located in Priority Area A. Enterprises from other areas are not qualify for the grant scheme, but can be entitle for tax benefits under the Law. Under the amended law, applies for income accrued starting 2011, enterprises complying with the requirements of the law may benefit simultaneously from both the tax benefits (lower corporate tax rate as described earlier) as well as applicable nonrefundable grants (only relevant for Area A). 1 Before the Amendment No 68 to the Law, the country's regions were divided for 3 zones: Priority Area A, Priority Area B and Other Areas. According to the amendment, Area B was cancelled. However, for the purpose of incentives for Tourism Project (see below) all three areas are relevant. Page 21 of 92

22 The T ax B e n e f i t s S cheme The Law prior to the Amendment No 68 determined differed tax exemption for a "Beneficiary Enterprise". However, the exemption was concluded only for the growth in the enterprise's revenue which was attributed to the extension of the plant 2. The tax exemption was concluded based on the location of the enterprise 3. Under the amended Law, all prior tax benefits schemes had been canceled. The "Beneficiary Enterprise" was replaced with "Preferred Enterprise", as defined below. Instead of differed tax exemption schemes, reduced flat tax scheme had been introduced. Enterprises located in Priority Area A would be eligible for reduced corporate tax of 9% on all preferred income. Corporate tax rate on other regions would be 16% " P r e f e r r e d C o r p o r a t i o n " Preferred Corporation is a legal entity which conducts all the following: An Israeli company, which was incorporated under the law of Israel, and the business of which is controlled and managed within Israel. The company may not be transparent entity for tax purpose, as a family company, a transparent company or a Kibbutz. Notwithstanding the above, registered partnerships may be consider as Preferred Corporation provided all its partners are Israeli companies which fulfill the above mentioned. The corporation owns a Preferred Enterprise (as defined below) The company must maintain admissible books and records and file any reports required under Israeli Tax Law. The company and its officers must be free of previous convictions on tax fraud charges during the 10 years proceeding the benefits periods. It should be noted that companies own factories and quarries for producing natural resources (minerals, gas and oil), as well as governmental corporation, will be excluded from the definition of "Preferred Corporation", and not be eligible for benefits under the Law. 2 It is possible to be eligible for the tax exemption on all the enterprise's taxable income in case the enterprise had fulfill the requirements of the Law from the first year income had been accrued (mainly for R&D centers). 3 Under the Law before the 68 Amendment, Priority Area A was entitled for 10 years exemption. Priority Area B 6 years. Other Areas 2 years. Page 22 of 92

23 " P r e f e r r e d E n t e r p r i s e " As mentioned, the tax benefits scheme would apply only on Preferred Income (as defined below) of a Preferred Enterprise. According to the law, Preferred Enterprise would be an industrial enterprise fulfilling the following terms: The enterprise is competitive within the international market; and The enterprise contributes to the Gross Domestic Product of Israel. An enterprise will be deemed to have fulfilled this condition if it is one of the following: Engaged mainly in biotechnology or nanotechnology, and obtained an approval of the Head of Industrial R&D Administration; At least 25% of its Preferred Income of the enterprise which was produced from direct exporting to international markets; or Engage mainly on the field of renewal energy " P r e f e r r e d I n c o m e " The Preferred Income would be determined as the gross income of a Preferred Enterprise (not including discounts) which was produced or which accrued during the course of business activities of the enterprise in Israel, as follow: Income from products manufactured in Israel, including components manufactured by subcontractors. Income derived from natural resources (Gas, Mineral, Oil) would not be calculated as part of the Preferred Income. Income from the sale of semiconductors manufactured by independent subcontractors, as long as the IP belongs to the Preferred Enterprise. Income derived from royalties for the use, or the right to use, a patent or knowhow which was developed in the Preferred Enterprise. Income derived from industrial research and development made for foreign resident, as long as an approval of the head of the R&D center had been provided T a x b e n e f i t s Preferred Enterprise would be eligible for tax benefits for each tax year on which it has fulfilled the 25% export condition. Page 23 of 92

24 Corporate Income Tax of a Preferred Enterprise would be 9% in 2015 if the enterprise is located on "Priority Area A", and 16% if it is located on other regions. However, a transitory provision for the years 2011 to 2014 determine the following tax rate as described in the following table (ordinary tax rate is being shown for convenience) : Tax Year Priority Area A Other Areas Ordinary Tax Rate % 15% 24% % 15% 25% % 12.5% 25% % 16% 26.5% % 16% 26.5% D i v i d e n d s f r o m P r e f e r r e d E n t e r p r i s e Dividend distributed from the preferred income would be taxed at 20% (Dividend distributed to Israeli corporation is exempt from taxes. Dividend distributed from exempt income would be taxed also at corporate tax rate (26.5% at 2015) T o u r i s m P r o j e c t s The law for encouragement of capital investments also applies on tourism enterprise. Nonetheless, the incentives for tourism projects remained as prior to the 68 amendment. "Tourism Enterprise" is defined as tourism facility which includes at least 11 hotel rooms, and provides sleeping arrangements service and additional services as catering, recreation and leisure. Unique Tourist attractions have also been included as Tourist Enterprise Grant Scheme Tourist Enterprise which is located in Priority Area A will be eligible for non refundable grant of up to 20% from its approved investments. Tourist Enterprise which is located in the Negev Area will be entitled for 30% grants. Page 24 of 92

25 Tourist Enterprise which is located in Priority Area B will be eligible for non refundable grant of up to 10% from approved investments. In addition to the grants, Tourism Enterprise would be eligible for the following tax benefits A c c e l e r a t e d d e p r e c i a t i o n Approved tourist enterprise may charge, at its request, accelerated depreciation on its assets (including buildings) used for the purpose of producing the approved income, as followed: machinery and equipments 200% of the ordinary percentages that could be charged; Buildings 400% of the ordinary percentages that could be charged. When proven that machinery and equipments had been used on double or more shifts or been used in extreme conditions, Approved Enterprises may charge 250% of the ordinary percentages that could be charged. Grants received for expenses made for land development would not be taxed, but, for the purpose of depreciation, the sum of the grant would be discharged from the cost of the building C o r p o r a t e i n c o m e t a x r a t e s Approved tourist enterprise located in Priority Area A would be exempt from tax (deferred) for the first two years starting the first year the enterprise realized taxable income. For the next 5 year the enterprise would be tax on the ordinary corporate tax rate (26.5% on 2015). Had the enterprise's shareholders are foreign residents the corporate tax rate would be as followed: When more than 49% but less than 74% of the enterprise's shareholders are foreign residents the corporate tax rate would not exceed 20%. When more than 74% but less than 90% of the enterprise's shareholders are foreign residents the corporate tax rate would not exceed 15%. When more than 90% of the enterprise's shareholders are foreign residents the corporate tax rate would not exceed 10%. Page 25 of 92

26 The two years tax exemption (deferred) would only be available for enterprise located in Priority Area A D i v i d e n d s Tourism Enterprise which distributes dividend from its exempted income would be charged on corporate tax regarding the exempted income. Dividend distributed from the approved income would be limited to 15% tax rate as long as the scheme approved before January 1, 2014 (unless relevant double tax convention is in force) T ax B e n e f i t S c h e m e Tourism Enterprise would be eligible for extensive tax benefits if it prefers the tax benefit scheme instead of the grant scheme. Tourist Enterprise not located on Priority Area A could only be eligible for the tax benefit scheme and not be eligible for the grant scheme. The tax benefits under this scheme are as followed: Tourist Enterprise located in Priority Area A would be exempt from tax (deferred) for 10 years starting the "Chosen Year". The enterprise may elect to be charged with flat reduced tax of 11.5% instead of the deferred exemption ("Ireland Scheme"). Tourist Enterprise located in Priority Area B would be exempt from tax (deferred) for 6 years starting the "Chosen Year". Tourist Enterprise located in Other Areas would be exempt from tax (deferred) for 2 years starting the "Chosen Year". Tourism Enterprise which distributes dividend from its exempted income would be charged on corporate tax regarding the exempted income. Dividend distributed from the approved income from January 1, 2014, would be limited to 20% tax rate as long as the scheme was approved starting from January 1, (Unless relevant double tax convention is in force). Page 26 of 92

27 4. 4. T a x b e n e f i t s f o r b u i l d i n g f o r r e n t s In order to encourage building apartments for rent the law for encouragement of capital investments determine several tax incentives for "building for rent". "Building for rent" includes at least 16 apartments used for living, and at least 70% of the approved building is being rented for living A c c e l e r a t e d D e p r e c i a t i o n The deductible depreciation rate allowed is 20% as long as the building uses as a "building for rent". (10 times the ordinary percentages charged for apartments) Tax rates The rate of the taxable income from rent or disposal of approved apartments would be as follow: The owner of the approved building is an Israeli Company 11%. The owner of the approved building is an Israeli Company whose shareholders are mainly foreign residents 18% or less 4. The owner of the approved building is an Israeli individual 20%. 4 For the tax rate regarding Israeli approved company whose shareholders are foreign residents see in chapter 4.3 regarding Tourism project. Page 27 of 92

28 4. 5. R e s e a r c h a n d D e v e l o p m e n t S u p p o r t O v e r v i e w The Office of the Chief Scientist (OCS) of the Ministry of Industry and Trade is responsible for implementing government policy regarding the support and encouragement of industrial research and development in Israel. The variety of support programs provided by the OCS, have played a major role in enabling Israel to become one of the most important centers for high-tech entrepreneurship outside of the United-States T h e d e v e l o p m e n t o f a n o v e l p r o d u c t A single or multi-year program that will provide know-how, processes or methods for the manufacture of a new product or the major improvement in an existing one or a new process or a major improvement in an existing process. The product must have a sizeable potential for export sales. The support is in the form of a conditional grant amounting to 30-50% of the approved R&D budget Support b y G r a n t s f o r R&D of S t a r t - U p C o m p a n y A start-up company is defined as one whose R&D program is its first and only activity and where the R&D staff is the sole source of financing. The support is in the form of a conditional grant of 66% of the approved R&D budget up to a maximum of $250,000 per year for up to two years. Any approved R&D expenditure above $250,000 may receive a conditional grant of 50%. The R&D support includes beta-site testing as well as patent registration R&D Support for companies i n special geographical a reas Any approved R&D program-taking place in Development Area A is entitled to a conditional grant of 60% of the approved budget. Page 28 of 92

29 In any area delineated as Front Line the conditional grant amounts to 70-75% of the approved budget with the higher figure for companies that also manufacture in that area R o y a l t y Any income derive from an R&D program that has enjoyed government support is liable for the payment of royalties to the OCS. The royalty payments are based upon a percentage of sales up to the repayment of the grant " E ngels " L a w - for I n v e s t m e n t i n R e s e a r c h a n d D e v e l o p m e n t C o m p a n i e s Investments in Israelis Research and Development companies (hereby:"r&d companies"), that are in the first stages of research and development activity (the "seed stage") represent a very high risk investment for the investors. These companies which represent a significant part of Israeli industry, have difficulties finding investors, and have difficulties finding alternative funding solution. In order to increase the funding of these companies, Israeli equity investors in these companies are entitled to expense their investment. The Engel Law establishes that Israeli individuals that purchase stocks of qualified companies will be eligible to expense the investment. The law is in effect for eligible investments made beginning in 2011 until 2015 and the maximum amount of the benefit is 5 million NIS for an individual investor in qualified Company. The law establishes that the eligible investments must meet three criteria in clause 20A: 1. Eligible investment 2. Period of benefit 3. Target company Eligible investment An eligible investment is an individual investment in a target company, in any tax year, in which the stock of a target company has been allocated in that year. The expensing of the eligible investment will be allowed only for the investment of the individual in an eligible company and not for funds that were transferred by a corporation. These criteria is based on 2 conditions: Page 29 of 92

