Guide Israel

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Israel
Prepared by Lex Mundi member frm,
S. Horowitz & Co.
Guide to Doing Business
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L/44193/0/2090001/1

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Prepared by:

31Ahad Haam Street
Tel-Aviv 65202
Israel
Tel: +972 3 567 0700
Fax: +972 3 566 0974
E-mail: info@s-horowitz.co.il
L/44193/0/2090001/1

F FI IR RM M O OV VE ER RV VI IE EW W

Founded in 1921, S. Horowitz & Co. is one of Israels leading and largest
corporate and commercial law practices. It is a full-range law firm, comprising of
over 110 fee-earners, many of whom are multilingual and have qualified and
practised as lawyers in the United States, England and South Africa. The firm is
widely known for the breadth and depth of its expertise and experience,
including in mergers and acquisitions, joint ventures, banking, dispute resolution,
venture capital, commercial law, intellectual property, information technology,
project and asset financing, energy and infrastructure, capital markets, financial
services, telecommunications, biotechnology, antitrust, tax, real estate, labour
law and environmental law. S. Horowitz & Co. has been recognised as being a
leader or first in its field in Israel by all the leading directories.

L LI IM MI IT TA AT TI IO ON NS S O ON N S SC CO OP PE E O OF F T TH HI IS S G GU UI ID DE E

By its nature, this Guide is merely an overview and is intended to highlight
issues for general information purposes only.
Because of the many issues discussed and the frequent changes in laws,
regulations and procedures, this Guide should neither be construed as offering
legal advice nor as a substitute for obtaining proper legal advice. This Guide
cannot be relied on for legal advice and use of this Guide does not create an
attorneyclient relationship. Anyone wishing to do business in Israel or wishing
to obtain particular information regarding any aspects of Israeli law or other
commercial considerations, should first consult with a qualified Israeli lawyer for
specific updated advice and/or information.
Accordingly, the information contained herein is not comprehensive and should
be used for guidance purposes only. No liability whatsoever with respect to the
inaccuracy or otherwise of any information contained in this Guide is accepted
by S. Horowitz & Co.
This Guide was prepared during 2011 and, with the exception of all matters
concerning and references herein to tax, which have not yet been updated and
do not necessarily reflect current law, and unless specifically stated to the
contrary, this Guide is intended to be accurate as of January 2011. For more
updated information on any of the topics discussed in this Guide, or with regard
to any other information on Israeli law, please contact the following individuals:
Alex Hertman, Adv. (alexh@s-horowitz.co.il)
Tal Band, Adv. (talb@s-horowitz.co.il)
Avi Ordo, Adv. (avio@s-horowitz.co.il)
S. Horowitz & Co.
31 Ahad Haam Street
Tel-Aviv 65202, Israel
tel: (+972) (3) 567 0700
fax: (+972) (3) 566 0974

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(ii)
T Ta ab bl le e o of f C Co on nt te en nt ts s

C Cl la au us se e P Pa ag ge e

1. THE COUNTRY AT A GLANCE ........................................................................ 1
1.1. Languages ..........................................................................................................1
1.2. Rate of Exchange ...............................................................................................1
1.3. Geography, Neighbouring Countries and Climate ...............................................1
1.4. Cultural Influences/Prohibitions ..........................................................................2
1.5. Religious Influences/Prohibitions ........................................................................3
1.6. Infrastructure ......................................................................................................4
1.7. Communication ...................................................................................................5
1.8. Public Services ................................................................................................. 10
GENERAL CONSIDERATIONS ................................................................................... 12
2.1. Investment Policies ........................................................................................... 12
2.2. Diplomatic Relations ......................................................................................... 17
2.3. Government ...................................................................................................... 21
2.4. Environmental Considerations .......................................................................... 27
2.5. Intellectual Property .......................................................................................... 36
3. INVESTMENT INCENTIVES .......................................................................... 63
3.1. Export Incentives or Guarantees ...................................................................... 64
3.2. Grants, Subsidies or Funds .............................................................................. 69
3.3. National Tax Incentives for Foreign Investors ................................................... 72
3.4. Regional Tax Incentives for Foreign Investors .................................................. 78
4. FINANCIAL FACILITIES ................................................................................. 79
4.1. Banking/Financial Facilities .............................................................................. 79
5. EXCHANGE CONTROLS ............................................................................... 84
5.1. Business Transactions with Nationals, Residents or Non-Residents ................ 84
5.2. Investment Controls .......................................................................................... 86
5.3. Money Transfer ................................................................................................ 87
6. IMPORT/EXPORT REGULATIONS ............................................................... 88
6.1. Customs Regulations ....................................................................................... 88
6.2. Exports ............................................................................................................. 91
6.3. Foreign Trade Regulations ............................................................................... 92
6.4. Imports ............................................................................................................. 92
6.5. Manufacturing Requirements ............................................................................ 94
6.6. Product Labelling .............................................................................................. 94
7. STRUCTURES FOR DOING BUSINESS ....................................................... 95
7.1. Governmental Participation .............................................................................. 95
7.2. Joint Ventures ................................................................................................... 96
7.3. Limited Liability Companies .............................................................................. 98
7.4. Liability Companies, Unlimited ........................................................................ 101
7.5. Partnerships, General or Limited .................................................................... 102

( (c co on nt t i i n nu ue ed d) )


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7.6. Sole Proprietorships ....................................................................................... 104
7.7. Subsidiaries/Branches/Representative Offices ............................................... 105
7.8. Trusts and Other Fiduciary Entities ................................................................. 107
8. REQUIREMENTS FOR THE ESTABLISHMENT OF A BUSINESS .............. 108
8.1. Alien Business Law ........................................................................................ 108
8.2. Antitrust Laws ................................................................................................. 109
8.3. Government Approvals ................................................................................... 116
8.4. Insurance ........................................................................................................ 117
8.5. Licences/Permits ............................................................................................ 117
9. OPERATION OF THE BUSINESS ................................................................ 118
9.1. Advertising ...................................................................................................... 118
9.2. Attorneys ........................................................................................................ 119
9.3. Bookkeeping Requirements ............................................................................ 120
9.4. Business Ethics/Codes ................................................................................... 121
9.5. Consumer Protection Laws ............................................................................. 122
9.6. Construction ................................................................................................... 126
9.7. Contracts ........................................................................................................ 127
9.8. Price Controls ................................................................................................. 128
9.9. Product Registration ....................................................................................... 128
9.10. Reductions or Return on Capital ..................................................................... 129
9.11. Sale of Goods ................................................................................................. 129
9.12. Trade Associations ......................................................................................... 130
10. CESSATION OR TERMINATION OF BUSINESS ........................................ 133
10.1. Termination .................................................................................................... 133
10.2. Insolvency/Bankruptcy .................................................................................... 148
11. LABOUR LEGISLATION, RELATION AND SUPPLY ................................... 151
11.1. Employer/Employee Relations ........................................................................ 151
11.2. Employment Regulations ................................................................................ 151
11.3. Hiring and Firing Requirements ...................................................................... 152
11.4. Labour Availability .......................................................................................... 153
11.5. Labour Permits ............................................................................................... 154
11.6. Safety Standards ............................................................................................ 155
11.7. Unions ............................................................................................................ 155
12. TAX ON CORPORATIONS ........................................................................... 156
12.1. Allowances ..................................................................................................... 156
12.2. Calculation of Taxes ....................................................................................... 157
12.3. Capital Gains .................................................................................................. 157
12.4. Filing and Payment Requirements .................................................................. 162
12.5. Miscellaneous Taxes Due ............................................................................... 162
12.6. Registration Duties ......................................................................................... 164
12.7. Sales Tax or Other Turnover Tax ................................................................... 166



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12.8. Social Security and Welfare System Contributions ......................................... 171
12.9. Special Tax Schemes ..................................................................................... 172
12.10. Tax on Profits ................................................................................................. 173
12.11. Tax Treaties ................................................................................................... 176
12.12. Territoriality Rules ........................................................................................... 178
12.13. Treatment of Tax Losses ................................................................................ 180
12.14. Wealth Tax ..................................................................................................... 180
12.15. Withholding Taxes .......................................................................................... 181
13. TAX ON INDIVIDUALS ................................................................................. 182
13.1. Allowances ..................................................................................................... 182
13.3. Capital Gains .................................................................................................. 184
13.5. Inheritance and Gift Tax ................................................................................. 189
13.6. Miscellaneous Taxes Due ............................................................................... 190
13.7. Real Estate/Habitation Tax ............................................................................. 190
13.8. Sales Tax ....................................................................................................... 192
13.10. Stock Option, Profit Sharing and Savings Plan ............................................... 195
13.11. Taxation of Benefits in Kind ............................................................................ 197
13.12. Taxes on Dividends ........................................................................................ 198
13.13. Tax on Income ................................................................................................ 198
13.14. Tax Treaties ................................................................................................... 200
13.16. Wealth Tax ..................................................................................................... 202
14. TAX ON OTHER LEGAL BODIES ................................................................ 203
14.1. Allowances ..................................................................................................... 218
14.3. Capital Gains .................................................................................................. 219
14.5. Miscellaneous Taxes ...................................................................................... 221
14.6. Registration Duties ......................................................................................... 221
14.7. Sales Tax or Other Turnover Tax ................................................................... 221
14.9. Special Tax Themes ....................................................................................... 222
14.10. Tax on Profits ................................................................................................. 222
14.11. Tax Treaties ................................................................................................... 222
14.13. Treatment of Tax Losses ................................................................................ 222
14.14. Wealth Tax ..................................................................................................... 222
15. GENERAL TAX CONSIDERATIONS ............................................................ 223



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15.1. Taxes Generally ............................................................................................. 223
16. IMMIGRATION REQUIREMENTS ................................................................ 224
16.1. Immigration Controls ...................................................................................... 224
16.2. Immigration Requirements/Formalities ........................................................... 227
16.3. Visas............................................................................................................... 229
17. EXPATRIATE EMPLOYEES ........................................................................ 230
17.1. Cost of Living and Immigration ....................................................................... 230
17.2. Drivers Licences ............................................................................................ 231
17.3. Education ....................................................................................................... 231
17.4. Housing .......................................................................................................... 232
17.5. Importing Personal Possessions ..................................................................... 233
17.6. Medical Care .................................................................................................. 234
17.7. Moving Costs .................................................................................................. 234
17.8. Tax Liability .................................................................................................... 235
17.9. Work Contracts ............................................................................................... 236
17.10. Work Permits .................................................................................................. 236

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G Gl lo os ss sa ar ry y o of f T Te er rm ms s

Acquisition Tax Law the Acquisition Tax Law (Goods and
Services), 1952
Advance Notice for Dismissal and
Resignation Law
the Advance Notice for Dismissal and
Resignation Law, 2001
Advisory Committee the Advisory Committee for Exemptions and
Mergers established under the RTP Law
which is authorised to review the Antitrust
Authoritys recommendation and give advice
Airports Authority Law the Airports Authority Law, 1977
Antitrust Authority the Israeli Antitrust Authority
Antitrust Controller the Controller of Restrictive Trade Practices
who heads the Antitrust Authority
Antitrust Tribunal the Restrictive Trade Practice Court
established under the RTP Law
Appellations of Origin and
Geographical Indications Protection
Law
the Appellations of Origin and Geographical
Indications (Protection) Law, 1965
Banking Law the Banking (Licensing) Law, 1981
Banking Ordinance the Banking Ordinance, 1941
Bank of Israel Law the Bank of Israel Law, 2010
Capital Investments Law the Encouragement of Capital Investments
Law, 1959
Civil Wrongs Ordinance the Civil Wrongs Ordinance [New Version],
1968
Commercial Civil Wrongs Law the Commercial Civil Wrongs Law, 1999
Companies Law
1
the Companies Law, 1999