30 1. the payment for the investment was transferred to the company 2. The stock purchase by the investor in the target company, relates to the same year of which the investment took place. Period of benefit The benefit period is a period of three tax years beginning in the tax year in which the fund for the eligible investments, were paid. The exact date during the tax year in which the funds were transferred, is not relevant. The benefit period relates to a specific investor with regards to a specific eligible investment in the company. In case there are number of investors, each one of them will have a personal investments period. Target Company The criteria for recognition as a Target Company are: 1. An Israeli company. 2. The Target Company has received approval by the Israeli Office of the Chief Scientist of the Ministry of Industry and Trade for it's in Research and Development activities. 3. The Target Company shares are not registered for trade on Stock Exchange. 4. At least 75% of the investment in the Target Company is utilized to fund its research and development activities. 5. At least 75% of the research and development expenses of the Target Company during the benefit period were spent in Israel. 6. In the first year of investment and in the succeeding year, the revenues of the Target Company were not in excess of 50% of its research and development costs. 7. The research and development cost incurred by the target Company were spent for the promotion or development of its subsidiary. 8. The research and development costs of the Target Company comprise at least 70% of its company's costs. Page 30 of 92

31 Ar t i c l e 5 : E M P L O Y M E N T R E G U L AT I O N S AN D S O C I AL S E C U R I T Y C O N T R I B U T I O N S 5. E m p l o y m e n t R e g u l a t i o n s a n d S o c i a l S e c u r i t y C o n t r i b u t i o n s 5.1 Work Permits Trade Unions and Worker Councils Labor Related Costs National Insurance (Social Security) Paid Vacation Severance Pay and Pension Funds Sick Leave Education Fund Reserve Military Duty 33 Page 31 of 92

32 5. 1. W o r k P e r m i t s In order for non-resident to work in Israel, a work permit or a status other than tourist is required. Under the Law of Return, immigrants are entitled to permanent residence status or an A-1 visa, which entitles the immigrant to a temporary resident status. It is a prerequisite for other non-residents who wish to work in Israel to apply for a work permit (usually B-1 visa). In order to obtain a work permit, Israeli employers must apply to the Ministry of Labor, and where applicable, also to the Investment Center T r a d e U n i o n s a n d W o r k e r C o u n c i l s There is no legal requirement for employers to recognize any trade union unless a majority of the work force votes in favor of such recognition. Agreements between employers and trade unions over pay and conditions are not binding by law and unions may not take industrial action without first securing a majority vote in a secret ballot of their members. There is no legal requirement for employees to be represented on the board of directors of companies L a b o r R e l a t e d C o s t s The Israeli employees' labor and social security costs include the following: National Insurance (Social S e c u r i t y ) Employees pay up to 12% and employers 6.75% for a total of 18.75% of employees salaries monthly. Cover includes unemployment insurance, maternity benefits, work injury, child allowances, old age pensions, medical care costs and reserve military duty compensation Paid Vacation Employees are entitled to yearly paid vacations of from 2 to 4 weeks depending on length of employment. They are also entitled to a recreational allowance based on length of service. Page 32 of 92

33 S e v e r a n c e P a y a n d P e n s i o n F u n d s Employees are entitled to severance pay on dismissal or reaching retirement age (67 for men and 64 for women) but not on voluntary resignation. However some employers are required to pay severance pay on resignation under terms of specific labor agreements. Severance pay amounts to one month s salary for every year of employment based on the last month s salary received. Many employers provide for this by monthly payments to a provident fund. In addition, most employers are required by labor agreements to make monthly payments to pension funds, at the rate of 6% of the average salary published by Social Insurance Authority, for employees pension on retirement Sick Leave Employees are entitled to payment of sick leave as follows: The 1 st day 0% The 2 nd and 3 rd day 50% The 4 th onwards- 100% Education Fund Some employers elect to make payment to recognized funds for the ongoing education of senior and academic employees by monthly payments, at the rate of % - the employer and 2.5% the employee, from the employees salaries, to a provident fund R e s e r v e M i l i t a r y D u t y It is customary, though not required by law, that employers pay the difference between compensation received by employees for periods of reserve duty from the National Insurance Institute and the regular salary they would otherwise have received. Page 33 of 92

34 Ar t i c l e 6 : T AX AT I O N 6. T a x a t i o n 6.1 News and Updates Income Tax Overview Corporations Residence Tax Rates Special entities Family Company / Transparent 38 Company Land Company Partnerships Controlled Foreign Occupational 38 Company Controlled foreign corporation (CFC) Dividends Received by a Corporation Domiciled 40 in Israel Individuals Residence Tax rates Special Tax Rates for Individuals 43 A Rental 43 B Rental derived from Real estate 43 Located outside Israel C Interest 43 D Dividend 43 E Gambling Capital Gains Tax General Tax Rates Benefits And Exemptions Tax incentive for foreign residents Deductions for Expatriate Employees Benefits to New Immigrants and Returning 46 Residents General Definitions The benefits Employee Stocks/Options Plan Losses Administration Filing Tax Return Collection of Taxes Withholding Taxes Advance Tax Payments Balance of tax 49 Page 34 of 92

35 6.8 International Taxation Double Taxation Relief Transfer Pricing Transfer Pricing Regulations Setting 50 an Arm Length Price Reporting Requirements and 51 Documentation Coming Into Effect and Transitional 51 Regulations Taxation of Trusts Participation Exemption for Israeli Holding 53 Company Overview Definitions Dividends distributed by the holding 54 company 6.9 Value Added Tax (VAT) Other Taxes Custom Duties Purchase Tax Stamp Tax Estate Tax Gifts Real Estate Taxes Acquisition Tax Betterment Levy Land Appreciation Tax Sales Tax Municipal tax 58 Page 35 of 92

36 6. 1. N e w s a n d U p d a t e s On November 25, 2013 a new tax reform had been enforced under The Law for Change in the Tax Burden (Legislative Amendments), According to the tax reform, the tax cuts planned which determined significally low tax rates (as low as 18% on corporate tax and 39% for individuals) was cancelled; instead corporate tax on 2014 will increase to 26.5% (25% on 2013) and the highest tax bracket's tax rate for individuals will be rise up to 50% (48% on 2013). Under the tax reform the taxes on Investment income had stayed the same: The regular tax rate on dividends, interest, loan discount, capital gains and land appreciation are 25%. The tax rate for dividends paid to major shareholders (holding 10% or more) is 30%. A 30% tax rate will generally apply to sales of shares in real-estate entities by major shareholders. Those rates are generally applied on foreign investors unless exempt of tax (see chapter 6.4.1) or a valid treaty in enforced. In order to boost the Israeli economy and support the exporting industry as well as the High-tech industry, major tax incentives were introduced as part of the Law of Encouragement of Capital Investments (see on Chapter 4 of this manual). In addition, the Israeli Tax Law includes tax incentives for foreign investments in Israel, as tax exemption on capital gain on the disposal of Israeli corporations' shares. For more information see Chapter 6.4 of this manual. As of 2008, and part of the government initiative to attract former Israeli residents and Jewish people to reside in Israel, major tax exemptions for new residents and for returning residents had been introduced. For further information see Chapter 6.4.3of this manual I n c o m e T a x O v e r v i e w According to Israeli Tax Ordinance, Israeli residents, either individuals or corporations, are subject to income tax on their worldwide taxable income. Non residents are subject to tax on any income derived from an Israeli source. Where there is a double tax convention between Israel and the other countries, its terms may modify the taxable income. Page 36 of 92

37 Usually, a fiscal year is a full year, starting on January 1 and ending on December 31, with very few exemptions, especially for subsidiaries of publicly traded foreign companies. With a few exemptions, accounting should be conducted in Israeli currency. Starting 2008, Financial Reports are based on the IFRS accounting system (public traded company implemented the IFTS accounting system since 2005). However, for tax purpose, the financial report should be based on Israeli GAAP. The income tax legislation taken as a whole provides for the payment of taxes on income from defined sources, after deduction of disbursements and expenses incurred in the production of income. This includes taxes on capital gains and provided special benefits for investors in approved enterprises. The amount subject to taxation is known as the taxable income Corporations R e s i d e n c e A corporation is considered an Israeli resident if one of these conditions has been fulfilled: The corporation was incorporated under Israeli law; or The corporation is managed and controlled from Israel T a x R a t e s The taxable income of Israeli corporations is subject to a company tax of 26.5%(2015) Dividend paid to another Israeli company is excluded from the taxable income. Dividend paid to Israeli individuals or foreign residents (both individuals and companies) is subject to withholding tax of 25%, or 30% if the shareholder holds 10% of the shares or more. The withholding tax rates can be reduced in case a valid tax convention is taking place. A foreign corporation having taxable income accrued in Israel would be subject to company tax as well. Foreign Corporation which conducts business in Israel through a permanent establishment would be subject to company tax, only for the income accrued from its activities in Israel. There is no branch tax. Page 37 of 92

38 As described in other sections of this booklet, Approved Enterprises, foreign controlled companies, and foreign investors may be subject to different and lower tax rates Special entities F a m i l y C o m p a n y / T r a n s p a r e n t C o m p a n y A company which all of its shareholders are individuals who are family relatives can apply to be consider as "Family Company". The election should be applied within three months from the incorporation of the company. (On the Memorandum of the economic plan for 2015, there is a suggestion to change filing the request to the day of incorporation) Income and losses of the Family Company would be considered as the largest shareholder's income and losses. Dividend distributed to the shareholders from income derived from the Family Company, would not be subject to taxes L a n d C o m p a n y Land Company is a company which all its assets and business includes buildings and the possession of buildings. As the company's request, its taxable income and loss would be attributed to its shareholders P a r t n e r s h i p s Partnerships, either registered or non-registered, are disregarded for tax purpose. Each partner would include his portion of the partnership taxable income (or losses) as his taxable income or loss C o n t r o l l e d F o r e i g n O c c u p a t i o n a l C o m p a n y "Foreign Occupational Company" a foreign corporation for which all the following hold true: If it is a company, then it is a small company, which is being held by no more than 5 persons. For this purpose, related individuals would be considered as one person); Page 38 of 92

39 At least 75% of its shares are controlled, directly or indirectly, by Israeli individuals; The company's Israelis shareholders are engaging in a "Special Occupation" for the benefit of the company; and Most of the company's income stems from the "Special Occupation". A Controlled Foreign Occupational Company is deemed to be managed and controlled from Israel. Any income attributed from the "Special Occupation" by the Israeli shareholders is deemed to be accrued as Israeli source income; therefore it is subject to Israeli company tax. Tax credit will be granted in respect of the foreign tax paid C o n t r o l l e d f o r e i g n c o r p o r a t i o n ( C F C ) Controlled foreign corporation is a foreign corporation for which all the following hold true: More than 50% of its shareholders are, directly or indirectly, Israeli residents. Most of the corporation s income or earnings during the tax year are derived from Passive Income. For this purpose, Passive Income shall constitute income from interest or linkage differentials, dividends, royalties, rental fees, and proceeds from the sale of an asset not used by the corporation for its business. The corporation's shares or rights thereto, are not listed for trade on the stock exchange; however, if said shares or rights were partly listed, less than 30% thereof were offered to the public. The tax rate on the Passive Income derived from the foreign countries does not exceed 15%. The Israeli controlling shareholder of the CFC, would be deemed to receive dividend from the CFC as his portion on the undistributed profits of the CFC by the end of the tax year. The controlling shareholder would be relief from the foreign tax which would have been applied in the country of the CFC's residency, had the dividend actually been distributed. Special provisions apply to shareholders holdings a chain of companies. Page 39 of 92

40 D i v i d e n d s R e c e i v e d b y a C o r p o r a t i o n Domiciled in Israel Dividends received by an Israeli Company from another Israeli corporation, is excluded from the taxable income. Dividends received by an Israeli Company from a foreign corporation, or dividends from income generated or derived abroad, is taxable according to the following: Notwithstanding the Corporate tax rate, the said dividend would be taxed on 25% tax rate, out of which tax credit would be applied according to the tax withheld by the foreign country when the dividends were distributed ("direct credit"); or Where the Israeli Company holds at least 25% of the controlling power in the foreign corporation, an indirect credit would be applied. The Indirect Credit is calculated by applying normal corporate tax on the "gross dividend" (the sum of the actual dividend Plus the taxes paid on the income from which the dividend was paid); Tax credit would be applied in respect of the foreign tax paid on the income from which the dividend was paid in addition to the foreign tax which was withheld. Relief for indirect credit is limited to the Israeli corporate tax liability on that income. Indirect credit is applied up to the 2 nd tier subsidiary, provided it is being held directly for at least 50%. Dividends distributed from an Approved Enterprises and /or to foreign investors may be subject to different tax rates. Page 40 of 92

41 I n d i v i d u a l s R e s i d e n c e An individual would be considering as an Israeli Resident if his "center of life" is within Israel. In the framework of determining the individual's center of life", a number of auxiliary qualitative criteria had been applied. This framework includes, inter- alia, an evaluation of the following: Location of his permanent home (even if he does not reside therein). Location of actual home of himself and members of his family, i.e. actual place of residence. Location of fixed or permanent business or work. Location of active material economic interests. Location of activity in organizations, associations or institutions. In addition to the said qualitative criteria, the legislation prescribes reinforcements as the existence of which provide evidences of the individual s center of life in Israel. The first reinforcements prescribes that an individual presence in Israel for 183 days or more in a certain tax year serves as an evidence of his center of life in Israel during that year. The second reinforcement prescribes that an individual presence in Israel for 30 days or more in a certain tax year, and total presence in Israel of 425 days or more during that tax year and the two previous ones, serves as an evidence of his center of life in Israel during the later year. It should be noted that the above reinforcements may be refuted by either the individual or the tax authorities. Page 41 of 92

42 T a x r a t e s Tax rate on individuals' income is being determined progressively, according to the amount of taxable income for the whole taxable year. Tax rates are reducing gradually as shown in the next table: Income (NIS) 2015 Up to 63,240 10% 63, ,000 14% 108, ,880 21% 167, ,760 31% 239, ,480 34% 501,481 UP 48% Individual that his annual income is over than 810,720 NIS will be taxed at 50%on annual income in excess of this amount. Tax rates on individuals' passive income are as follows: Income (NIS) 2015 Up to 239,760 NIS 31% 239, ,480 NIS 34% 501,480 UP 48% Tax brackets are adjusted annually in accordance with changes of the CPI. There are exceptions to the above tax brackets, such as: income from dividends, interest, rental of residential housing, etc. There are also allowances for savings in pension funds, life insurance etc. Individuals are entitled to personal tax credits against calculated tax. The amount of the credits depends on personal status. Most of the credits are not available to nonresidents and some are available only to new immigrants. Page 42 of 92

43 S p e c i a l T a x R a t e s f o r I n d i v i d u a l s A. R e n t a l Income from rental fees of residential apartment is exempt from income tax, if the income does not exceed 5,070 NIS per month. The income tax liability on rental fees from renting a residential apartment can also be calculated on the basis of one of the following alternatives: (a) Rental income is calculated after deduction of expenses according to the regular tax bracket; or, (b) Tax is payable at a flat rate of 10% of rental gross income. No deduction or expenses are allowed. B. R e n t a l d e r i v e d f r o m R e a l e s t a t e L o c a t e d o u t s i d e I s r a e l An individual accruing income derived from rental of real estate property located outside Israel, may elect to pay tax on such income at the rate of 15% from the gross income, instead of the individual s graduated tax bracket to which the individual is subject to, if the said rental income does not reach the level of business income. Having chosen this alternative 15% tax rate, no deduction or expenses are allowed, and there will be no credit in respect of foreign tax paid abroad. Notwithstanding the above, depreciation on the building would be deductible. C. I n t e r e s t Most of the interest income from bank deposits and savings plans will be subject to 25% tax rate, if certain conditions are met. Concurrently with the tax liability, exemptions were determined for low income earners and retired persons. D. D i v i d e n d Dividend paid to an Israeli individual from both Israeli or foreign corporation, is subject to 25% tax rate. If the individual holds 10% or more of the corporation means of control, the tax rate imposed on him will be 30%. Page 43 of 92

44 A foreign individual or foreign company would be subject to tax upon dividends received from an Israeli corporation as an Israeli individual, unless a valid tax treaty is being enforced. E. G a m b l i n g There is 30% tax rate on gambling income C a p i t a l G a i n s T a x General Gains from the sale of fixed and intangible assets (other than real estate) are taxed under the Income Tax Ordinance. A capital gain is the excess of the sale proceeds of an asset over its depreciated cost. In determining the capital gain, inflation index is being considered Tax Rates Capital gain derived by companies is subject to the general company tax 26.5%. Capital gain derived by individuals is subject to 25% tax rate. "Major Shareholder" who holds 10% or more of corporation securities, is subject to 30% tax rate. Upon disposal of an asset purchased by a "Major Shareholder" prior to January 1, 2003 is subject to ordinary tax rates (up to 48%) on the proportional period from the day of purchase until January 1, 2003, and 25% rate for the period starting January 1, 2003 to December 31, The tax is being calculated on the linear bases. In computation of capital gain, Inflationary gain is subtracted from the taxable capital gain. Inflationary gain is determined by multiplying the depreciated cost by the Inflation index. Inflationary gain is exempt from tax, unless the inflationary gain accrued since the date of purchase to the end of the tax year 1993 is taxable at 10% tax rate. Liquidation of company is considered as capital gain, and the shareholders are treated as if they sold their shares in exchange to their share of the company's net assets fair value. Page 44 of 92

45 In computation of capital gain of an Israeli company, from the disposal of shares of another Israeli company, the amount equals to the retain earnings of the later, as the first company's portion, would be exempt from tax (as if the retain earning had been distributed) B e n e f i t s a n d E x e m p t i o n s Tax incentive for Foreign R e s i d e n t s There are several tax incentives for foreign residents investing in bonds and in Israeli companies' securities: Foreign residents are subject to the same tax rates as Israeli residents. However, if foreign currency was invested, they may choose to calculate the capital gains in the original currency rather than in Israeli currency. In addition, the inflationary gain on the sale of shares of an Israeli company or other assets, purchased originally with foreign currency, is exempt from tax if the calculation is based on changes in the specific exchange rates of the Israeli currency. A foreign resident will be exempt from capital gains tax in respect of sale of marketable securities, if the capital gains are derived from a non Israeli permanent establishment of the foreign resident in Israel. The above exemption will also apply to securities purchased prior to being listed. These will be taxed at sale only on the part of the capital gains developed up until their listing, (capital gains of a notional sale at time of listing). Foreign residents of a treaty country, under certain conditions set below, are exempt from capital gain tax on the sale of Israeli non-tradable securities, or foreign securities whose main assets are located in Israel. The exemption is limited to securities purchased between July 1, 2005 and December 31, 2008, and is subject to certain requirements. As from 2009, all foreign residents are exempt from capital gain tax on the sale of Israeli securities, or foreign securities whose main assets are located in Israel. The exemption is limited to securities purchased not before The exemption will not apply to the sale of the securities of a company, the majority of whose assets, at the time of purchase and for the two years preceding the sale thereof, were comprised of real estate and/or real estate companies. Page 45 of 92

46 Interests paid to non residents from bonds traded in the Israeli Stock Exchange are exempt from tax. During 2011 the Ministry of Finance had cancelled this exemption due to major foreign investments in Israeli bond due to the relatively high interest rate. Nonetheless, treaty benefits are still applied Deductions f o r E x p a t r i a t e E m p l o y e e s A "Foreign Specialist" or a "Visiting Professor" (as describe on the regulations) entitles for a deduction during the period of his stay in Israel, but no more than 12 months, out of his generated Israeli income the following: Payments he made for rental or accommodations in Israel; and A sum of 330 NIS (2015) per day paid for meals. "Foreign Specialist" a foreign resident which consist of all the following: His stay in Israel is permitted according to the law; He was invited from abroad by an Israeli resident to perform services to that Israeli resident on the field of his expertise. He was paid more than 13,300 NIS (2015) per month for his service Benefits t o N e w I m m i g r a n t s a n d R e t u r n i n g Residents G e n e r a l In order to attract new immigrants and returning residents to Israel, the Ministry of Finance, along with the Ministry of immigrant absorption had approved a new tax reform, which constitutes extended tax exceptions and other benefits and incentives for new immigrants and returning residents. The reform was approved on the "Knesset" (the Israeli Parliament) on September 2008, but its actions were constitutes retroactive for all immigrants and returning residents reside in Israel since January 1, D e f i n i t i o n s New Immigrant is an individual who acquires the status of an Israeli resident for the first time. Page 46 of 92

47 Returning Resident is an individual who ceased to be Israeli resident and lived outside Israel on a permanent basis during at least six consecutive years after ceasing to be an Israeli resident, subsequent to which he returned to Israel. Senior Returning Resident is an individual who ceased to be an Israeli resident and lived outside Israel on a permanent basis during at least ten consecutive years, subsequent to which he returned to Israel T h e b e n e f i t s Ten years tax exemption for new immigrants and senior returning residents on all income and capital gain derived outside of Israel. New Immigrant and Senior Returning Resident can apply for an acclimatization period of one year from the time an individual arrives in Israel during which the individual, at his own request, will not be considered Israeli resident for tax purpose. Foreign companies controlled by New Immigrants and Senior Returning Residents will not be classified as Israeli Companies, or as a Control Foreign Corporation, or as a Control Foreign Occupational Company, as if the New Immigrant or the Senior Returning Resident would have been foreign resident. New Immigrants and Senior Returning Residents are exempt from reporting their tax-exempt income and foreign assets. A returning resident is exempt for interests, dividends, pensions, royalties and rental, which derived from assets he obtained when he was a foreign resident E m p l o ye e S t o c k s / O p t i o n s P l a n Generally, a benefit compensation granted by employer to its employees is subject to the employee's income tax rate. Section 102 to the Tax Ordinance allows a company to elect granting restricted for at last 24 months options/shares to trust, whereby upon the release of the options/shares from the trust to the employee; the employee will be subject to tax for capital gain - 25% or tax at regular individual income tax rate, based on the original election of the company. Provided that, should the company elect the capital gain course, Page 47 of 92