1 This law was recently substantially amended, such amendments are not reflected in this Guide.


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Companies Ordinance the Companies Ordinance [New Version],
1983, many of the provisions of which have
subsequently been repealed by the
Companies Law
Consumer Goods and Services
Supervision Law
the Consumer Goods and Services
Supervision Law, 1957
Consumer Protection Law the Consumer Protection Law, 1981
Consumer Protection Order the Consumer Protection Order (Marking of
Goods), 1983
Consumer Protection Order (Food
Products)
the Consumer Protection Order (Marking and
Packaging of Food Products), 1998
Controller of Foreign Currency the officer appointed by the Minister of
Finance to be responsible for currency
control policies in Israel
Copyright Act the Copyright Act, 1911
Copyright Law the Copyright Law, 2007
Copyright Ordinance the Copyright Ordinance
Currency Control Law the Currency Control Law, 1978
Customs Order the Customs Order (Regulation of Imports),
1986
Customs Ordinance the Customs Ordinance
Defecti ve Products Law the Defective Products (Liability) Law, 1980
Eilat Free Trade Zone Law the Eilat Free Trade Zone (Tax Exemptions
and Reductions) Law, 1985
Entry into Israel Law the Entry into Israel Law, 1952
Entry into Israel Regulations the Entry into Israel Regulations, 1974
Equal Opportunities at Work Law the Equal Opportunities at Work Law, 1988
Foreign Workers Law the Foreign Workers (Prohibition against
Unlawful Employment and Securing Fair
Conditions) Law, 1991
Free Export Order the Free Export Order, 1978


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Free Import Order the Free Import Order, 1978
Free Ports Law the Free Port Zone Law, 1969
Free Zones Manufacturing Law the Free Zones for Manufacture in Israel
Law, 1994,
Government Companies Law the Government Companies Law, 1975
Hazardous Substances Law the Hazardous Substances Law, 1993
Health Ordinance the Health Ordinance, 1940
Hours of Work and Rest Law the Hours of Work and Rest Law, 1951
Import and Export Ordinance the Import and Export Ordinance [New
Version], 1979
Income Tax Ordinance the Income Tax Ordinance [New Version],
1961
Inflationary Adjustments Law the Income Tax (Taxation in terms of
Inflation) Law, 1982
Integrated Circuit Topography Law the Integrated Circuit Topography Law, 1999
Investment Centre a vehicle specifically established by the
Ministry of Industry, Trade and Labour to
regulate investments under the Capital
Investments Law
Knesset the Israeli Parliament whose members are
democratically elected and comprises 120 in
number
Knesset Finance Committee a special committee established by the
Knesset to deal with finance issues on a
parliamentary level, including, inter alia, the
State budget, all types of taxation, matters
relating to foreign currency and banking
Law and Administration Ordinance the Law and Administration Ordinance, 1948
Law of Return the Law of Return, 1950
Licensing of Businesses Law the Licensing of Businesses Law, 1968
Merchandise Marks Ordinance the Merchandise Marks Ordinance, 1929


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Minimum Wage Law the Minimum Wage Law, 1987
National Health Insurance Law the National Health Insurance Law, 1994
National Parks and Nature Reserves
Law
the National Parks and Nature Reserves
Law, 1963
NIS New Israel Shekels, the lawful currency of
Israel
Nuisances Claims Law the Abatement of Environmental Nuisances
Law (Civil Claims), 1992
Nuisances Law the Abatement of Nuisances Law, 1961
OCS the Office of the Chief Scientist and head of
the Industrial Research and Development
Administration at the Ministry of Industry,
Trade and Labour (an authority established
under the R&D Law which is responsible for
implementing governmental policy regarding
the support and encouragement of industrial
research and development ( R&D ) in Israel)
Paid Leave Law the Paid Leave Law, 1951
Partnership Ordinance the Partnership Ordinance, 1975
Patents and Designs Ordinance the Patents and Designs Ordinance, 1924
Patents Law the Patents Law, 1967
Penal Law the Penal Law, 1977
Performers and Broadcasters
Rights Law
the Performers and Broadcasters Rights
Law, 1984
Planning and Building Law the Planning and Building Law, 1965
Planning and Building Regulations the Planning and Building Regulations,
(Application for Permit, its Conditions and
Fees), 1970
Plant Breeders Rights Law the Plant Breeders Rights Law, 1973
Prevention of Sea Pollution Law the Prevention of Sea Pollution (Dumping of
Waste) Law, 1983


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Prohibition on Money Laundering
Law
the Prohibition on Money Laundering Law,
2000
Prohibition on Money Laundering
Regulations
the Prohibition on Money Laundering
Regulations, 2000
R&D Law the Encouragement of Industrial Research
and Development Law, 1984
Research Committee an authority within the Industrial Research
and Development Administration at the
Ministry of Industry, Trade and Labour
established under the R&D Law for the
purposes of, inter alia, determining which
R&D projects should be approved for support
and setting the conditions under which the
relevant benefits are to be granted
RTP Law the Restrictive Trade Practices Law, 1988
Seawater Oil Pollution Law the Seawater Pollution by Oil (Prevention)
Ordinance [New Version], 1980
Securities Law the Securities Law, 1968
Shipping and Ports Authority Law the Shipping and Ports Authority Law, 2004
(which law replaced the Ports Authority Law,
1961 which has since been repealed)
Sick Pay Law the Sick Pay Law, 1976
Stamp Duty Law the Stamp Duties on Documents Law, 1961
Standard Contracts Law the Standard Contracts Law, 1982
Standard Contracts Tribunal a body established pursuant to the Standard
Contracts Law, with the power to approve
standard contracts and/or to declare certain
provisions thereof void under the Standard
Contracts Law
Standards Law the Standards Law, 1953
Streams and Springs Authorities
Law
the Streams and Springs Authorities Law,
1965
TASE the Tel Aviv Stock Exchange
Trade Marks Ordinance the Trade Marks Ordinance [New Version],
1972


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Traffic Ordinance the Traffic Ordinance, [New Version], 1961
Trust Law the Trust Law, 1979
Unjust Enrichment Law the Unjust Enrichment Law, 1979
VAT Law the Value Added Tax Law, 1975
Water Law the Water Law, 1959
Work Safety Ordinance the Work Safety Ordinance [New Version],
1970
WTO the World Trade Organisation

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Page 1
1 1. . T TH HE E C CO OU UN NT TR RY Y A AT T A A G GL LA AN NC CE E

1 1. .1 1. . L La an ng gu ua ag ge es s

What languages are spoken?

The official languages of Israel are Hebrew and Arabic. However,
English and Russian are also widely spoken.

Most students in Israel study English as a primary foreign language
and French or Arabic as a secondary foreign language. Proficiency
in English constitutes one of the elements for gaining admission to
study at any of the Israeli universities. The major language
commonly used for business culture purposes is also English.

1 1. .2 2. . R Ra at te e o of f E Ex xc ch ha an ng ge e

What is the exchange rate for the US dollar and the Euro?

The official currency used in Israel is New Israel Shekels (NIS). In
2010 the average exchange rate of the US dollar and the NIS was
approximately US $1 = NIS 3.73 and the exchange rate of the Euro
and the NIS was approximately 1 = NIS 4.95. As of January 2011,
such rates were stated to be US $1 = NIS 3.55 and 1 = NIS 4.74,
respectively.

The exchange rates are subject to frequent fluctuations. Thus
checking the updated rates of exchange on a regular basis is strongly
recommended and, particularly, prior to doing business in Israel.

1 1. .3 3. . G Ge eo og gr ra ap ph hy y, , N Ne ei ig gh hb bo ou ur ri in ng g C Co ou un nt tr ri ie es s a an nd d C Cl li im ma at te e

Describe your countrys geography, proximity to other countries and climate.

Israel is located in the Middle East, along the eastern coastline of the
Mediterranean Sea and is bordered by Lebanon and Syria in the
north, Jordan in the east and Egypt in the south. Israel lies at the
intersection of three continents: Europe, Asia and Africa.

Long and narrow in shape, the country is about 470 km (290 miles) in
length and 135 km (85 miles) in width at its widest point. The
countrys area (including the Golan Heights but excluding the Gaza
Strip and the West Bank) is 22,020 sq km/12,878 sq mi.

Israels population (excluding the Gaza Strip and the West Bank
whose population numbers approximately 3.8 million Palestinians),
comprises approximately 7.58 million residents, divided as follows:
Jews76%; Muslims17%, Christians2%; Druze1.7%; and the

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January 2011

Page 2
remaining percentage of the population represents residents having
no religious affiliation.

The capital city of Israel is Jerusalem, having a population of
approximately 774,000.

Israel encompasses varied topographical features, ranging from
forested highlands and fertile green valleys in the north to
mountainous deserts in the south; from the coastal plain in the west
to the semitropical Jordan Valley and the Dead Sea in the east.
Approximately half of the countrys land area is semi-arid.

The dominant geographical feature in Israel is the Rift Valley, which
originates in Turkey and extends through Israel and further south into
Africa. The Rift Valley includes among its natural resources the Dead
Sea, the Jordan, Arava and Hula Valleys as well as Israels major
lake, Lake Kinneret (also known as the Sea of Galilee). Israel is not a
wet country (the Jordan River is Israels major river) and the north
sustains most of the countrys agriculture. The countrys only inland
sea is the Dead Sea which has an inordinate salt content and is
regarded to be the lowest point on earth. The Dead Sea is flanked by
the Judean Desert which extends further south into the Negev.

Israels climate is characterised by constant sunshine, with a rainy
season from November until April. Total annual precipitation ranges
from 700 mm (27.5 inches) in the north to less than 30 mm
(1.1 inches) in the far south. Regional climatic conditions vary
considerably: hot, humid summers and mild, wet winters on the
coastal plain; dry warm summers and moderately cold winters, with
rain and occasional light snow, in the hilly regions; and semi-arid
conditions, with warm to hot days and cool nights, in the south.

1 1. .4 4. . C Cu ul lt tu ur ra al l I In nf fl lu ue en nc ce es s/ /P Pr ro oh hi ib bi it ti io on ns s

Are there cultural influences or prohibitions on the way business is
conducted?

Israel is an old-new country, small in stature, but with a culturally
active, heterogeneous population. Four thousand years of Jewish
heritage, over a century of Zionism and more than half a century of
modern statehood, have contributed to a culture which has already
created an identity of its own, while preserving the uniqueness of
seventy different communities. A largely immigrant society, Israel's
creative expression has absorbed many different cultural and social
influences, as it blends tradition and innovation and strives to steer a
course between Israeli particularism and universalism.

Today, Israel is a democratic and egalitarian society where
competition thrives to promote and advance both cultural and

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Page 3
commercial ideals. Despite inevitable inequalities, equal rights are
guaranteed to all Israelis.

Worldwide culture ties focus on cooperation in a broad range of
fields, including language, literature, the arts, science, media and
sports. Based on cultural agreements with more than seventy
countries, in addition to links with many others, activities range from
student and academic exchange programs, reciprocal tours by dance
troupes, theatre companies, art exhibitions, musicians and
orchestras, to participation in book fairs, film festivals and sports
competitions. Such exchange programs offer an opportunity for
obtaining insight into the language(s) and cultural traditions of the
various countries as well as of those prevalent in Israel.

1 1. .5 5. . R Re el li ig gi io ou us s I In nf fl lu ue en nc ce es s/ /P Pr ro oh hi ib bi it ti io on ns s

Are there religious influences or prohibitions on the way business is
conducted?

The major religious influence affecting transaction of business in
Israel relates to prohibitions on conducting work on specified days of
rest. Most businesses in Israel may not be conducted on the
prescribed days of rest as defined in the Law and Administration
Ordinance (which include, inter alia, the Sabbath, Yom Kippur,
2

Passover, etc.). The Hours of Work and Rest Law expressly provides
that on the prescribed days of rest

the owner of a workshop or industrial undertaking
shall not work in his workshop or undertaking and
the owner of a shop shall not do business in his
shop.

It should be emphasised that the enforcement of the above
prohibition is, to a certain extent, influenced by the policy of the
serving government and, thus, many businesses may be found
operating despite the said prohibition.

In addition, an employee is not obligated to work on the relevant days
of rest, as determined according to his religious beliefs. However,
with regard to certain types of employment (e.g., jobs in the security
field, crucial jobs for the State, etc.) a special permit may be sought
and obtained from the Minister of Labour permitting that work be
conducted on days of rest. Nevertheless, an employee has the

2 YomKippur (the Day of Atonement) is a dies non (a legal holiday) under J ewish law and customs. For a period
of twenty-five hours, commencing one hour before sunset on the eve of YomKippur until sunset on the following
day, no Jewish businesses or establishments are allowed to operate. In addition, in the later hours of the
afternoon on the eve of YomKippur, all Israeli television and radio broadcasts are terminated and all public
transportation operating throughout Israel ceases to function, including Israels airports, which similarly cease to
operate and are closed.

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discretion to inform his employer that he will not work on days of rest
due to his religious convictions, even if such a permit was obtained.

The business week for Jews commences on a Sunday and ends
early on Friday afternoon. The Jewish Sabbath begins an hour
before sunset on Friday and ends after sunset on Saturday evening.
Most Jewish businesses are closed on Friday afternoons and all day
Saturday. In practice, most businesses (other than shops,
restaurants and the like) have adopted a five-day working week and
are closed on Fridays.

The day of rest for Muslims is Friday and Christian-owned
establishments are closed on Sundays. Hence, Islamic-owned
organisations will be closed on Fridays, while Christian-owned
establishments will be closed on Sundays.

It should be mentioned that the Equal Opportunities at Work Law
prohibits discriminating against an employee on account of his
religious belief.

Nevertheless, certain businesses are bound by religious rules. For
instance, under Jewish laws and customs, the breeding of pigs and/or
the selling of pork is strictly prohibited. Therefore it is not common for
the major food chains and supermarkets in Israel to engage in such
businesses or to stock their shelves with, or supply, such non-kosher
foodstuffs.

All in all, religion does not interfere with, or significantly impact, doing
business in Israel.

1 1. .6 6. . I In nf fr ra as st tr ru uc ct tu ur re e

Explain your countrys infrastructure. Be sure to explain which cities have
airports, railroad systems, ports and public transportation.

In a country of short distances, automobiles, buses and trucks are the
main mode of transportation in Israel. In recent years, certain
modifications, improvements and expansions were made to the road
network (including the introduction of a toll system on a major
highway in Israel) in order to accommodate and regulate the rapid
increase in the number of vehicles, as well as to connect and provide
easy access not only to the major cities and towns, but also to remote
areas.

The Israeli railway system, in particular, has undergone substantial
modification and development. Currently, Israel Railways operates
passenger services between Tel-Aviv, Haifa, Nahariya and Beer
Sheva as well as between other major cities. A further passenger
service operates linking Ben Gurion International Airport (in Lod) with

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Tel-Aviv and cities further north, as well as with the city of Modi'in to
the east, in order to facilitate easy access to and from the airport.
Freight services operate mainly in the south, serving the port of
Ashdod, the cities of Ashkelon and Beer Sheva and the mineral
quarries south of Dimona. Over recent years, both freight and
passenger usage has increased.

The ancient ports of Jaffa, Caesarea and Acre have been replaced by
three modern deep-water harbours located in Haifa, Ashdod and
Eilat, all of which serve to accommodate international shipping.
Today, Haifa is one of the largest container ports on the
Mediterranean Sea as well as a busy passenger terminal. The
Ashdod port is used mainly for shipping goods and the port of Eilat on
the Red Sea links Israel to the southern hemisphere and the Far
East.

Ben-Gurion International Airport, located near Loda twenty-five
minute drive from Tel-Aviv and fifty minutes from Jerusalemis
Israels main and largest international and domestic air terminal. Due
to rapid increases in the number of airline passenger traffic, in 2004 a
new, larger and more modern terminal (Terminal 3), equipped with
state-of-the-art features, opened at Ben-Gurion International Airport.
Short distance international flights and charter flights, mainly from
Europe, are also served by the Eilat and Ovda airports in the south
and the Haifa airport in the northern part of Israel. Domestic air travel
is also served by smaller airports throughout the country, mainly Sde
Dov airport in Tel-Aviv.

All of Israels ports (relating to air and sea travel) are managed by
state through the Israel Airports Authority (as established under the
Airports Authority Law) and through the Israeli Ports Authority (as
established under the Shipping and Ports Authority Law),
respectively.

1 1. .7 7. . C Co om mm mu un ni ic ca at ti io on n

Explain the communication system.

The Israeli telecommunications sector has, in recent years, been
developed at a rate that can only be described as revolutionary. The
substantial changes in the sector are due, in large part, to a
fundamental change in policy on the part of the Ministry of
Communications, which serves as the primary sector regulator.

Today, Israel is connected to the worlds major commercial, financial
and academic data networks and is fully integrated into international
communications systems by means of underwater, fibre-optic lines
and satellite link-ups. The countrys communications infrastructure is
highly developed, offering telephone, facsimile services, internet and

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sophisticated databases as well as cable network to users throughout
the country. In addition, a well-integrated postal service network
operates throughout Israel and international postal and courier
services provide postal delivery to and from most overseas countries.

Fixed Services

Israel has in excess of three million direct exchange lines
(constituting 50% penetration) using a 100% digital network
(owned by Bezeq, The Israel Telecommunications Corporation
Ltd. ( Bezeq ), the incumbent local exchange carrier) that
provides sophisticated services to all customers.

Over 96% of Israels households have telephone lines, 20% of
which have two separate telephone lines. For every one
hundred residents, there are forty-eight telephone lines.

In March 2002, each of the three local television cable
companies (currently operating jointly under the name HOT
see Broadcasting below) were granted a licence to provide
faster access to the Internet on their respective infrastructures.
Until then, Bezeq had been, for several years, the only provider
of such service and, therefore, the inclusion of the three cable
television companies provided healthy and active competition to
the Israeli market. In the long run, this change not only
benefited subscribers but also increased the volume of Internet
users applying for such service. At present, additional
companies (other than Bezeq and the cable television
companies) provide broadband internet services (see Internet
below).

Cellular Telephony

There are approximately 6.9 million cellular telephone
subscribers in Israel of which 4 million persons are recorded as
owners of cellular telephones (out of a total population of
approximately 6.7 million). In 2003 itself, the cellular telephone
companies recorded an additional 350,000 new subscribers. It
is estimated that 70% of the population own at least one cellular
telephoneone of the highest levels of market penetration
worldwideand that 40% thereof own two cellular telephones.
The rapid growth rate is apparent from the fact that in January
1995 there were only 125,000 cellular telephone subscribers.
The introduction of competition in 1995 brought about an
extremely high subscriber growth rate, one of the highest in the
world. This rapid growth was achieved by providing nationwide
coverage, low tariffs, the introduction of Calling Party Pays
(CPP) system in 1994, improvement of network quality and
effective marketing.

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There are currently four cellular operators in Israel, all of which
provide countrywide coverage and modern network services.

In December 2001, tenders were concluded for licences for
additional 2G and 3G cellular frequency bands, in order to
expand network capacities and enable use of broadband
cellular applications employing DCS-1800 and UMTS
technologies. Three suppliers, namely Cellcom, Pelephone and
Partner participated in these tenders; a total of 115MHz has
accordingly been assigned to those parties at a total price of
NIS 1,026,000,000 (approximately US $240 million). The new
frequencies have enabled the operators to provide GSM1800
modern services since the beginning of 2002. During the latter
part of 2004, mobile telephones equipped with 3rd Generation
UMTS features became available for purchase on the Israeli
market.

International Telecommunications Services

International long-distance services were traditionally a
monopoly held by Bezeq and Bezeq International (a subsidiary
of Bezeq). In July 1997, two privately-owned facility-based
carriers, Golden Lines and Barak, were also licensed. Outgoing
traffic quickly tripled and the new carriers rapidly gained
substantial market share as the incumbent operator lost its
exclusive position. Fair and transparent interconnection
arrangements, equal access rules and bold cuts in retail prices
have enhanced competition in the provision of international
long-distance services.

All three operators currently deliver services over a modern
digital network, including several switching facilities
incorporating advanced intelligent network infrastructure.
Recently, additional operators have begun to provide similar
long-distance services (several of them applying VOip
technology).

Aside from the major operators, it is possible to obtain long-
distance services from various additional companies offering
such services, usually at a cheaper rate, over the internet.

Internet

Internet penetration is also growing quickly. Four major, and
about sixty smaller, Internet service providers serve more than
two million users, including 40% of households and 60% of
businesses. Cellular phone companies introduced wireless
Internet during 2001. Bezeq began to offer ADSL services in

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2000 and the cable companies commenced providing
broadband cable modem access shortly thereafter. Broadband
penetration rates are quite promising, and the overall growth
rate during JanuaryAugust 2002 reached 175%.

Israel is a world leader in developing Internet technologies and
applications and Israeli companies operating in the field have
marked several international successes. This international
reputation is also recognised on the domestic market and has
had a substantial impact on local interest and use.

The country's strong tradition of academic inquiry and research
has placed Israel on the global research network for the NGI
(Next Generation Internet), linking Israel to the world's seekers
of scientific and industrial knowledge through StarTap
(Chicago) to the U.S.-Internet 2 Network, through the Point of
Presence (London) to the EU GEANT Network and to Q-Med
(Mediterranean Consortium Quantum Extension)

Broadcasting

Televisionthe multi-channel TV subscriber market
comprises three cable television operators (Matav, Tevel,
Golden Channels), which currently operate as a joint
single operator (HOT) as well as a single DBS (Direct
Broadcasting Satellite) operator (Yes) that commenced
operations in July 2000 using Israels AMOS-1
communications satellite.