48 compensation cost relate to the options/shares granting will not be deductible for tax purposes by the granting company. The provisions of Section 102 refer only to granting to employees that following such granting hold less than 10% of the outstanding shares of the company L o s s e s A loss incurred by a person during the tax year in a business or vocation may be set off against that person's total chargeable income from other sources in that tax year. If all of the loss cannot be wholly set off in the said tax year, then the amount of loss not set off shall be carried forward to the subsequent years in succession and it shall be set off against that person's total chargeable income from business or vocation in those years, including capital gains from business or vocation. A loss incurred by a person from the letting of a building may be set off against his income from that building in subsequent years. The amount of capital loss suffered by a person in a giving tax year shall be set off against that person's capital gain. Capital loss incurred by the sale of securities during the tax year, the capital loss may also be set off against interest or dividends, as long as the tax rate applicable to the interest or dividend received by that person would not exceed 26.5%. Capital loss which could not be set off during the said tax year would be carried forward to the subsequent years in succession and it shall be set off only against capital gain Ad m i n i s t r a t i o n F i l i n g T a x R e t u r n Taxpayers carrying on business are required to keep accounting records and file tax returns. The Director of the Tax Authority issues directives on the manner in which such records shall be kept. The Director may refuse to accept tax returns based on records not properly kept and may then summarily issue assessments according to his judgment. Page 48 of 92

49 Taxpayers who are employees or taxpayers whom their only income is subject to full withholding tax are not required to file annual tax returns. Company tax returns must include the following: Full scope financial statements, according to the Israeli General Accepted Principals, audited by certify accountant. Tax Adjustment Statements, review by accountant. Tax returns should be filed within 4-5 months from the end of the tax year (the tax year ends on December 31, annually) unless an extension has been applied for and granted Collec t i o n o f T a x e s W i t h h o l d i n g T a x e s To a large extent, the tax collection system is based of withholding of tax deducted at source from payments. All employers are obligated to withhold tax on employee's salary (employees usually are not required to file tax returns). Payment for nonresident which constitute as taxable income of the recipient requires withholding tax of 25% from the payment, unless the scope of a valid treaty is being enforced A d v a n c e T a x P a y m e n t s Companies and self-employed individuals are required for monthly advance payments during the year. These payments are based on turnover or on the actual tax liability determined on the previous tax year for which an assessment has been issued. Withheld tax may be set off against advance payments. Monthly advance tax payments, at the rate of 45%, must also be made on certain nondeductible expenses such as excessive car expenses, foreign travel or entertainment expenses B a l a n c e o f T ax The balance of tax payable determined in the tax return, after deducting the above advances and withholding taxes must be paid on filing the tax return. This balance is Page 49 of 92

50 linked to increases in the CPI from the end of the tax year and bear interest at the rate of 4% per annum. In the event of an overpayment, the balance accrues interest and linkage income on the same terms I n t e r n a t i o n a l T a x a t i o n Double T a x a t i o n Relief Income derived abroad, and is taxable in another country, may be entitled for tax relief. Israel has signed comprehensive bilateral treaties for the avoidance of double taxation with most of its principal trading partners, based on the model recommended by the Organization for Economic Cooperation and Development (OECD). These treaties restrict the right of their signatories to tax income from particular sources and oblige the country of a taxpayer's residence to credit him for taxes paid in the country where income arose T ransfer P r i c i n g Section 85A of the Income Tax Ordinance determines that every international transaction between related parties must reflect the fair value, according to the arms length principal. The Transfer Pricing Regulations introduced in 2006, determines the scope of the inspected transactions and the necessary means for achieving the fair market. The regulations are based on both the OECD 1995 transfer pricing guidelines and the U.S main principals T r a n s f e r P r i c i n g R e g u l a t i o n s S e t t i n g an A r m L e n g t h P r i c e In order to ascertain whether an international transaction conducted between related parties is at a fair market or arms length price, market research must be performed whereby the international transaction is compared to similar transactions by specific comparison methods. Once a comparison method has been selected and the market research performed, the international transaction will be deemed to be conducted at a fair market price, insofar as it does not deviate from the specified range of the said market price. If the international transaction does deviate from the specified range, as determined by the Regulations, the reported price of the transaction will be adjusted for Page 50 of 92

51 tax purposes in the manner stipulated by the Regulations and, consequently, the assessed will be subject to additional tax on the adjusted price. If the transaction is a one-off international transaction, duly approved as such by the assessing officer, no obligation to perform the market research will apply. Nonetheless, a one-off international transaction will not be exempt from some of the reporting requirements outlined below R e p o r t i n g R e q u i r e m e n t s a n d D o c u m e n t a t i o n The Regulations oblige any tax entity who is party to an international transaction, to report in his annual tax return, the execution of the international transaction, its actual conditions and price thereof as well as the conditions and price of the transaction at fair market value, on the predetermined form. In addition, at the request of the assessing officer, the entity must present, within 60 days, a comprehensive report detailing the international transaction. The said reporting obligation will apply to all international transactions, regardless of the size of the particular international transaction or the overall turnover of the transactions. As such, in terms of the Regulations, even transactions for which special conditions apply between small businesses and the other non Israeli party to the transaction, the small businesses will be obliged to comply with the reporting requirements C o m i n g I n t o E f f e c t a n d T r a n s i t i o n a l R e g u l a t i o n s The Regulations came into effect in respect of international transactions executed from publication date thereof (29 November 2006). Market research performed before the Regulations came into effect would be considered as market research according to the Regulations, if performed within two years from publication thereof and provided it was performed within the OECD accepted guidelines or within the guidelines of OECD member states Taxation of Trusts The tax treatment of trusts distinguishes between six types of trusts: Israeli Resident Beneficiary Trust Relatives Trust Page 51 of 92

52 Israeli Resident Trust Foreign Resident Settler Trust Foreign Resident Beneficiary Trust Testamentary Trust Trusts are flowing-trough entities for tax purpose. Therefore, the trust's income will be considered as the settler's or the beneficiary's income. Israeli Resident Beneficiary Trust is a Trust that from its establishment all of her settlers are foreign and in the taxable year there is at least one beneficiary who is Israeli Resident. Relative Trust is an Israeli Resident Beneficiary Trust that between her Settlers and beneficiaries exist close relation. The Trust will be taxable with 25% on the relatively income of the Israeli Beneficiary on the taxable year, or with 30% on the full income. Israeli Resident Trust will usually be taxed as if the trusts income and asset accrued to the settler. As an irrevocable trust is concerned it is possible, by the taxpayer request, to attribute the income to the beneficiary instead of to the settler. Foreign Resident Trust is a trust where all the settlers and all the beneficiaries are foreign residents. The trusts income and assets would be considered as assets which are held by a foreign Resident. Conclusively, there is no Israeli tax imposed on the trusts income or assets, unless income is derived from Israeli source. Conversely, in a Foreign Resident Beneficiary Trust and in a Testamentary Trust, the trust's income is accrued to the beneficiary. Therefore, an Israeli settler would be taxed on income derived from impartation an asset to the trust, as if the settler had transferred the assets to the beneficiary directly. There is no additional tax to the beneficiary unless the income derived from an Israeli source. Holding Company Trust Assets A company that established to holds the Trustee's assets. The company has to report its establishment within 90 days. Such company will not be considered as an Israeli Resident Company for the purposes of Tax treaties. Page 52 of 92

53 Participation Exemption for Israeli Holding C o m p a n y O v e r v i e w The tax reform includes participation-exemption conditions for Israeli holding companies, under specific circumstances. Israeli holding companies will be exempt from tax on dividends received from foreign subsidiaries and from capital gains tax upon the sale of such subsidiaries. Furthermore, Israeli holding companies will be exempt, inter-alia, from tax on interest received on bank deposits in Israel and on income (interest, dividend and capital gains) from traded securities. Dividend paid by the Israeli holding company to its foreign shareholders is subject to reduced withholding tax of only 5% D e f i n i t i o n s An Israeli holding company is a company that has to meet all of these conditions: The company was registered in Israel and is managed and controlled from within Israel; The company is privately owned and not a transparent or family company (similar although not identical, to the U.S. S-Corp). Additionally, the company must not be a financial institution; Its investment in foreign subsidiaries for at least 300 days of the tax year amounted to a minimum of NIS 50 million (approx. US$12.5 million); For at least 300 days of the tax year, a minimum of 75% of its assets constitute the subsidiaries (including loans granted to subsidiaries); The holding company has no business income except for services, including management services, provided to the subsidiaries; and The holding company submits a request to be recognized as such to the assessing officer within the timeframe stipulated; Subsidiary for participation exemption purposes is foreign company that has to meet all of these conditions: The company is a resident of a treaty country (who files tax returns in that country) irrespective of the corporate tax rate of the particular country, or it is resident of a non-treaty country only if the corporate tax rate on Page 53 of 92

54 business income of the non-treaty country is greater than 15% at the time the shares were purchased; At least 10% of rights to profits of the subsidiary are owned by the Israeli holding company for 12 consecutive months; At least 75% of the subsidiary s income derived abroad is business income; and Israeli assets and Israeli income of the subsidiary may not comprise more than 20% of the subsidiary s total assets or income, respectively. There are no limitations as to the identity of the holding company s shareholders. However, as shown henceforth, Israeli shareholders cannot obtain any tax advantage D i v i d e n d s d i s t r i b u t e d b y t h e h o l d i n g c o m p a n y A foreign shareholder will pay a 5% flat tax rate on dividends distributed by the holding company, irrespective of their legal status (individual, corporation, trust etc.), and irrespective of the source of income from which the dividend is distributed. Double tax treaties may further improve this tax rate the Israel- Sweden DTT, for example, has set a 0% tax rate for such dividends. An Israeli shareholder will pay the regular tax rates imposed on distributed dividends (25% to 30%, or company tax) V a l u e Ad d e d T a x ( V AT ) The Value Added Tax Law requires the payment of VAT of 18% on goods sold and services rendered and is collected from the buyer by the seller at the time of sale. These amounts, less VAT paid by the seller on his inputs, are paid monthly to the tax authorities. If the VAT on inputs exceeds amounts collected in any given period, the excess is refundable. VAT on inputs not related to the production of income and VAT on some expenses, which are not tax deductible, may not be claimed. Financial institutions, such as banks and insurance companies, do not collect VAT on their services and may not claim VAT on inputs, but instead pay payroll tax of 16% on payroll costs and on profits. Profits for payroll purposes are similar to taxable income for tax purposes before the set off of losses from previous years. Nonprofit organizations pay payroll tax of 7.5% and may not set off VAT on inputs. Importers pay 18% VAT on value of goods for customs purposes when cleared. Page 54 of 92