Cable TV home-pass extends to 97% of all households
and about 60% thereof constitute subscribers (comprising
1,082,000 cable-connected households). As of
September 2004, approximately 500,000 households
were recorded as subscribers to the DBS service
operated by Yes.

As of November 2001, Israeli television comprised the
national Channel 1 public channel (as well as two other
public channelsthe satellite-delivered Channel 33 and
the Educational TV channel) and one national commercial
channel (Channel 2). A second commercial channel
(Channel 10) was licensed during 2001 by public tender
and commenced operations through cable and satellite in
February 2002. The aforesaid channels form part of a
package provided by the cable companies and the DBS
operator, which also provide additional access to locally-
produced movies, sports and other channels of interest as
well as dozens of foreign offerings.

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Over recent years additional commercial special-interest
TV channel licences for distribution by cable and satellite
were granted by tender. The main channels which
received a licence are: the Israeli news channel, a
Russian-speaking channel, an Israeli music channel as
well as a channel dedicated to religious affairs and
traditions. Tenders for additional commercial special-
interest channels (e.g., an Arabic-speaking channel) are
currently pending.

Radiothere are approximately ten public national
AM/FM radio stations and fifteen commercial local FM
radio stations, licensed by public tender.

Satellites

The AMOS-1 geostationary satellite, located at four degrees
West, began operations in 1996. It was built by Israel Aircraft
Industries Ltd. and uses seven Ku-band transponders, and it is
primarily used for direct-to-home television broadcasting, TV
distribution and VSAT services for customers in the Middle East
and in Central Europe.

A second satellite, the Gurwin-II TechSAT, was launched in
July 1998. This experimental satellite, which was designed and
manufactured, and is controlled by The Technion-Israel Institute
of Technology. The Gurwin-II TechSAT provides
communication, remote sensing and research services.

In December 2003 Spacecom Ltd. launched AMOS-2, which is
co-located with AMOS-1. AMOS-2 provides services via eleven
Ku-band transponders.

ImageSat Ltd., an international consortium headed by Israel
Aircraft Industries Ltd., launched its EROS satellite in 2000.
EROS is a non-geostationary orbit satellite which provides
highly accurate commercial photography and surveillance
services.

Newspapers

The press in Israel is generally free and unbiased. Save for
censorship on certain articles, the publication of which would
harm public interests or whose content is confidential or may
not be published for security reasons, the State does not
usually interfere with the press. In order to publish a
newspaper, one must apply to the Ministry of Interior and meet
and comply with certain regulatory requirements.

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Three main daily newspapers are published in the Hebrew
language (namely, Yediot Aharonot, Maariv and Haaretz). A
financial newspaper (Globes) is also published on a daily basis.
In addition, a relatively large volume of special interest
newspapers and publications (some published daily while
others are published less frequently) are published, including,
periodicals in languages other than Hebrew (namely, Arabic,
Russian and English to serve Israels non-Hebrew speaking
population , and newspapers with content directed to certain
sectors of the community (e.g., the Ultra-Orthodox community,
etc.).

1 1. .8 8. . P Pu ub bl li ic c S Se er rv vi ic ce es s

Describe the public servicesi.e., water, electricity, gas. Are they publicly
or privately owned?

The Israeli government, in principle, favours privatisation of state-
owned companies and public services.

Consequently, privatisation has extended to a significant portion of
Israel's public services, particularly, the education (largely affecting
higher education) and health sectors, as well as to many formerly
State-owned companies (such as banks, etc.).

Notwithstanding the enormous advances in privatisation, the
electricity and water services in Israel still remain largely nationalised
and state-regulated.

Electricity and Natural Gas

In 1996, the Israeli government extended the monopoly of "The
Israel Electric Corporation Ltd." for another ten years, with
private producers permitted to supply 10% of Israels electricity
demand by 2000. De facto, private producers supply only 1%
2% of Israels total electricity consumption. The Israel Electric
Corporation's licence was subsequently renewed in 2009 and is
now valid until January 1, 2011.

It should be mentioned that the electricity market is a closed
market (i.e., Israel does not purchase electricity from other
countries) and the prices of electricity in Israel are determined
by the Authority for Public Services Electricity, a state
authority of five members, two representatives of the
government, two representatives of the public and a chairman.

At present, electricity in Israel is produced mainly from coal
(64.7%) and natural gas (32.6%). It is hoped that both from an

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environmental and cost perspective natural gas will become the
dominant source of electricity in Israel in the future.

Recently natural gas was discovered offshore and it is hoped
that the utilisation of natural gas will indeed bring about an
environmentally friendly means of producing electricity to
replace Israels current To that end, the Israeli government has
implemented a natural gas project to be largely executed by the
private sector (including the purchasing, conduction, distribution
and marketing thereof), although the projects conduction
system will be constructed by means of BOT (i.e., the
entrepreneur will build the system, operate it and thereafter
transfer it to the State).

Israel has also taken strides to diversify its electricity sources
and to utilise alternative mechanisms such as solar and wind
energy.

Currently Israeli Electric Corporation carries out all
manufacturing, delivery and distribution of electricity. Israel
plans to separate the manufacturing, delivery and distribution
operations in the future, and grant separate licenses for each
operation in each specific geographic area. This process is
expected to promote competition in the electricity sector in
Israel.

Water

Mekorot Ltd., Israels national water company, is responsible for
managing the countrys water resources, developing new
sources and ensuring regular delivery of water to all localities
for all purposes. In addition, it maintains water quality through
laboratory testing and biological control and constructs and
operates desalination and fluoridation plants.

Several other water suppliers are responsible for distributing
water to certain restricted areas in Israel.

It should be mentioned that a chronic scarcity of water is a fact
of life in Israel (as well as the entire region), where industry,
agriculture and a rapidly-growing population accustomed to
modern urban living compete for limited resources in a largely
semi-arid environment. Rainfall is not uniformly distributed
throughout the country and the rainy season is short. Water
consumption that stretches the basic supply to the limit has
necessitated construction of an elaborate system of water
storage and distribution and the search for additional water
sources. Due to the scarcity of water, the Israeli government
has issued tenders for the establishment of plants to desalinate

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seawater and, new desalination plants are currently under
construction. Two desalination plants have already been
constructed and provide for about 15% of the Israels water
needs. Furthermore, several measures have been taken in
order to more efficiently take advantage of the rainfall to
increase the quantity of available water in Israel (for instance,
several reservoirs have been constructed in order to
accumulate the rainfall).

2 2. . G GE EN NE ER RA AL L C CO ON NS SI ID DE ER RA AT TI IO ON NS S
3 3

2 2. .1 1. . I In nv ve es st tm me en nt t P Po ol li ic ci ie es s

2.1.1. Does the country generally welcome investment? Are there governmental or
private agencies devoted to the promotion of investment?

Foreign investments are welcomed by both the private sector and the
public sector in Israel.

The Investment Centre (see Chapter 3Investment Incentives)
below), is responsible for encouraging the development of industry
and tourism in Israel.

The Investment Centres main goal is to attract investors (whether
local or foreign) and offers financial assistance to potential companies
by means of, inter alia, subsidised long-term loans (having low
interest rates), direct grants (constituting a percentage of the total
investment and R&D financing), or through tax reliefs and/or tax
rebates. The scope of such benefits is determined by the Investment
Centre according to the percentage by which a specific investors
contribution relates to certain geographical and economic factors
(such as population dispersion, promotion of exports, the area in
which the company is situated and the like). The granting of
Approved Enterprise status (see section 3.1.1 below) to foreign
investments as well as the ensuing benefits, requires the consent of
the Investment Centre.

The Israeli government also encourages foreign investment by
providing R&D grants in accordance with the provisions of the R&D
Law. R&D grants are available from the OCS for a wide range of
projects. The grants are contingent on:

the innovation of the project;

the technological and business risk involved in the project;

3 Some of the information contained in this Chapter 2 was obtained fromthe respective internet sites of the Israeli
Ministry of Foreign Affairs (www.mfa.gov.il) and of the Israeli Ministry of Communications (www.moc.gov.il)

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manufacture of the project being conducted in Israel and the
know-how remaining in Israel (though a company may
manufacture abroad, such manufacture is conditioned upon the
approval of the OCS and obligates the company to pay
increased royalties of up to 300% of the value of the grant); and

with respect to the relevant company: (a) grants previously
obtained by such company; (b) the contribution made by such
company in fulfilling employment needs; (c) its anticipated
exports; and (d) its rate of yield to the Israeli economy.

The OCS will usually require that rights in intellectual property ( IP )
be owned by an Israeli company. Limited licensing agreements,
which do not involve the transfer of IP or manufacture outside of
Israel, may be permitted. If saleable products are developed as a
result of programs which received R&D grants, repayment of the
grant is generally required by way of royalties (see in this regard
section 2.5.3 below).

Technological incubators are spread throughout the country focusing
on providing support to nascent companies in developing their
innovative technological ideas and forming new business ventures in
order to attract private investors. From 2002 to 2008, 22 of 24
technological incubators were acquired by private investors. The
incubators programs offer support of up to 85% of the approved
budget.

The OCS R&D Fund supports industrial competitive R&D programs.
The support is in the form of a conditional grant constituting 20%,
30%, 40% or 50% of the approved R&D budget. Royalties to the OCS
are due on any income deriving from an R&D program that has
enjoyed government support. The royalty payments are based upon
a percentage of sales up to the repayment of the grant..

Alternative R&D grants may be obtained through numerous funds
specifically established for bi-national cooperation (see
section 3.2.1(c) above).

Israel has also established bi-national funds that provide financial
assistance for qualified R&D projects between partners in Israel and
participating countries (e.g., the US, UK, Singapore, Canada) and, to
this end, has allocated national priority zones for diversified
geographic investments.

In addition, there are over eighty venture capital funds readily
available to assist new business development (up from just one fund
in 1993). Most of the capital in the Israeli funds comes from overseas,
including from leading institutional investors such as Goldman Sachs,
Chase Manhattan, Morgan Stanley and George Soros Quantum

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Technologies, as well as private investors and major global
corporations including telecoms providers such as British Telecom,
Deutsche Telecom and Motorola. Investors in Israel also benefit from
relaxed currency regulations that permit repatriation of funds, thereby
enhancing opportunities for raising capital both in Israel and abroad.

Israels high-tech core competencies are in telecoms, including
cellular and internet technologies and applications, which attract 41%
of the countrys VC investments. It is safe to assume that much of the
15% of investments in software and 8% are also communications
related systems. Other areas in which Israeli start-ups excel include
defence and homeland security systems and solutions,
semiconductors and biomedicine including medical devices with an
emphasis on minimally invasive treatments. A new area of expertise
is cleantech, including water, energy and environmental technologies.

In the first half of 2011, 285 Israeli high-tech companies raised
$1.048 billion of capital, 82 percent above the $577 million raised in
the first half of 2010. The second quarter of 2011 was the best in two
years, with 145 Israeli high-tech companies raising $569 million from
local and foreign venture investors.

As a result of the diversity in providing benefits and other relief to
investors, particularly to foreign investors, Israel has a well-
established presence of multinational companies, such as Microsoft,
Intel, Lucent Technologies, Motorola, IBM, Nortel, Unilever, Sony,
Fuji, Toshiba, Brother, 3Com, Boeing, British Telecom, News Corp.,
Siemens, Samsung, Cisco Systems, Hewlett-Packard and many
others.