55 Some transactions are zero-rated. This means that a nil rate of tax is to be charged, but the business supplying the goods or services is nevertheless entitled to a refund of the VAT it has incurred on its purchases. Businesses making only zero-rated supplies will therefore be in a position to obtain periodic refunds from the tax authorities. Some services are exempt. Again there is no VAT to be charged, but in contrast to the position on zero-rated supplies the vendor is not entitled to a refund of the VAT paid on purchases. Businesses that make exempt supplies in addition to either standard-rated or zero rated supplies may be able to recover part of the VAT they incur on their purchases. The principal categories of main goods and services classed as zero-rated or exempt are listed in Appendix 5. The VAT compliance regulations are strict and penalties are imposed for the late submission of periodic returns and for errors in returns. Businesses need to avoid potential problems by implementing an efficient accounting system at an early stage O t h e r T a x e s Custom Duties Certain goods imported to Israel are subject to custom duties. The rates vary and are usually based on CIF value. Various agreements with the USA, European Community and EFTA reduce duties in comparison to imports from other countries Purchase Tax Certain goods sold in Israel are subject to purchase tax. The tax is payable by the Israeli manufacture or by the importer at the port of entry. Goods manufactured for export are exempt from purchase tax Stamp Tax Most contracts and legal documents are subject to stamp tax of 0.4% to 2% of the stated value. As of January 1, 2006 the stamp tax imposed on most contracts and official documents were cancelled. Page 55 of 92

56 Estate Tax There is no estate tax in Israel Gifts There is no gifts tax on the beneficiary. An asset which was given as a gift is considered capital gain to the extent of the fair value of the asset. However, had an asset been given to a relative or to the state of Israel, it is exempt from tax. The exemption will not apply in a case the beneficiary is a foreign resident R e a l E s t a t e T a x e s A c q u i s i t i o n T a x Purchase of real estate is subject to an acquisition tax, to be paid by the buyer. The tax is based on the purchase price of the assets as follows: Residential dwellings 0% -10% Other 0.5% - 6% The Purchase Tax rates on Residential dwellings are as follows: Day of Purchase Singular Apartment (NIS) (Including a Foreign Resident) Another Apartment (NIS) 01/08/ /12/ ,517,210 0% 1,517,210-1,799, % 1,799,605-4,642,750-5% 4,642,750-15,475,835-8% 15,475,835 and up - 10% 0-1,123,910 5% 1,123,910-3,371,710 6% 3,371,710-4,642,750-7% 4,642,750-15,475,835-8% 15,475,835 and up - 10% Page 56 of 92

57 Betterment Levy Betterment levy at the rate of 50% is imposed on real estate, if its value increased due to changes in building rights or upon rezoning. The levy, linked to increases in price indices, is payable when a building permit is issued or upon the sale of the asset L a n d A p p r e c i a t i o n T a x Profits on the sale of real estate rights in Israel are subject to capital gain tax under the Land Appreciation Tax Law. The calculation of the tax is similar to that of other assets subject to capital gains tax (see 5.2.2). However, special rules apply to the sale of shares and rights in companies in which the major assets consist of real estate ( Real Estate Entities ). The sale of residential dwellings by individuals is exempt from tax only if it is the individual's only apartment. (For a foreign resident to receive this exemption, he has to present a specific authorization from his country's authority that he does not have an apartment in his residential country).the exemption from Tax betterment given one to 4 years has been canceled. As previously stated, the sale of real estate may be subject to capital gains tax. The regulations applicable to the sale of real estate are almost identical to those mentioned above. The land Appreciation tax was reduced on November 7, 2001 as follows: The tax on land betterment, accrued until November 7, 2001 will be at the marginal rate of up to 48% for individuals and 29% for companies (in 2007). The tax on land betterment, accrued after November 7, 2001 will be at the rate of 20% for individuals (in 2007 onward), and 25% for companies. Distribution of land betterment among the various periods will be implemented on a linear basis Sales Tax The following tax rate is applicable to the sale of real estate: Page 57 of 92

58 Sale of land or title to a property purchased prior to November 7, %. Sale of land or title to a property purchased after November 7, 2001 is exempt from sales tax. Sale of residential real estate held as inventory is exempt from tax. The sales tax on real estate transactions executed after November 7, 2001, is taxdeductible from the seller s income M u n i c i p a l t a x This annual tax, known as Arnona, is payable to the relevant local authority. The rate is based on the floor, area and location of the property. Page 58 of 92

59 Appendix AP P E N D I X 1 - W i t h h o l d i n g T a x e s o n D i v i d e n d P a y m e n t s Dividend payments to overseas shareholders are generally subject to the deduction of withholding taxes of 25% to 30%. The following table, however, summarizes the withholding tax rates according to existing tax treaties. One should bear in mind that the data listed below is subject to exceptions, conditions and etc. according to the details of each treaty. % % Austria 25 Luxemburg 15/10/5 Belgium 15 Mexico 10/5 Byelorussia 10 Moldova 5/10 Brazil 15/10 Netherlands 15/10/5 Bulgaria 12.5/10 Norway 25 Canada 15 Philippines 15/10 China 10 Poland 10/5 Croatia 5/10/15 Portugal 5/10/15 Czech 15/5 Romania 15 Denmark 25 Russia 10 Estonia 0/5 Singapore 5/10 Ethiopia 5/10/15 Slovakia 10/5 Finland 15/10/5 Slovenia 5/10/15 France 15/10/5 South Africa 25 Germany 25 South Korea 15/10/5 Greece 25 Spain 10 Hungary 15/5 Sweden 0 India 10 Switzerland 15/5 Ireland 10 Thailand 15/10 Italy 10/15 Turkey 10 Jamaica 22.5/15 Ukraine 15/10/5 Japan 15/5 United States 25/15/12.5 Latvia 15/10/5 United Kingdom 15 Lithuania 15/10/5 Uzbekistan 10 Page 59 of 92

60 Appendix AP P E N D I X 2 - W i t h h o l d i n g T a x e s o n I n t e r e s t P a ym e n t s Interest payments to overseas lenders are generally subject to the deduction of withholding tax of 25%. The following table, however, summarizes the withholding tax rates according to existing tax treaties. One should bear in mind that the data listed below is subject to exceptions, conditions and etc. according to the details of each treaty. Additionally the Commissioner of Taxes may, under certain circumstances, depending on the interest rate payable by the lender, reduce the tax rate. % % Austria 15 Luxemburg 10/5 Belgium 15 Mexico 10 Byelorussia 10/5/0 Moldova 5 Brazil 15/0 Netherlands 15/10 Bulgaria 10/5 Norway 25 Canada 15 Philippine 10/0 China 10/7 Poland 5 Croatia 5/10 Portugal 10 Czech 10/0 Romania 10/5 Denmark 25 Russia 10/0 Estonia 5 Singapore 7 Ethiopia 5/10 Slovakia 10 Finland 10/0 Slovenia 5 France 10/5 South Africa 25 Germany 15/0 South Korea 10/7.5 Greece 10 Spain 10/5 Hungary 0 Sweden 25 India 10/0 Switzerland 10/5 Ireland 10/5 Thailand 15/10 Italy 10 Turkey 10/0 Jamaica 15/0 Ukraine 10/5 Japan 10 United States 17.5/10 Latvia 10/5 United Kingdom 15 Lithuania 10 Uzbekistan 10 Page 60 of 92

61 Appendix AP P E N D I X 3 - W i t h h o l d i n g T a x e s o n R o ya l t y P a ym e n t s Royalty payments are generally subject to the deduction of withholding tax of 25%. The following table, however, summarizes the withholding tax rates according to existing tax treaties. One should bear in mind that the data listed below is subject to exceptions, conditions and etc. according to the details of each treaty. % % Austria 10 Luxemburg 5 Belgium 10/0 Mexico 10 Byelorussia 10/5 Moldova 5 Brazil 15/10 Netherlands 10/5 Bulgaria 12.5 Norway 10 Canada 15/0 Philippine Up to 15 China 10 Poland 10/5 Croatia 5 Portugal 10 Czech 5 Romania 10 Denmark 10 Russia 10 Estonia 0 Singapore 5 Ethiopia 5 Slovakia 10 Finland 10 Slovenia 5 France 10 South Africa 1.5 Germany 5/0 South Korea 5/2 Greece 10 Spain 7/5 Hungary 0 Sweden 0 India 10 Switzerland 5 Ireland 10 Thailand 15/5 Italy Up to 10 Turkey 10 Jamaica 10 Ukraine 10 Japan 10 United States 15/10 Latvia 5 United Kingdom 15/0 Lithuania 10/5 Uzbekistan 10/5 Page 61 of 92

62 Appendix AP P E N D I X 4 - V AT : Z e r o - r a t i n g a n d e x e m p t i o n s The principle categories of goods and services classed as zero-rated or exempt are as follows: Zero-rated Goods exported and sold for foreign currency. Receipts by a hotel for services rendered to tourists and paid for in foreign currency. Receipts for services rendered outside Israel to a nonresident by a person whose main place of business is in Israel, if payment is made in foreign currency. Receipts for services rendered in Israel for a nonresident. However, the service will not be exempt if they are provided in relation to assets situated in Israel, unless they are for export and have been exported. Sale of an intangible asset to a nonresident. Exempt Rent received on a private residence for a period of less than 25 years. Proceeds from the sale of a building, which is rental building under the Encouragement of Capital Investment Law, leased for not less than 10 years before the sale. Sale of an apartment which is not new by an individual who is not a dealer. The import of personal effects by a new immigrant. Exported goods, re-imported. Goods sold by a duty free shop. Income from deposits with financial institutions. Page 62 of 92

63 Notes N o t e s Crowe Horwath (Israel) Doing business in Israel 2015 Page 63 of 92

64 C r ow e H o r w a t h ( I s r a e l ) F I R M P R O F I L E Crowe Horwath (Israel) provides accounting, auditing, tax and advisory services. The firm was established in the early 1982's operate through a head office in Ramat Gan, 4 branches which cover North, South and East of Israel and an International Division consisting of a US- Israeli- UK Desk of operation. Crowe Horwath (Israel) provides audit and consulting services to publicly traded companies on Tel Aviv, NASDAQ and AIM stock markets, private SM entities, governmental institutions, non- profitable organizations, startup and development stage companies. The firm provides its clients service with a vision toward maximizing the client's development and growth potential as an international player. The firm service client team consists of CPAs, economists, lawyers, internal auditors and tax advisors divided to categories by specialize skills and expertise required for the services in order to maximize the realization of our technical knowhow and experience in the different business fields of our clients. The professional relations with Crowe Horwath International of the International Division and US and UK Desk of operation, allow us to provide response to global clients needs. Our client service teams include American staff that is engaged with our clients in Israel and in some cases some of our local staff are temporarily relocated to Horwath international firms outside Israel. The firm is PCAOB registered to act as CPA for companies trading on US stock exchanges. Among the firm's departments: audit, technical accounting, corporate taxes, economic services, internal audit, incentive programs and R&D financing, individual services, and International Desk of Operation for US and UK. Services are provided to both the private and public sectors, in the following fields: industry, high-tech, real estate, commerce and services, financial institutions, not-for-profit organizations, and others, in a wide range of areas, such as: international and local taxation, capital raising, mergers and acquisitions, due diligence, pre-ruling and SARBOX 404. Crowe Horwath (Israel) provides clients with continuance professional technical guidance and training in accounting, taxation and business topics through conferences, seminars and professional news alerts. Crowe Horwath (Israel) Firm Profile Page 64 of 92