Israel is the only country in the world that has entered into free trade
agreements with the USA, the European Union and the EFTA,
Turkey, Canada, the Czech Republic, Hungary, Poland, Slovenia and
other EFTA nations. Additional free trade agreements with other
countries are currently under negotiation (see section 6.1.3 below).
Israel is also party to tax treaties with many advanced industrialised
nations including the US, UK, Canada, France, Germany, Japan and
others (see, in this regard, Chapter 12Tax on Corporations and,
specifically, section 12.11Tax Treaties, below).

Not surprisingly, in proportion to its population, Israel has the largest
number of start-up companies in the world. In absolute terms, Israel
has the largest number of start-up companies compared to any other
country in the world, other than the U.S. (3,500 companies, mostly in
high-tech).

In May 2011, Israel became the 32
nd
country to join the Organization
for Economic Co-operation and Development (OECD), which is an
international organization of countries with developed economies.

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The OECD's mission is to promote cooperation between its members
while maintaining high international economic standards. Israel's
accession to the OECD may increase international recognition of
Israel's government policy regarding regulation, corruption and
property rights protection, and attract foreign investors who rely on
the OECD's seal of approval. Further, OECD membership should
have a positive influence on Israel's credit rating and reduce the costs
of Israel's debt recruitment, turn Israel into a full partner in the
establishment of new international standards, and encourage Israel to
adopt a methodology of collecting data and performing statistical
analysis as a tool for international comparisons and for taking political
decisions.

With respect to Israels credit rating, very recently Israels debt was
upgraded by Standard and Poors from A to A+.

2.1.2. What is the rate of inflation?

Between 2008 and 2010, the average rate of inflation was
approximately 3.5%. In the first six months of this year, the Consumer
Price Index (CPI) increased by 1.9 percent on a seasonally adjusted
basis (which is an annualized rate of 3.9 percent). The main factors
behind the higher index were increases in the prices of food, energy,
and housing (rentals).

During the global recession, the inflation rate was allowed to rise as
the Bank of Israel lowered interest rates to stimulate the economy.
However, by being the first in the West to raise interest rates, the
central bank has shown a willingness to resume combating inflation
as the global economic situation changes,.

2.1.3. Explain any sector exceptions, incentives or restrictions on foreign
investment.

As mentioned above, the Israeli government encourages foreign
investment. There are, however, a few sectors, including
telecommunications and broadcasting, which restrict foreign investors
from holding shares in Israeli companies. In the telecommunications
industry, in order to obtain a licence for certain general activities,
there is often a minority Israeli holding requirement, to which
domestic and mobile national phone carriers in Israel are subject.
While there are no exchange control restrictions on direct or indirect
foreign investment in Israel, reporting requirements apply in certain
cases (see in this regard Chapter 5Exchange Controls below).

Furthermore, if the rights in a long-term lease are to be transferred to
a foreign resident and the lessor thereunder is the Israel Lands
Administration, generally, pursuant to the terms of such long-term
lease, it would be necessary to obtain the consent of the Minister of
Infrastructure to transfer such leasehold rights to the foreign resident.

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2.1.4. Describe de facto restrictions on investment, if any, such as bureaucratic
discretion.

Investment of capital in Israel is not subject to bureaucratic discretion.
However, the granting of Approved Enterprise status to foreign
investments as well as the ensuing benefits (loans, R&D finance and
tax relief), requires the consent of the Investment Centre, as
explained above.

2.1.5. What is the size of the different markets?

As stated in Chapter 4Financial Facilitiesall public companies
whose shares are listed for trade in Israel are listed on the TASE.
The mid-nineties saw a major increase in the volume of trade on the
TASE. Both the peace process and the flourishing high-tech
industries attracted foreign investors.

More than 50 TASE-listed companies are also listed on bourses in
other countries, most notably those of the USA (e.g., the Nasdaq and
New York Stock Exchange). As a consequence of such dual listings,
there has been a considerable increase in such companies investor
base which has resulted in a vast improvement in the overall volume
of shares being traded on the TASE. The number of large-cap
shares has increased substantially in the past decade, mainly due to
privatisation. The stocks of the major Israeli banks and other
companies previously owned by the Israeli government are amongst
the most-liquid in the market.

In 2009, the daily turnover of shares and convertibles on the TASE was $432 million,
$1,035 million of bonds and ETNs, $163 million of T-bills, and
252,000 options and future contracts. Total market cap at the end of
2009 was $189 billion shares and convertibles, $174 billion
government and corporate bonds, and $23 billion T-bills, a total of
$386 billion.
The bonds market is dominated by government bonds and the
involvement of foreign investors in this market is limited.

2.1.6. What types of businesses are conducted in the country?

The major types of businesses conducted in Israel fall under the
categories of industry, construction, transportation,
telecommunications agriculture and tourism. Until the 1980s the
Israeli economy focused mainly on traditional industries; since the
1980s, the economy has undergone a transformation, strongly
influenced by the boost in high-tech and the incessant demand for
optical fibre, broadband, wireless and related technologies, including
devising new methods and applying unique tools (whether comprising
software or hardware) to integrate, improve, enhance and expand,
inter alia, the mobile telephone industry, the provision of more

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improved internet services to Israeli subscribers and the integration
and development of internet-related activities specifically designed for
Israeli subscribers.

Nowadays, Israeli industry is concentrated on manufacturing
sophisticated, high quality products based on technological
innovations. These include, medical electronics, agro-technology,
biotechnology, genetic engineering, telecommunications, computer
hardware and software, solar energy, food processing,
pharmaceutical products and fine chemicals.

In 2010, the Israeli GDP stood at US $104,488 million and investment
in fixed capital amounted to US $24,266 million. Exports (excluding
services) amounted to US $50.9 billion thus constituting
approximately 23% of GDP (43% of industrial exports were related to
hi-tech). Exports comprising services contributed an additional
US $30 billion.

Israel has one of the highest rates of employment in the information
and technology sector ( IT ), as compared to other industrialised
economies, and IT exports have grown exponentially.. R&D
expenditure as a percentage of the GDP was 4.8% in 2008, the
highest such percentage of any country in the world in that year.
Correspondingly, Israels agricultural exports were reduced to under
2% of total exports in 2010 (compared to 60% of total exports during
the 1960s).

Chemicals and plastic formed the largest branch of Israels industrial
production in 2010, at 40%, electrical, electronic & transport formed
26%. Israels real annual percentage rise in industrial production in
2010 (compared to 2009), was 7.8, above France, Italy, the United
States, the United Kingdom, and more.

Until 2000, tourism was a major source of foreign currency earnings,
contributing approximately 3% of the GNP and 8% of total exports,
with an added value of 85%. In addition, the number of persons
directly employed in tourism totalled approximately 50,000. During
the period from October 2000 until mid-2003, the entire tourism
industry was substantially affected by the unrest and unstable political
situation in the region. However, since mid-2003 there has been a
vast increase in the number of tourists visiting Israel.

2 2. .2 2. . D Di ip pl lo om ma at ti ic c R Re el la at ti io on ns s

2.2.1. Explain any established diplomatic relations your country may have.

The State of Israel, established on May 14, 1948 and a member of
the United Nations since 1949, maintains relations with a majority of

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states around the world. Israel maintains diplomatic relations with
approximately 160 countries worldwide.

In addition, Israel has 99 diplomatic missions worldwide, including 75
resident embassies, 19 consulates general, special missions to the
United Nations in New York, Geneva, Vienna (at the Israeli embassy)
and Paris, and a mission to the European Union in Brussels.

The special relationship Israel has with the United States
encompasses mutual economic, political, strategic and diplomatic
concerns. Since the 1970s, Israel has been one of the top recipients
of U.S. foreign aid. While it is mostly military aid, in the past a portion
was dedicated to economic assistance, but all economic aid to Israel
ended in 2007, due to Israel's growing economy. In 2007, the United
States increased its military aid to Israel by over 25% to an average
of $3 billion per year for the following ten year period. . In 2003, on
the heels of the second intifada and a sharp economic downturn in
Israel, the U.S. provided Israel with $9 billion in conditional loan
guarantees made available through 2011 and negotiated each year at
the U.S.-Israel Joint Economic Development Group (JEDG).

Similar systems of government and shared social values, as well as
the long and sometimes tragic history of Jewish communities in
Europe, form the foundation of relations between Israel and the
European countries. Each bilateral relationship is expressed in a
wide range of economic, cultural, scientific, technological and political
activities, as well as by ongoing dialogues maintained with heads of
state, ministers, parliamentarians and public figures through frequent
reciprocal visits.

2.2.2. Give addresses, telephone numbers for the embassies or consulates in your
country
4

In Israel:

the British Embassy is located at 192 Hayarkon Street, Tel-Aviv
(tel: +972 (0) 3 725-1222). The Consular Section is located in
the Migdalor Building at 1 Ben Yehuda Street, Tel-Aviv
(tel: +972 (0) 3 510-0166);

the Canadian Embassy is located at 3/5 Nirim Street, Tel-Aviv
(tel: +972 (0) 3 636-3300);

the French Embassy is located at 7 Havakuk Street, Tel-Aviv
(tel: +972 (0) 3 546-6535);

4 The details listed below apply in respect of the G8 countries only. You may contact our office should you wish
to obtain further details and/or information with respect to other embassies or consulates in Israel.

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the German Embassy is located at 3 Daniel Frisch Street,
Tel-Aviv (tel: +972 (0) 3 725-1222);

the Italian Embassy is located at the Trade Tower Building,
25 Hamered Street, Tel-Aviv (tel: +972 (0) 3 516-1744);

the Japanese Embassy is located at 24 Berkovitz Street, Tel-
Aviv (tel: +972 (0) 3 695-7292);

the Russian Embassy is located at 120 Hayarkon Street,
Tel-Aviv (tel: +972 (0) 3 522-6736); and

the US embassy is located at 71 Hayarkon Street,
Tel-Aviv (tel: +972 (0) 3 519-7364). The US Consulate General
in Jerusalem has offices at 18 Agron Road (tel: +972 (0) 2 622-
7230) and on Nablus Road (tel: +972 (0) 2 622-7230).

2.2.3. Are there prohibitions or restrictions on certain business dealings with the
country?

Apart from prohibitions ordinarily imposed on illegal businesses in
western countries (such as dealing in drugs, slavery, prostitution and
engaging in the trade of woman, etc.), there are very few prohibitions
on conducting business dealings in the country.

For illustration purposes only, engaging, inter alia, in the following
activities is restricted:

Pornography

The Israeli courts have ruled that presentation of pornography
is permitted as part of the right to free speech. However, they
have restricted the scope in which pornography may be
portrayed in Israel.

Thus, the broadcast or publication of pornography in Israel is
limited in certain respects, such as in advertisements, the
restriction of television shows which contain pornographic
material to adults, broadcasting at late night hours only, etc.

Due to a legislative amendment which was recently enacted
into Israeli law (inter alia, as a result of measures imposed by
the ultra-orthodox members of the Knesset), the broadcasting
of pornographic films on designated TV channels has been
banned. However, the Israeli Supreme Court recently ruled that
the broadcasting of the Playboy channel is allowed, based,
largely, on the canon of freedom of speech and, in so doing,
denied the plea filed to prohibit the channels due to its
pornographic content.