65 Firm Profile Our Mission and Philosophy: The Firm strives to maintain professional, excellence, efficient and authoritative services in accordance with the highest standards of quality and ethics in compliance with the firm's reputation and the profession regulations. Fields of expertise Public companies traded in Israel an abroad, technology companies and Medical devices, financial institutes, hi-tech, start-up companies, hotels, real estate, commerce and service, non-for profit organizations, associations, companies in the capital markets and partnerships. Our expertise includes Israeli GAAP, IFRS and US GAAP as well as the Israeli Securities Authority Regulations, US SEC Regulations and UK Regulations under the quality assurance procedures of the firm, and Horwath International. Departments and Specialties: Israeli Capital Markets Division provides services of accounting, auditing, review, Initial Public Offering, Private Placement and due diligence to public traded companies and the state of Israel governmental institutes. International Division provides services of accounting, auditing, review, Initial Public Offering, Private Placement and due diligence to public traded companies in various stock exchange: NASDAQ, AIM and others report under IFRS and US GAAP. SME Division provides services of accounting, auditing, preparation of tax returns, and business consulting to entities report under Israeli local GAAP. Accounting and Auditing Technical Department provides consulting in accounting and auditing, technical training, expert reports in accounting issues and Continuance Professional Education Seminars (CPE). Tax Services provides services of tax planning grounding for complex-transaction and capital issuance, tax pre-ruling applications in Israel and abroad, tax benefits planning under the various encouragement laws, value added tax, land betterment tax, national security. US Tax Services provides US tax compliance, tax planning and voluntary disclosure to the US Internal Revenue Services Transfer price Department provides transfer pricing, tax documentation and economic benchmark studies for Israel and various foreign nations' law and regulation. Economic Department provides valuation for intangible assets, investments, mergers and acquisitions, capital issuance, fairness opinion, business and financial models for investors and strategic partners. Additional services include: accounting due diligence, business plans, re-organization plans, corporate liquidations, etc. Crowe Horwath (Israel) Firm Profile Page 65 of 92

66 Firm Profile Internal Audit & Risk Management Department provides internal audit services, risk management, and integrity issues, consult for internal control process and procedures, etc. Incentives, Financing, and Research and Development Department deals with government financing for companies involved in technology, biotechnology, medical devices, life sciences and industry. Human Resources Management Department provides tax and accounting advice on employee compensation, incentive share option plans, reallocation plans, trust and escrow services. Individual Client Services Department provides services of personal tax returns, capital declarations for Tax authority, financing consultation, etc. Contact: Arieh Ovadia Managing Partner, CEO Crowe Horwath (Israel) 12 Abba Hillel Silver Street Ramat-Gan, Israel Tel: Fax: Page 66 of 92

67 Crowe Horwath (Israel) International Division Crowe Horwath (Israel) Firm Profile Page 67 of 92

68 International Division Contents 1 Executive Summary 69 2 Approach to Audit 72 3 Our Tax Approach 77 4 Our Team Approach 79 5 Firm Code 85 Page 68 of 92

69 International Division We provide in Israel audit and other assurance advisory services to over 1,000 public and private clients in the Hi- Tech and the technology industries, HealthCare, traditional industries, services, software, communication service and construction sectors. Section 1 Executive Summary Crowe Horwath (Israel) International Division Contact Arieh Ovadia Managing Partner, Tel: Mail: [email protected] Contact Contact Contact Contact Contact Ronen Leibovitz Chanoch Pick Menachem Steinberger Ora Vaknin Leonard Tuber Partner public Audit Services Tel: Partner, SME Service Tel: Partner, Technical Services Tel: Manager, Tax Services Tel: Manager, US Tax Services Tel: Mail: [email protected] Mail: [email protected] Mail: [email protected] Mail: [email protected] Mail: [email protected] As a dynamic professional accounting firm Crowe Horwath (Israel) brings significant added value with a core global integrated engagement team comprises of entrepreneurial, aggressive leaders with hand-on experience in multination marketplace. To leverage the scope and efficiency of services to global clients, Crowe Horwath (Israel) maintains in Israel a US Desk of operations to provide audit and non audit services to Israeli companies which considered foreign issuers listed companies in the U.S. stock markets and to non listed companies. This US Desk enables us to perform such service in Israel through Israeli based leadership for the process. The International Desk operates by a combine Israeli and foreign UK/US teams of professionals with extensive International IFAC, SEC/PCAOB, and experience to be able to provide to global organizations a comprehensive and unique blend of technical know-how, solid business acumen and specialized industry knowledge and to deliver proactive and creative ideas through a solid business approach. Crowe Horwath (Israel) Firm Profile Page 69 of 92

70 International Division What Crowe Horwath (Israel) International Division Offers? Integrated global audit service provided by one international network Audit IFRS/U.S. GAAP financial information end compliance to AIM London and Israeli Security Authority Regulations We have thorough understanding of our clients' organization with the most critical perspectives We provide added value advisory services on continuing basis. Each member of the client-service team has extensive experience servicing growing clients, and is motivated to provide the highest quality services. Our highly talented tax team understands the local and international tax needs and will provide exceptional service. Our experience will stand poised to assist you with Joint Venture, Mergers & Acquisition, providing unique and essential added value and links to the Israeli and foreign industry and capital markets. We provide services at reasonable fees, without compromising the quality and the value of services rendered. We conduct client satisfaction reviews with management to continually update and improve our service. Assistance beyond statutory compliance, for example advice on tax-effective international group structures Initial public offerings (IPO s) Local and international tax compliance and consulting Cross border transactions and transfer pricing studies SOX 404 and ISOX compliance and internal audit ERP implementation Expatriate services Due diligence investigations Employee incentive and compensation plans Purchase price allocation studies Management risk analysis Corporate finance and capital markets Crowe Horwath (Israel) Firm Profile Page 70 of 92

71 International Division Anticipating management concerns key challenges Integrated audit service provided by one international network. Transition will occur in a manner that is smooth efficient and seamless Expanding strategic partnership and joint ventures with local and foreign entities. Enhance opportunities in accordance with the Israeli Income tax Law and regulations as amended by Tax Reform 2004 and developing tax strategy and tax minimization opportunities under the Israeli Encouragement Laws for Capital Investment and Research and Development. Crowe Horwath (Israel) Firm Profile Page 71 of 92

72 International Division Section 2 Working as a team Our business depends on the quality of our people. Our people work as a cohesive team with our clients and with each other because they share our aims and our commitment to provide first class business solutions and advice for every one of our clients. Approach to Audit The International audit The annual audit is an opportunity not an overhead. Our approach is based on three critical success factors: a thorough understanding of our client s business, people and objectives; an audit team with the right experience and understanding of the industry; and An audit team that is well experience with IFAC, SEC/PCAOB standards. As well as providing audit information, our approach is used to: identify possible cost savings plan for tax Highlight potential growth opportunities. Crowe Horwath (Israel) Firm Profile Page 72 of 92

73 International Division Our international audit process The diagram describes the key stages of our audit approach. Strategy Understanding the factors Driving operation of the business and assessing local international audit risks Feedback Debrief local international audit results, incorporate changes into the plan Coordinating with corporate senior management and local management in other locations Communicating with Audit Committee and the Board of Directors Plan the Audit Focus on key operational areas worldwide and potential high risk areas. Reporting Ongoing communication of issues worldwide; improvement opportunities Fieldwork Obtain audit evidence; analyze financial trends, audit testing; Partner/ Manager reviews 1. Global Strategy Our global audit strategy will be based on a sound understanding of your needs and the issues you are facing. It will ensure that our work complies with local/ international and US auditing standards. Our commitment to you is to deliver audits that are based on a detailed grasp of audit issues, based on IFAC/US GAAS PCAOB, we are also committed to provide you with a team who are able to discuss technical matters on accounting and compliance issues and give constructive and practical advice. Our primary responsibility will always be to the members of your organization an ancillary responsibility is to help corporate management to carry out their duties with minimal disruption and maximum help from our audit activities. Crowe Horwath (Israel) Firm Profile Page 73 of 92

74 International Division Defining a clear global audit strategy at the outset will give both the client and Crowe Horwath (Israel) International Desk the assurance that: we understand the strategic issues you facing our work is in compliance with IFAC/PCAOB auditing standards we are aware of and comply with any regulatory and legislative requirements, both current and future and IFRS compliance of financial reporting We understand your needs and respond to them as appropriate throughout our audit work. 2. Planning the audit By completing a comprehensive pre-audit planning exercise prior to the start of audit assignment, we will be fully conversant with developments within your organization. To ensure that the audit is adequately planned we will ensure that we meet with the executive team early on in the process to gain a full understanding of all relevant accounting and audit issues. We also consider the group s structure, tax issues, VAT matters and anything else that might have an impact on the audit Increased efficiency, lower costs We believe that detailed planning by senior staff and the adoption of a risk based audit approach will enable us to provide a cost effective service that will exceed your expectations. The year-end timetable is also being discussed and agreed upon and shortly after a formal planning memorandum is submitted to you, which will include: audit timetable key risks and controls audit milestones meeting dates reporting dates Schedule of deliverables We will agree the scope of the audit with the Audit Committee and confirm our independence as auditors before commencing the detailed audit work. To ensure that we meet the stipulated timetable we will carry out our audits as soon as the management accounts and year end audit information becomes available. Crowe Horwath (Israel) Firm Profile Page 74 of 92

75 International Division Our audit fieldwork is designed to ensure that our tests are focused in those areas where in our judgment the risk of errors is high, and where the likely impact of such errors would be significant. Each year this will involve: Reviewing reports and minutes of relevant meetings locally noting any concerns or requirements that your management may have Revising our international audit plan for changes in corporate governance standards, financial systems and controls and other significant financial matters Reviewing internal controls and evaluating and testing their reliability locally using statistically random samples. Performing detailed substantive tests locally on key areas using monetary sampling techniques Subjecting the local and consolidated annual financial statements to detailed analytical review, examining significant ratios, trends and other statistics, deviations from average performance of businesses in the same sector and obtaining explanations for any unusual or unexpected variations. Reporting We believe that both formal and informal reporting procedures are needed to ensure that the audit objectives are achieved and that all parties are aware of their responsibilities. Specifically we report and consult with management: at the initial pre-planning stage at completion of planning during the audit at the end of the audit - before issuing our audit opinion and submitting our draft management letter (if appropriate) Partner and manager reviews will be conducted locally on-site alongside the audit team. Issue communication letter to audit committee, if appropriate. Crowe Horwath (Israel) Firm Profile Page 75 of 92

76 International Division No surprises Following the initial planning meeting, we will give you regular updates as the work progresses, to ensure that we meet your expectations and that there are no surprises at the end of the assignment. Feedback Once we have reached our conclusions, following the resolution of any audit queries, we will complete our formal audit report. As part of this process we will provide constructive feedback to management and report any issues of concern make recommendations for control improvements and highlight other issues of interest by submitting a detailed global management letter. Crowe Horwath (Israel) Firm Profile Page 76 of 92