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Needless to say, Israeli penal laws restrict the publication of
any profane advertisement involving a minor.

Trade with enemy countries

Israeli law contains restrictions on the entering into of
commercial and/or financial transactions or dealings with any
country which is defined as being an enemy of Israel (whether
or not war is actually being waged between Israel and any such
country at a given time) or with any country with which Israel
does not maintain diplomatic relations or into which country the
import of Israeli goods is prohibited (such prohibition also
extends to citizens of, and companies incorporated in, any such
country or where the supervision of a company is performed by
a person resident of any such country).

You may also refer in this regard to sections 1.4Cultural
Influences/Prohibitions and 1.5Religious Influences/Prohibitions,
above.

2.2.4. Explain any travel restrictions to or within the country.

Tourist visa requirements for entry into Israel vary depending on the
tourists country of origin. The Embassy of Israel maintains a list of
countries whose citizens do not need to obtain a tourist visa for trips
less than three months. Individuals wishing to stay in Israel for longer
than three months must apply for a tourist visa. Individuals travelling
to Israel as students are required to obtain a student visa, which is
valid for no more than one year. People who will be visiting Israel for
official or diplomatic reasons must obtain an official visa from the
Embassy of Israel. The embassy notes that visas must be applied for
in person and that applications cannot be sent through the mail. An
updated list of countries from which citizens are required to obtain a
visa is published in Israel by the Ministry of Interior (see
section 16.1.3 below).

Due to the large number of foreign workers entering Israel illegally in
search of employment possibilities, the Israeli border police often
question visitors from certain countries on their intended activities
during their stay in Israel. Also upon leaving the country, a security
check is conducted to prevent hijacking, etc.

Travel in Israel may be restricted on security grounds. For example,
the US Department of State issued an official Travel Warning on
August 10, 2010, urging all US citizens travelling to Israel or the West
Bank, including journalists, aid workers and government officials, to
avoid travelling into the Gaza Strip. The border region is considered
volatile and dangerous.

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2 2. .3 3. . G Go ov ve er rn nm me en nt t

2.3.1. Explain your countrys election system and schedule.

Israel is the only democracy in the Middle East. The electoral system
of Israel is based on nationwide proportional representation and the
number of seats which each party receives in the Knesset is
proportional to the number of votes cast in favour of that party. The
Knesset elections take place once every four years, or earlier if the
Knesset so directs.

The leader of the party receiving the most Knesset seats is given the
first opportunity to form a government and becomes the Prime
Minister if he/she succeeds. To form a government, a party must
have the support of the majority of the 120-seat Knesset.

The central election committee, headed by a justice of the Supreme
Court and including representatives of the parties holding Knesset
seats, is responsible for conducting the elections. Regional election
committees oversee the proper functioning of local polling
committees, which include representatives of at least three parties in
the outgoing Knesset. The entire country constitutes a single
electoral constituency and all citizens, age 18 and over, are eligible to
vote. In every election to date, between 77% and 90% of all
registered voters have cast their ballots, expressing the great interest
taken by most Israelis in national politics.

The contest in the elections is between lists of candidates. Since the
Parties Law was passed in 1992, only a party which has been legally
registered with the Registrar of Parties or an alignment of two or more
registered parties, which have decided to run in the elections
together, may participate in the elections. The two main traditional
parties, Labouressentially social-democratic; and Likud
substantially national-liberal, have historical roots and traditions
preceding the establishment of the State of Israel in 1948 and both
began to crystallise into their present forms in 1965. In 2005, Kadima
(see more below, in 2.3.2), a new centrist and liberal political party
was established by moderates from Likud and was soon joined by
like-minded Labour politicians. It quickly became the largest party in
the Knesset after the 2006 elections, winning 29 of the 120 seats,
and led a coalition government. Although Kadima also won the most
seats in the 2009 elections, it became an opposition party for the first
time after a Likud-led government was formed.

Prior to elections, each party presents its platform and a list of
candidates in order of preference, determined through various
internal procedures; candidates must be Israeli citizens over the age
of 21 years. The President, State Comptroller, judges and other

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senior-ranking public officials, as well as the Chief-of-Staff and other
high-ranking military officers, are disqualified from presenting their
candidacy, unless they have resigned from their respective positions
at least 100 days before the elections.

2.3.2. Briefly explain your countrys political history in the last decade.

Over recent years, the stability of the Israeli government has been
affected mainly by the security situation as well as by Israeli-
Palestinian peace negotiations .

In 1999, a premature election was held in Israel and Ehud Barak, of the Labour party,
was elected as Prime Minister. During Mr. Baraks tenure (May 2000)
Israel withdrew from the 'Security Zone' in southern Lebanon, where
Israeli troops and Hezbollah guerrillas had been lobbing artillery at
one another for decades. Mr. Baraks efforts to reach a final peace
agreement with the Palestinian Authority were rejected by the
Palestinians and since October 2000, Israel has experienced ongoing
terrorist attacks, shootings and other atrocities at the hands of the
Palestinians. Palestinian suicide bombers have killed and wounded
scores of civiliansat open markets, in restaurants and on public
transport. More than eight hundred Israelis have been murdered in
terrorist attacks and the country is in the throes of its own war
against terrorism.

In light of widespread public discontent with Baraks government, a
special election was held in July 2001. In this election, Ariel Sharon
defeated Barak and was appointed Prime Minister. Mr. Sharon was
re-elected Prime Minister in January 2003.

Following the death of the Palestinian leader, Yasser Arafat, in
November 2004 and the appointment of Abu Mazen as his successor
as Chairman of the Palestinian Authority, the optimism for peace in
the region was renewed.

In 2004, Prime Minister Sharon proposed a unilateral disengagement
plan to evict all Israelis from the Gaza Strip and from four settlements
in the northern West Bank. Despite the fact that many of his partys
(Likud) Knesset members did not support the disengagement plan, it
was nevertheless enacted in August 2005. Those Israeli citizens who
refused to accept government compensation packages and
voluntarily vacate their homes prior to the August deadline were
evicted by Israeli security forces over a period of several days.

Subsequent to the enactment of his plan, Sharon left the Likud in
November, 2005 and formed his own new Kadima party. He was
joined only days later by Shimon Peres, who left the Labour party to
join Sharon in a bid for a new government. This represented a

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significant realignment in Israeli politics, with the former right and left
joining in a new centrist party with strong support.

In January, 2006 Prime Minister Sharon suffered a massive stroke
and went into a coma, in which he still remains. Designated Acting
Prime Minister Ehud Olmert took power, becoming interim Prime
Minister. Following March 2006 elections, Kadima became the largest
party in the Knesset, and Mr. Olmert became prime minister.

Later on in 2006, a 34-day military conflict in Lebanon, northern Israel
and the Israeli-occupied territories, commonly referred to as the
Second Lebanon War, broke out. The principal parties in the conflict
were Hezbollah paramilitary forces and the Israeli military. The
conflict started in July 2006, and continued until a United Nations-
brokered ceasefire went into effect in August/September 2006.

Faced with internal opposition due to mounting corruption charges,
Olmert announced that he would not seek re-election. Tzipi Livni won
the Kadima leadership elections and Kadima went on to win slightly
more votes than Benjamin Netanyahu's Likud in the subsequent
February 2009 elections. However, Ms. Livni was not successful in
forming a coalition majority government, and in March 2009, the
Knesset approved the appointment of Mr. Netanyahu as Prime
Minister. He is still in office.

2.3.3. The countrys judicial system.

2.3.3.1. General Overview

The judicial system in Israel is divided into two main categories:
one, comprising the general law courts and the other
comprising tribunals and other authorities having judicial
powers.

Israel employs a single system of general law courts. The
Basic Law: The Judiciary, establishes a three-tier court system,
as follows:

The Supreme Court
District Courts
Magistrates Courts

The Supreme Court is an appellate court which also functions
as the High Court of Justice. Israel does not employ a jury
system.

Other types of tribunals which have been established in Israel
to regulate issues and/or disputes in a specific area of law,
include:
trial courts

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Family Courtswhich have the authority to deal with
disputes relating to family law and related matters;

Labour Courtswhich have the authority to deal with
labour law and related issues, to make decisions with
respect to collective agreements and extension orders in
Israel, as well as to handle employment disputes
between, inter alia, employers and employees;

Antitrust Tribunalwhich has the authority to exempt or
approve restrictive arrangements and to rule on
applications submitted by the Antitrust Controller with
respect to monopolies and mergers as well as on
applications seeking injunctive relief in connection with
the aforegoing. In addition, the Antitrust Tribunal serves
as a court of appeals to which considers appeals of the
Antitrust Controllers decisions with respect to the
approval or exemption, as applicable, of restrictive
arrangements, mergers and monopolies;

Religious Courtswhich mainly deal with marital and
divorce issues and whose jurisdiction is subject to the
religious convictions of the parties to the dispute; and

Patents, Designs and Trade Marks Officewhose
principal function is to facilitate the protection, in Israel, of
intellectual property rights by the grant of patents and the
registration of designs, trade marks, appellations of origin
and geographical indications, to applicants entitled to
such protection, in accordance with the relevant
intellectual property laws. The Registrar in charge of the
above office has the authority, inter alia, to hear
arguments raised by applicants against decisions of the
examiners, as well as to rule on oppositions to the grant
of patents and trade marks and on applications for the
cancellation of registered patents and trade marks.

2.3.3.2. Is the judicial system generally perceived to be impartial?

The Israeli judicial system is independent and impartial.

2.3.3.3. Must disputes be resolved in the country?

Broadly, the basic principle of Israeli law is that the Israeli
courts have territorial jurisdiction and the authority of the courts
is not contingent upon the parties' consent, subject to the
possibility of serving a party with court documents. Service of
court documents outside the jurisdiction of the Israeli courts

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requires the permission of the court. If such permission is
granted, then the court would also have authority to adjudicate
the case.

However, where an agreement contains an exclusive
jurisdiction clause designating a foreign jurisdiction, then the
Israeli courts will generally decline to exercise jurisdiction,
based on the principle that the parties agreement is controlling.

It should be emphasised that the Israeli courts may decline to
exercise jurisdiction based on the existence of a choice of
forum clause only if such clause is exclusive. In deciding
whether a choice of forum clause is exclusive, the courts
generally give significant weight to the wording of the clause.
The Israeli courts have ruled in the past that an exclusive
jurisdiction clause must be explicit and clear. Preferably, such
clause should be drafted in active language (i.e., "all claims
shall be submitted") rather than in the passive form ("the foreign
courts shall have the jurisdiction"). In addition, it is preferable
for an exclusive jurisdiction clause to mention not only the
designated jurisdiction, but also to state, specifically, the denial
of the jurisdiction of any other forum.

It should be noted that even where an exclusive jurisdiction
clause exists, the Israeli courts are still competent to exercise
their powers and to try the matter. However, this will be done in
exceptional circumstances only, i.e., where the Israeli court is
convinced that the agreed forum constitutes forum non
conveniens or where it is convinced that trying the matter in the
agreed forum would cause grave injustice to one of the parties.

2.3.3.4. Is there a political method of resolving disputes?

No.

2.3.3.5. Are alternative methods of dispute resolution permitted?

Alternative methods of dispute resolution include primarily
arbitration and mediation and such methods are becoming
increasingly acceptable. Furthermore, the courts are now more
inclined to propose mediation to resolve a dispute and to
encourage parties to agree that the court rule without giving full
reasons (namely, by way of compromise).

2.3.3.6. How long does it take to resolve disputes?

Litigation in Israel tends to be slow, due to considerable backlog
and frequent delays. Nevertheless, applications for provisional

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orders, including provisional injunctions, are heard and
determined on an urgent basis.

2.3.3.7. Can foreign judicial decisions be enforced in the country?

Foreign judgments may be enforced in Israel provided that:
(a) the court which rendered the judgment was competent to
render the judgment according to the laws of the state of the
court and the judgment is enforceable in the country in which it
was given; (b) the judgment is final, and no longer subject to
appeal (in exceptional cases, interim judgments can also be
enforced); (c) the obligation pursuant to the judgment is
enforceable according to the general laws of enforcement in
Israel and its content is not contrary to public policy (in Israel);
and (d) the requirement of reciprocity between the courts is
met, in other words, that judgments granted by Israeli courts are
enforceable in the country in which the foreign judgment was
granted.

2.3.3.8. Can decisions from the country be enforced outside the country?

Enforcement of decisions of the Israeli courts outside of Israel
depends on the local law of the jurisdiction where enforcement
is sought.

2.3.3.9. Are there separate tribunals depending upon the subject-matter of the
case?

See section 2.3.3.1 above.

2.3.3.10. Are there different legal systems within the country or its political
subdivisions?

No.

2.3.3.11. Can the investor choose to be subject to the countrys jurisdiction or
not?

Only to a certain extentsee section 2.3.3.3 above.

2.3.4. Explain your countrys legislative system.

The legislative body in Israel is the unicameral Knesset. The initiative
for a bill may come from the Israeli government, Knesset members or
its committees. In order to be adopted, a bill must be supported by a
majority vote in three readings. Israel has enacted eleven basic laws
concerning the President of the State, the Knesset, the Government,
the Judiciary, the Israel Defence Forces, Jerusalem, Israel Lands, the
State Comptroller, the Economy, Human Dignity and Liberty and

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Freedom of Occupation. In a very limited number of cases, acts of
legislation have been set aside by the courts on the grounds that they
do not comply with the basic laws.

2 2. .4 4. . E En nv vi ir ro on nm me en nt ta al l C Co on ns si id de er ra at ti io on ns s

2.4.1. What is the public/government attitude towards environmental regulation?

Israel has wide-ranging legislation designed to promote protection of
the environment, including laws, regulations, administrative orders
and by-laws.

Israels environmental legislation encompasses, inter alia, laws for
the protection of air and water, laws for the safe treatment of
hazardous substances, magnetic and electronic fields and solid
waste, laws for encouraging recycling and the reduction of solid
waste disposal and laws for the prevention of environmental
nuisances such as noise and smell.

Largely, the primary environmental laws include the Water Law and
regulations enacted thereunder, the Nuisances Law and regulations
enacted thereunder, as well as the Maintenance of Cleanliness Law.

During the last few years, public debate on environmental issues has
become significantly more prominent in Israel and has been one of
the motives for the governments proactive stance in the
environmental arena.

In 1988, the Israeli government established the Ministry of
Environmental Protection, to implement the governments
environmental protection policy. The Ministry of Environmental
Protection is responsible, first and foremost, for formulating and
implementing a comprehensive national environmental policy,
developing and updating legislation and standards and setting
priorities in the field of environmental protection.

The Ministry of Environmental Protections goals are, inter alia, to
minimise air pollutant emissions, to reduce solid waste disposal, to
rehabilitate natural resources, to prevent and reduce population
exposure to environmental nuisances, to reinforce the countrys
ability to confront and adequately deal with climate changes and pest
outbreaks and to promote environmental education and awareness.

For this purpose, among many other actions which had been taken
over the last few years, Israel enacted several environmental laws
that reflect some of the global trends in environmental legislation.

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The Clean Air Law, for instance, which is intended to regulate the
treatment of air pollution, is a new comprehensive law that entered
into force in January 2011. Another significant law recently enacted
in Israel is the Packaging Law, which imposes direct responsibility on
manufacturers or importers for the collection and recycling of
packaging, as more fully detailed in section 2.4.2 below. In 2007 the
Non-Ionizing Law entered into effect, whose objects and purposes
are similarly described in section 2.4.2 below. In addition, the Israeli
government recently adopted a resolution to increase electricity
production from renewable energy sources such as solar, biomass
and wind energy systems.

In addition to the above-described legislation, the Ministry of
Environmental Protection has also implemented various initiatives
with respect to environmental matters, including:

In November 2005, the Standards Institution of Israel published
Israel Standard 5281, which is Israels first green building
standard for office and residential buildings with reduced
environmental impact. At the request of the Ministry of
Environmental Protection, the Standards Institution of Israel is
currently working on issuing an upgraded green building
standard, which is to include a minimum mandatory threshold
for all buildings in Israel, while other recommendations for
green building are to remain voluntary. The new upgraded
standard is due to be published during 2011.

In January 2010, the Ministry of Environmental Protection
initiated a vehicle scrapping program which is aimed at
encouraging the transfer of old and fuel inefficient vehicles for
scrapping, thereby contributing to air pollution reduction in
Israel. Pursuant to the program, owners of old cars with a valid
car registration, are able to deliver their vehicles to one of six
authorised scrapping sites that have been opened in Israel, and
receive compensation for parts that are transferred for
recycling.

The Clean Coast Program was initiated by the Ministry of
Environmental Protection several years ago, for the purpose of
assisting local authorities with cleaning unspoilt beaches within
their jurisdiction. The program combines routine cleanups by
local authorities with educational programs aimed at increasing
the public awareness of the importance of maintaining clean,
unspoilt beaches.

Israeli law takes the violation of environmental laws seriously.

Breach of environmental laws and regulations, in most cases,
constitutes a criminal offence and several sections of the Penal Law

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are devoted solely to environmental offences, such as water and air
pollution.

The Polluter Pays Law, enacted in Israel in 2008, allows the courts to
impose heavy penalties on environmental offenders, in addition to the
imprisonment sanction that exists for many environmental offences.
In addition to penal sanctions, the Polluter Pays Law empowers the
authorities to impose pecuniary sanctions on environmental
offenders, without requiring any legal proceedings.

In the case of companies, liability is imposed on the actual company
as well as on its responsible office holders.

Furthermore, many environmental laws provide citizens and non-
governmental bodies with the power to initiate proceedings against
environmental offenders, by filing private criminal complaints.

It should also be noted that with regard to many environmental
criminal offences, an accused having taken all the appropriate
measures in his power, beforehand, to prevent the environmental
harm being caused is a good defence to possible criminal liability.

The defences available to an accused are either expressly set forth in
the relevant environmental law, unless the offence is classified as a
strict liability offence, as are most environmental offences. Examples
of the available defences are set out in the Water Law, the
Maintenance of Cleanliness Law, the Nuisances Law and the Clean
Air Law.

Recently, Israel has witnessed a growing trend of class actions with
concerning environmental nuisances such as air and water pollution.
This development stems from the Class Action Law enacted in 2006,
enabling a large group of individuals to join together and file an
action, seeking relief for environmental nuisances.

In addition, at the beginning of December 2010, the Knesset (the
Israeli parliament) enacted new regulations, obliging companies
whose shares are listed for trading on an approved stock exchange
(i.e., public companies) to disclose in their annual reports to the
Israeli Securities Authority, their activities that have or may have an
environmental effect, and the environmental risks to which the
company may be exposed. The rationale underlying such disclosure
is that implementation of the regulations is expected to result in
greater management and responsibility being taken by companies
with respect to environmental issues, inter alia, the obligation to
disclose a companys risk management policy.

The above regulations reflect a new tool that has been employed to
highlight the importance of environmental matters and to prevent

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environmental nuisances by companies. This tool differs from the
more common criminal and administrative enforcement measures
adopted to regulate companies.

2.4.2. Explain any environmental regulations; is the business of the investor
subject to environmental regulation?

The Nuisances Law is one of a few major pieces of environmental
legislation that was enacted in Israel and which, largely, permits
plaintiffs to file lawsuits on matters pertaining to air pollution, noise
and smell.

The Nuisances Law has been amended over the years and the
prohibitions contained therein have correspondingly widened.

Subsequent to its enactment of the Nuisances Law, the Knesset
enacted the Nuisances Claims Law, which deals largely with issues
not expressly included in the Nuisances Law, such as water,
radiation, waste and hazardous substances.

Another major piece of environmental legislation is the Water Law,
enacted in 1959. The Water Law establishes the framework for the
control and protection of Israels water resources. Numerous
regulations have been promulgated pursuant to the Water Law.
Further, the Water Law and its regulations deal with the prevention of
sewage and effluent discharge into water sources and, indirectly,
regulate the issue of ground pollution.

Examples of some water regulations enacted include: Water
Regulations (Prevention of Water Pollution) (Gasoline Stations), 1997
and Water Regulations (Prevention of Water Pollution) (Fuel
Pipelines), 2006.

The Maintenance of Cleanliness Law, which entered into force in
1985, repealed the former law that was enacted in 1976. The
provisions of the Maintenance of Cleanliness Law and its regulations
reinforce the awareness of proper waste disposal and impose
criminal and administrative sanctions as a means of efficient
enforcement.

In addition to these fundamental laws, comprehensive legislation and
regulations on various aspects of environmental protection have also
been adopted and incorporated into the relevant Israeli legislation.

Below are a few examples of major laws and regulations whose
provisions are intended to ensure protection of the sustainability and
quality of the environment:

Air Pollution

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The Clean Air Law, which entered into force in January 2011, is
a new comprehensive law designed to regulate air pollution in
Israel.

In Israel, as elsewhere in the world, rapid technological
development, improvement in standards of living and increased
population density have brought in their wake pollutant
emissions from both stationary and mobile sources. Israels
specific conditionsconcentration of population and industry in
the coastal area, small land area, variety of natural assets and
singular geological, topographical and climatic features
aggravate the problems of air pollution. The rapid emergence
of industrial plants in the vicinity of urban centres, coupled with
a dramatic increase in the number of motor vehicles, has
exacerbated air pollution problems throughout the country.

The Clean Air Law, which has been described as one of the
most complex and innovative environmental laws passed in
Israel, is intended to bring about an improvement of air quality
and decrease air pollution, inter alia, by setting prohibitions and
duties in accordance with the Precautionary Principle.
According to the Clean Air Law, industrial plants with high air
pollution potential, including, inter alia, large-scale energy
industries, metal production and processing industries, mineral
and chemical industries and waste management businesses, as
specified in the Appendix to the Clean Air Law, require an
emission permit from the Ministry of Environmental Protection.

The Clean Air Law provides, inter alia, that by January 2012,
the Israeli government shall approve a national program for air
pollution reduction and prevention. This program will enable
Israel to comply with international environmental standards. In
addition, the Clean Air Law sets stringent means of
enforcement against plants violating its provisions, including
injunctions against air pollution, administrative financial
sanctions amounting to hundreds of thousands of NIS, and in
some cases, imprisonment.