77 International Division Section 3 Our Tax Approach Tax compliance services Our clients need a cost effective, efficient and timely tax compliance service. We will aim to gather all of the data necessary to prepare the companies tax computations on site, during the course of our audit work, and to deliver completed computations at the conclusion of our audit. This is, however, dependent on management providing the necessary information at that time. Tax compliance is an essential part of tax strategy We regard tax compliance as an essential element of a company s tax strategy, not least because no tax planning is effective until it has been properly reflected in a company s financial statements and tax returns, submitted to, and agreed by, the local tax authority. A company s tax position and the accounting treatment of that position are rarely objective facts: there are areas which are subjective and where judgment is required. Using the audit to carry out a tax health check Most tax planning which fails does so because of poor implementation, not poor advice. Our value-added approach to compliance therefore begins with our audit work. We use this as an opportunity not just to form an opinion on your tax provision, but also to carry out a tax health check, highlighting areas of risk and opportunity and ensuring that the tax implications of accounting treatments and disclosures are properly considered. It is often tax issues identified as a result of this work, and the subsequent preparation of tax returns, that form a focus for the following year s tax planning. We understand the importance of the Company s reported tax charge: of managing and meeting the market s expectations and of no surprises. We therefore ensure that the structural elements of your tax charge are understood and that, where appropriate, planning is undertaken to address these. We also use this information to help forecast your future tax rate, identify any trends, and any uncertainties to which these are subject. Tax advisory services Our approach to tax advice is to understand your business and the constraints within which it operates, and also your risk profile, so that we only bring you planning ideas which are relevant to your business and its objectives, and also which are likely to meet your acceptability criteria. We will always present you with a clear value proposition, Crowe Horwath (Israel) Firm Profile Page 77 of 92

78 International Division explaining both the costs and the expected benefits of any planning, and also where the planning falls on the risk spectrum. Our tax advisory services are led by Ora Vanin who works with our clients to agree those tax issues and opportunities which are high priority. Strategy Understanding your business and its tax issues Planning Tax issues identified during audit are initial focus for next year s planning Coordination between audit and tax team Communication with Corporate Senior management Implementation Implement agreed tax planning, focusing on priority risks and opportunities Reporting Tax returns delivered at conclusion of audit. Tax risks and opportunities high lighted Fieldwork During audit, identify tax risks and opportunities and obtain data for tax computations Crowe Horwath (Israel) Firm Profile Page 78 of 92

79 International Division Section 4 Our Team Approach Crowe Horwath (Israel) rank among the 10 leading accountancy and business advisory firm in Israel. The firm was established in the early 1980 s and operates through a head office in Ramat Gan, 4 branches which cover all of Israel: Tel Aviv, Jerusalem, Haifa, Ashkelon and Eilat and an International Division consisting of a Israeli U.S. UK German Desks of operation. We deliver a high quality, value for money service that clients can rely on. Our clients have access to a full range of professional solutions of quality and commerciality one would expect from a firm of our size and repute. Crowe Horwath International is ranked among the eight largest accounting and business consulting firms with 120 independent member firms over 500 offices with 30,000 employees. The firm provides audit and consulting services to publicly traded companies on Tel Aviv, NASDAQ and AIM and Frankfurt stock markets, private SME entities, governmental institutions, nonprofitable organizations, startup and development stage companies. The firm provides its clients with individual service with a vision toward maximizing the client s development and growth potential, whether it is a growth company or a public company establishing itself as an international player. The firm service client team consists of CPAs, economists, lawyers, internal auditors and tax advisors divided to categories by specialize skills and expertise required for the services in order to maximize the realization of our technical knowhow and experience in the different business fields of our clients The professional relations with Horwath International through the International Division and US and UK Desk of operation, allow us to provide response to global clients needs. Crowe Horwath (Israel) is a dynamic and progressive firm combining the full range of professional services that you would expect from a major Israeli accounting practice with a personal, partner-led service. Crowe Horwath (Israel) Firm Profile Page 79 of 92

80 International Division Our client service teams include American staff that are engaged with our clients in Israel and in some cases some of our local staff are temporarily relocated to Horwath firms outside Israel. The firm is PCAOB registered to act as CPA for companies trading on US stock exchanges. Among the firm s departments: audit, technical accounting, corporate taxes, economic services, internal audit, incentive programs and R&D financing, individual services. Services are provided to both the private and public sectors, in the following fields: industry, services, high-tech, real estate, commerce and services, financial institutions, high education institutions, not-for-profit organizations, and others, in a wide range of areas, such as: international and local taxation, capital raising, mergers and acquisitions, as well as due diligence, pre-ruling and assisting companies with Sarbanes Oxley Section 404 implementation. Crowe Horwath (Israel) provides clients with continuance professional technical guidance and training in accounting, taxation and business topics through conferences, seminars and professional news alerts. Industries: Public Companies, International Corporations, Government Companies, Private Companies, Underwriters, Financial Institutions, High-Tech, Start-Up Companies, Real Estate, Trade and Services, Industry, Technology, Life Sciences and Biotechnology, Medical Devices, Tourism, Hotels, Professionals, Self-Employed, Non-Profit Organizations, Capital Markets, Partnerships, Provident Funds, Continuing Education Funds, Medical Services, Local Authorities and Municipal Associations. Areas of Practice: Auditing - Financial Statements, Financial Statements Preparation Based on U.S GAAP, Public Offerings - Offering Process Accompaniment, Risk Management, Internal Audit, Sarbanes Oxley Consulting, Preparation of Tax Reports, International Taxation, Tax Planning, US Tax Compliance and OVI Programs Transfer Pricing, Pre-Ruling, Approved Enterprises, Governmental Incentives, Global Incentives, R&D Finance, Mergers and Acquisitions, Economic and Financial Consulting, Due Diligence, Economic Feasibility Studies, Business Plans, Valuations, Investigative Auditing, Mediation, Capital Declarations, Expert Professional Opinion for the Court, Arbitration, Stock Option Plans, Employee Compensation, Reorganization and Recovery Plans, Trusts, Liquidations. Crowe Horwath (Israel) Firm Profile Page 80 of 92

81 International Division Accessibility and relationships Crowe Horwath (Israel) US Desk provides a pro-active partner-orientated service. Our clients tell us they genuinely value the accessibility of our partners who are always available to act as a sounding board for ideas or the provision of commercial or technical advice. Our distinctive features Our exponential growth rate, achieved through the implementation of a clear growth strategy demonstrates Crowe Horwath (Israel) ability to think and act strategically over the long-term. This is the same expertise we bring to our clients, reflecting their individual circumstances and aspirations The culture of our firm is characterized by a robust focus on technical excellence and a dedication to client care Our clients tell us that they genuinely value the accessibility of our partners - partners and senior staff are always closely involved in planning and directing our assignments. Core team a top level commitment Our Best Team ethos We have put together a team to ensure your compliance and advisory requirements are met. The combined team has the appropriate blend of practical experience, technical expertise and commercial acumen to ensure that the service provided meets your immediate and future needs. We never look at a relationship with our clients as a commodity. We are in the business of providing comprehensive business advice, marked by a high level of responsiveness, proactive identification of issues and, efficiency. Understanding management concerns is crucial to our relationship. We invest our time to better understand the business, and to broaden our appreciation for the corporate philosophy and critical success factors. We make a substantial commitment of our firm resources to provide our clients with services that fulfill their expectations. We assemble an experienced and creative engagement team that complement and support our clients' team. Our professional team is long on the kind of experience that our clients are seeking. Each team member is dedicated to using his or her knowledge to better respond and serve our clients needs. A core engagement team comprises of entrepreneurial, aggressive leaders with hand-on experience in multination marketplace. Wide experience in PCAOB, IFAC and SEC audit. Wide experience with US GAAP and IFRS reporting Wide experience with Capital Markets, IPO's, Mergers and Acquisitions. Crowe Horwath (Israel) Firm Profile Page 81 of 92

82 International Division Brief description of the International Division leaders Arieh is the managing partner of the firm and takes overall responsibility for all work that Crowe Horwath (Israel) International Division does. He heads the International Division and the SEC practice group of Crowe Horwath (Israel) and has over 20 years of experience in both Israeli and US public and private accounting. Arieh Ovadia Managing Partner Arieh acts for a wide range of very active public clients and international groups, including a number of fully-listed companies on NASDAQ, AIM London Frankfurt and Tel-Aviv Stock Exchange reporting under PCAOB, US GAAP and IFRS. He has extensive experience with M&A transactions, due diligence for acquisitions and for underwriters, Sarbanes Oxley implementation testing, valuation and PPA Study and in strategic and business planning. Menachem is the Technical Partner of the firm's US Desk and Head of the Crowe Horwath Israel IFRS Academy He has 25 years of experience in dealing with publicly quoted companies, of which more than 15 years of experience in technical accounting services US GAAP and IFRS and regulatory requirements. Menachem Steinberger SEC Technical Partner US GAAP IFRS [email protected] Serve 2 years in PWC Central Team in London providing global IFRS advisory services to territories around the world and responding to the IASB initiatives. A member of the Accounting Principles and Financial Reporting Committee of the Institute of Certified Public Accountants in Israel. Crowe Horwath (Israel) Firm Profile Page 82 of 92

83 International Division Ronen acts for a wide range of very active public clients and international groups, including a number of fully-listed companies Tel-Aviv Stock Exchange and a big Government companies reporting under PCAOB, IFAC and IFRS. Ronen has extensive experience with M&A transactions, due diligence for acquisitions and for underwriters, Sarbanes Oxley implementation testing and in strategic and business plan. Ronen was serving in DELOITTE with 20 years of experience in leading several engagements of public companies (including IPOs), big governments companies and a privet companies. Ronen was responsible of the internal practice review in Deloitte Israel. Ronen is a member of the Accounting Principles and Financial Reporting Committee of the Institute of Certified Public Accountants in Israel. Ronen is a member and a reviewer at the organization of Peer Reviewers for the Institute of Certified Public Accountants in Israel. Ronen Leibovitz Partner, [email protected] Leonard is the head of our US tax services. He has More than 10 years of experience in the areas of US taxation, international financial reporting and accounting. Leonard has held various positions in accounting firms specialist in US tax and well as accounting position in Israeli Hi -Tech companies. Leonard Tuber Partner, Head of US tax services [email protected] Leonard specialists in advising clients regarding very sensitive and discrete issues of US tax compliance as part of a US government amnesty program (OVDI). Leonard specialists in the preparation of US federal individual partnership, corporation, gift, estate and state tax returns. Leonard has experience in the areas of US taxation of foreign corporations and foreign investments in US real estate. Leonard manages the US tax compliance group of Crowe Horwath Israel in joint venture with US Tax & Financial Services Middle East GmbH. Crowe Horwath (Israel) Firm Profile Page 83 of 92

84 International Division Ora is the head of our Tax services. Ora is a tax lawyer (L.L.B& M.B.A) who made her internship at The Israeli State Attorney. Ora has specialized in legal examination and analysis of tax issues, assistance with tax structuring in relation to business, as well as personal activities, tax opinion writing, representation with the Israeli Income Tax Authority on all of its levels, including with the Real Estate Taxation Section. Ora Vaknin Head of Tax services [email protected] As a part of our service we provides Tax services including Corporate Tax Compliance, Employment Tax, International Tax, Cross border transaction, Relocation tax Services, Pre-Ruling, Personal Tax compliance, VAT,Real Estate Taxation, Governmental Incentives Plan, Transfer Pricing. Crowe Horwath (Israel) Firm Profile Page 84 of 92

85 International Division Section 5 Firm Code Crowe Horwath (Israel) is a professional corporation engaged in the practice of public accounting in Israel. Crowe Horwath (Israel) is committed to conduct its business in a manner consistent with all legal, regulatory and professional requirements, which pertain to its practice, and in all instances in a manner, which is consistent with the highest standards of integrity ethics and fairness. The success of Crowe Horwath (Israel) is due, in no small measure, to our reputation for the highest standards of integrity and ethical conduct. Partners and staff share the collective responsibility that reputation by conducting the business of the firm fairly, ethically and responsibly and in a manner that is fully in compliance with all relevant legal, regulatory and professional requirements. Each of the partners and staff must comply conscientiously with all laws and government and professional regulations applying with the business of the firm. The firm requires that each partner and staff member understand and abide by the requirements and procedures out in this firm's Code. Each of the partners and staff is responsible for being familiar with all laws, regulations and professional requirements, which are relevant to our areas of practice or responsibility. A violation of this Code may result in disciplinary action including, in the extreme, termination of employment, withdrawal from the firm and referring of the matter to appropriate legal or professional authorities. Investigations and disciplinary decisions will be made by the firm s Authorized Partners and will be subject to review by the Partners Authorized. Our responsibility for protecting the reputation of the firm extends beyond our own actions and includes an obligation to bring to the attention of the Management Committee legal or ethical issues with respect to the conduct of other firm's partner and staff members. The firm fully supports in carrying out this responsibility. We have an overriding objective of providing high quality audit, accounting, tax and advisory services to clients in the best professional manner. Our partners and staff are expected to comply with this statement of philosophy in order to achieve that objective. Crowe Horwath (Israel) Firm Profile Page 85 of 92

86 International Division Professionalism in the accounting profession means integrity, objectivity, independence where required, adherence to professional standards and applicable laws and regulations, and a demonstrated will to maintain and improve the quality of professional services and to withstand all pressures, competitive and otherwise, to compromise on principles, standards and quality. In the field of auditing particularly, professionalism requires an understanding of and dedication to public interest. The public interest in audited financial statements has placed the public accounting profession in a unique position of public trust. Moreover, there is also a significant public interest in the way in which the firm carries out accounting, tax and advisory services. Therefore, no client or firm consideration is allowed to interfere with our ability to carry out our commitment to professionalism. Professional Performance Crowe Horwath (Israel) demands integrity, objectivity, competence and due care from all of its personnel in the conduct of all of its engagements, whatever their nature. We demand independence in fact and appearance in all audit and other engagements where independence is required by applicable laws and regulation and the requirements of professional societies. We take steps to ensure that personnel assigned to engagements, whatever their nature, have the professional and specialized knowledge required to carry out their responsibilities, recognizing that supervisors and other reviewers and consultants can complement that knowledge. Crowe Horwath (Israel) subscribes to a standard of professional excellence in all of its activities. Our goal is to provide superior, distinctive client services services that are prompt, efficient, authoritative, performed to the highest standard of quality and ethics responsive to client needs, and available when and where needed. Crowe Horwath (Israel) services must be the best obtainable. Our firm is structured to provide leadership in achieving high quality professional performance while maintaining the concept of individual responsibility so necessary to clients and to individuals within the firm. Crowe Horwath (Israel) has established policies and procedures that we believe provide assurance that professional engagements are properly planned and executed and that decisions are based on the substance of issues, not on form. Accounting standards cannot deal with all possible situations, and we at times urge our clients to adopt accounting and reporting policies that we believe are the most appropriate in the circumstances. Our policies and procedures provide, among other things, for consultation on significant matters and Crowe Horwath (Israel) has designated partners of the firm whose opinions are to be sought on significant ethical, technical and industry questions. The Crowe Horwath (Israel) Firm Profile Page 86 of 92

87 International Division policies and procedures we have established are designed to assure that our clients receive those best professional services we can provide and that in providing those services we continually keep in mind the public interest in our work. We expect our partners and staff to identify and resolve all important issues relevant to an engagement. More specifically, to achieve high quality professional performance, and to comply with the membership requirements of the Israeli AICPA. Crowe Horwath (Israel) has adopted policies and procedures that implement the quality control standards for the conduct of accounting and auditing engagements established by the US AICPA. Those policies and procedures relate to the following elements of quality control, among other matters: Independence, Integrity and Objectivity To be free from financial, business, family and other relationships involving a client when required. To be honest and candid within the constraints of client confidentiality. To have a state of mind and a quality that lends value to the firms services and imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest. Personnel Management To hire individuals who possess the appropriate characteristics to enable them to perform competently. To assign work to personnel who possess the technical training and competence required. To provide personnel with the training necessary to fulfill responsibilities assigned and satisfy applicable continuing professional education requirements. To select for advancement those individuals that have the qualifications necessary to fulfill responsibilities involved. Acceptance and Continuance of Clients and Engagements To appropriately consider the risks associated with providing professional services so as to decrease the likelihood of association by the firm with clients and engagements in which client management lacks integrity. To associate with clients and engagements in which the firm can reasonably expect to complete with professional competence. Crowe Horwath (Israel) Firm Profile Page 87 of 92

88 International Division Engagement Performance To determine that the design and execution of work performed is efficient and in accordance with applicable professional standards. To have personnel refer to authoritative literature or other sources and consult with individuals with the knowledge, technical competency, judgment, and authority when appropriate. The audit work performed on every client engagements is to be supervised to the extent necessary to ensure the highest quality of professional performance. Monitoring To develop a system to evaluate on an ongoing basis whether the other elements of quality control established by the firm are partially designed and are being effectively applied. We have also adopted appropriate policies and procedures in the above areas to guide the conduct of tax and advisory services engagements. The adequacy of the firm s quality control system for our accounting and auditing practice and our compliance with that system are independently evaluated every three years through a peer review conducted under the auspices of the Israeli AICPA Peer Review Institution for CPA Firms. The peer review report is available to our clients. Relationships with Clients The value of our services is, to a large degree, dependent on the public perception of our integrity and objectivity. If the public were to doubt our integrity or objectivity or our competence or professional care as a result of our work for a given client, the value of our services to that client, to all other clients, and to the public at large, could drop significantly. Accordingly, just as our clients are selective in their choice of CPA firms, Crowe Horwath (Israel) is selective in accepting clients. Our responsibilities to existing clients and to the public demand that we consider the appropriateness of client relationships and that we carefully consider the nature of services we are asked to provide and our ability to provide those services in a quality manner in conformity with all relevant professional standards. When potential clients who disagree with their present auditors on significant auditing, accounting, or reporting questions request our opinion on the matter, we consult within our firm and with the potential client s present or predecessor CPA firm before giving our final conclusion on the matter. Crowe Horwath (Israel) Firm Profile Page 88 of 92

89 International Division We value our reputation for quality services and believe that reputation is the basis on which we attract new clients and build our practice for the future. We are committed to rendering value for our fees and believe our clients should have a reasonable basis for making that judgment for themselves. Accordingly, we carefully evaluate the services we are asked to provide and the factors, such as the nature of control systems and procedures, that will affect the costs we expect to incur in providing such services before we inform present and potential clients of the fees we estimate those services willentail. Once Crowe Horwath (Israel) undertakes a client engagement, we bring all the resources to the engagement necessary in the circumstances. We do not disclose to anyone outside of our firm any confidential client information obtained in the course of any engagement, unless the disclosure is authorized by the client or is required to discharge properly our responsibilities under law or authoritative regulatory or professional standards. (Our peer reviewers have access to client information, but they are bound by the same standards of confidentiality.) Services Provided Crowe Horwath (Israel) provides a full range of audit, accounting, tax and advisory services, consistent with ethical and professional standards and regulatory requirements and with the limitations imposed by our firm s membership in the Israeli AICPA. The services provided by CPA firms must be responsive to changes in the environment, which is affected by development in information technology, the increasing complexity of tax laws and regulations, greater demands by the public for new types of information and CPA assurances on such information, the increasing need of many clients for advisory services, and a host of other factors. If the public accounting profession as a whole and Crowe Horwath (Israel) in particular, are to meet the legitimate and changing needs of clients and the public, arbitrary restrictions on the services provided are not appropriate. However, Crowe Horwath (Israel) as a matter of policy will undertake only engagements that we believe we can perform with competence, that will be useful to our clients or to appropriate third parties, that will not impair our independence in fact or appearance when we also provide audit services to the client involved, and that will help attract and retain the personnel we need to provide the knowledge base essential to maintain our ability to serve our clients and the public in a professional manner. In evaluating proposed engagements, as well as the way we inform clients and others of our capabilities, we consider whether such engagements will lessen public confidence in our independence, integrity and objectivity in the performance of the audit function or in our commitment to that function. Crowe Horwath (Israel) Firm Profile Page 89 of 92

90 International Division Proposals Every proposal, whether written or oral, should be prepared carefully in terms of its two principal purposes: as an affective display of the firm s capabilities and as an articulation of the commitments the firm is undertaking. Fees The firm charges clients comparable fees for equivalent services. In determining the rates at which individual engagements should be billed, various criteria, including cost and service-related economic factors, are considered. Fee estimates furnished to prospective clients should be based upon estimated time charges modified, as appropriate, in the partner s business judgment. Maintenance of auditing standards is mandatory irrespective of time budgets supporting fee estimates. Growth of the Practice Quality service and aggressive pursuit of attractive market opportunities are not mutually exclusive. Crowe Horwath (Israel) competes for new business by assigning specific roles in achieving firm goals to practice units and individual partners. The firm actively seeks to augment its competitive position by committing resources to the development of services oriented to emerging business needs and to the maintenance of a strong base of specialized skills. All partners are expected to develop their associations with business and professional leaders and to encourage each staff member to become known in the community as a representative of the firm. Crowe Horwath (Israel) Firm Profile Page 90 of 92

91 International Division Accounting Advice Clients - The firm has a responsibility to every client to provide its best professional accounting advice on every occasion. The firm will not ordinarily demand compliance with a standard higher than that extant in practice. However, the firm always reserves the right to refuse to accept certain practices when it believes the practice is indefensible however displayed and disclosed, even though that practice is accepted by some members of the profession. The Authorized Partners are responsible for developing firm positions and providing technical guidance on matters of accounting principle including disclosure. Non-clients - The firm accepts engagements to furnish technical advice to a client of another accounting firm on two conditions: (1) the firm must be able to comply fully with applicable professional standards, and (2) acceptance of the engagement must be approved in advance by the Authorized Partners. If a written opinion is furnished by the firm, it should be reviewed with the other firm prior to issuance. Positions on Issues The firm is prepared to speak out publicly, unhesitatingly, on any issue that lies within its professional field. It is the firm s judgment as to action that is in the public interest, and consonant with sound principles of accounting. Firm s position, rather than the desires of one or more clients. Compliance with this Statement At least once a year, partners and professional staff will be requested to acknowledge their understanding of, and compliance with, this statement. Crowe Horwath (Israel) Firm Profile Page 91 of 92

92 Contact Information Head Office 12 Abba Hillel Silver St. Ramat Gan, Israel Tel: ; Fax: Arieh Ovadia Chanoch Pick Alexander Kriheli Head of the Firm and Managing Partner Partner Partner, Office Manager Ashkelon Mail: Mail: Mail: Ronen Leibovitz Partner, Menachem Stienberger Ofer Sossover Partner, Ora Vaknin Partner, Technical Accounting Services Tax Services Mail: Yaniv Cohen Mail: Daniel Edenburg Economic and Valuation Services Risk Management and Internal Audit Mail: Mail: Crowe Horwath (Israel) Firm Profile Page 92 of 92