Section 38 of the Clean Air Law provides that sellers and
marketers of new vehicles are obliged to advertise data
regarding the level of air pollution emitted from the vehicle and
the vehicles fuel consumption. The Clean Air Regulations
(Disclosure of Air Pollution Data from a Motor Vehicle in an
Advertisement), enacted in 2009, specify the method of
calculation of air pollution, as well as the exact manner and
form for presenting the required data in advertising material,
pursuant to Section 38 of the Clean Air Law.

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Another means of prevention and reduction of air pollution
recently implemented in Israel concerns the introduction of tax
incentives for clean vehicles whose pollution emissions are
significantly low. The Israeli green tax reform, which became
effective in August 2009, sets out tax incentives, based on the
level of pollution emitted by new vehicles. In the framework of
the reform, taxes imposed on clean vehicles, which emit
reduced levels of pollution, are significantly lower than those
imposed on new vehicles with relatively high levels of air
pollution. Indeed, since the new tax rules went into effect,
Israel has witnessed an increase in sales of clean cars.

Renewable Energy

In January 2009, the Israeli government set guideline targets for
the encouragement of renewable energy, particularly in the
regions of the Negev and the Arava, which enjoy high levels of
solar radiation and comprise of vast open spaces. Broadly, the
government resolution provides that electricity production from
renewable energy sources such as solar, biomass and wind
energies shall constitute 5% of the electricity consumption in
Israel by 2014, and 10% of the electricity consumption in Israel
by 2020. Following the resolution, in December 2010 the Israeli
government approved a national land planning program,
designed to prescribe directives for the installation of
photovoltaic devices in order to encourage the use of solar
energy for electricity production.

Another means of encouraging the use of renewable energy
which was recently implemented in Israel, is through the grant
of financial benefits. An example of this is an amendment made
in 2009 to the Capital Investments Law, which provides certain
financial benefits to plants whose main area of activity is
renewable energy.

Solid Waste

Solid waste disposal has been a grave problem in Israel, a
country with meagre land resources and an ever-increasing
population. Solid waste disposal takes up valuable landfill
space, using up precious land resources and leading to
increased emission of greenhouse gases.

As part of the efforts to reduce solid waste disposal, Israel
enacted regulations designed to prevent air and olfactory
pollution. Indictments issued to operators of improperly run solid
waste sites have resulted in court sentences carrying stiff fines
and, in many cases, legal proceedings have led to the closure
of polluting landfills.

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Over the last few years, many illegal landfill sites have been
shut down so that waste is generally transferred to a few
authorised central landfills which fully comply with the most
stringent environmental requirements.

In addition, Israels current policy calls for a shift from landfilling
to an integrated treatment of solid waste based on re-use,
recycling, incineration and landfilling.

As mentioned above, one of the most significant laws enacted
in Israel based on this new policy is the Packaging Law, which
was confirmed by the Knesset (the Israeli parliament) in
January 2011, and whose objects are to reduce the waste
transferred for landfilling and increase the re-using and
recycling of packaging.

The Packaging Law imposes direct responsibility on
manufacturers or importers for the collection and recycling of
packaging that they produce or import, including requiring them
to bear the full costs of such collection and recycling activities.
The Packaging Law applies to packaging made of different
materials and covers a wide range of products (both household
and industrial), including paper, glass, plastic and metal. Under
the Packaging Law, local authorities will be required to make
arrangements for the separation of waste into two streams (wet
and dry) and the Ministry of Environmental Protection will
finance the establishment of waste sorting and recycling
infrastructure in all localities. Failure to comply with the
Packaging Law will result in the imposition of financial
sanctions.

Non-Ionizing Radiation

The Non-Ionizing Radiation Law, which, as mentioned above,
came into force in 2007, is aimed at protecting the public and
the environment from the effects of exposure to non-ionizing
radiation. The Non-Ionizing Radiation Law regulates the
installation and operation of all non-ionizing radiation sources,
including cellular networks, radio and television antennas, and
electricity networks, and determines duties and prohibitions in
accordance with the Precautionary Principle. The Non-Ionizing
Radiation Law prohibits the installation and operation of a non-
ionizing radiation source without first obtaining the appropriate
permit from the Ministry of Environmental Protection. A permit is
also required under the Non-Ionizing Radiation Law in order to
provide radiation measurement services. Penal and
administrative sanctions are imposed on any person installing
or operating a radiation source without the appropriate permit,

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and in the case of companies, both the company and its
responsible office holders will be held accountable.

Hazardous Substances

The Hazardous Substances Law is aimed at protecting the
environment and public health from damage resulting from use
of poisonous materials. The Hazardous Substances Law
prohibits, inter alia, any commercial activity which involves
poisonous materials, including the handling, marketing,
transportation, import and export thereof, without possessing an
appropriate poison permit.

Sea and Water

Israel signed the Barcelona Treaty in 1976 and subsequently
signed all of the relevant protocols relating thereto, all of which
have been incorporated into Israeli law. In addition, many
consequential laws were enacted to protect the quality of water
and prevent pollution of the sea, such as: the Water Law, the
Streams and Springs Authorities Law (appointing an authority to
oversee and ensure the maintenance and preservation of
Israels rivers and springs), the Seawater Oil Pollution Law and
the Prevention of Sea Pollution Law.

In addition, in order to implement the Barcelona Treaty, in 1998
the government of Israel appointed the Ministry of
Environmental Protection to formulate and implement a
National Contingency Plan for Preparedness and Response to
Marine Oil Pollution. To that end, the Ministry of Environmental
Protection has initiated legislation designed to regulate the
National Contingency Plan for the prevention of sea pollution by
requiring various authorities to prepare themselves for dealing
with sea pollution and by granting access and inspection
powers to the sea and coast inspectors employed by the
Ministry.

Nature Conservation

The Israeli legislation contains several laws designed to protect
nature reserves and open spaces:

The National Parks and Nature Reserves Law ensures
the protection of natural habitats, natural assets, wildlife
and sites of scientific and educational interest.

The Forests Ordinance, enacted during the British
mandate in Israel, is designed to protect the forests and

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contains a long list of actions prohibited in areas
designated as forests.

The Coastal Environment Protection Law, which came
into force in 2004, is aimed at protecting and preserving
the coastal environment and establishing principles and
limitations for the sustainable management, development
and use of the coastal environment. The Coastal
Environment Protection Law imposes penal sanctions on
individuals, companies and their responsible office
holders, for damaging the coastal environment.

In addition to laws and regulations focusing on specific
environmental matters, such as those discussed above,
environmental considerations have also been incorporated into
the Planning and Building Law and the Licensing of Businesses
Law, both of which may impact potential business in Israel at
their early planning and building stages.

As a result, business licenses granted under the Licensing of
Businesses Law may contain special environmental conditions
and restrictions according to the particular business being
licensed. Similarly, planning and building permits granted by the
relevant local licensing authority, may contain unique and
specific environmental conditions.

For example, the Clean Air Law has lead to the enactment of
certain amendments to the Planning and Building Law,
pursuant to which certain requirements of the Clean Air Law
have since been incorporated into the Planning and Building
Law. In addition, the Clean Air Law empowers the Minister of
Environmental Protection to set rules, standards and emission
thresholds for granting planning and building permits under the
Licensing of Businesses Law to businesses operating an
emission source.

Moreover, the Planning and Building Regulations require the
preparation of an environmental-impact survey with respect to
development plans for certain types of establishments, such as
power stations, refineries, harbours, airports, hazardous waste
sites, as well as other plans which may significantly impact the
environment. The Planning and Building Regulations further
empower the relevant planning institution to require the
preparation of an environmental-impact survey in other
appropriate circumstances. The purpose of the survey is to
ensure that environmental considerations are taken into
account during the planning institutions decision-making
processes.

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Ground

On January 16, 2011, the Ministerial Committee on Legislation
approved the bill for enactment of the Contaminated Lands
Law. The aim of the proposed law is to protect, nurture and
preserve the land as a resource for the benefit of the public,
future generations and the environment and to prevent and
minimise its contamination, inter alia, through the regulation of
provisions on pollution prevention, the performance of tests and
surveys, the nurturing and disposal of contaminated land as
well as the imposition of criminal and administrative sanctions.

2 2. .5 5. . I In nt te el ll le ec ct tu ua al l P Pr ro op pe er rt ty y

2.5.1. Describe the law for the protection of intellectual property, including trade
marks, copyrights, patents and know-how.

2.5.1.1. P Pa at te en nt ts s

(a) Legislation
The protection of patents is governed by the Patents Law,
as well as by secondary legislation in the form of various
Patent Regulations.

(b) Nature of right
A patent is granted for an invention, whether a product or
a process, which is new, useful and appropriate for
industrial use and which involves an inventive step (i.e.,
non-obvious to a man skilled in the art). An invention is
deemed new, in general, if, prior to the date of filing the
relevant patent application therefor, it has not been
published in any manner whatsoever, whether in Israel or
abroad. Patents will not be granted for a method of
therapeutic treatment of the human body and for varieties
of plants or animals, except for microbiological organisms
not derived from nature.

(c) How protected
Patents are protected by registration at the Israel Patents
Office, based on examination.

(d) Length of protection
Generally, patents are granted for twenty years
commencing from the date of filing the patent application.
Patents of addition are granted for the period remaining in
the main patent.

(e) Patent term extension

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Subject to certain conditions being met (see
paragraphs (1)(8) below), an extension beyond the
statutory twenty-year patent term may be obtained for a
Basic Patent (as defined below).

Type and number of patents, which can be extendedan
extension order can be granted only with respect to a
Basic Patent. In general, a Basic Patent is a patent
that protects a material (generally, the active component
of a medical preparation) (both of which terms are defined
in Section 64A of the Patents Law Material and
Medical Preparation , respectively), a process for the
production of a Material, the use of a Material, a Medical
Preparation that incorporates a Material or a process for
the production of such Medical Preparation, or medical
equipment for which licensing is required in Israel.

Deadline for submission of term extension application
the application for extension should be filed not later than
ninety days after marketing approval for the Medical
Preparation has been granted by the Ministry of Health.

Length of term extension and limits on termAn
extension order of the Basic Patent shall be valid for a
period equal to the extension afforded to the Reference
Patent (as such term is defined below), in a country which
is listed in the first annex to the Patents Law ( a
Recognised Country ).
5
A Reference Patent is a
patent which protects the same Material as that protected
by a Basic Patent using any of the forms of protection
conferred on a Basic Patent in respect of such Material
(i.e., the Material itself, use of the Material, any process
for the production of the Material, etc.). If an extension
has been granted in several Recognised Countries, the
extension period granted in Israel will be the shortest of
such extension periods. In the event the licence was
applied for in Israel only, the term of the extension order
shall be for a period equal to the period commencing on
the date of filing the application for marketing approval
until the date it is granted, provided that such application
was submitted promptly and dealt with both expeditiously
and in good faith.

In any event, the term of the extension order may not
exceed five years beyond the twenty-year term. The
Patents Law further provides that the overall period of the
Basic Patent and the extension order pertaining thereto

5 The list of countries includes: Australia, Iceland, J apan, Norway, Switzerland and the USA.

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shall terminate no later than fourteen years from the date
on which the first marketing approval for the Medical
Preparation which includes the Material or the medical
equipment, covered by such Basic Patent, was granted in
a Recognised Country. Moreover, the extension order
shall expire no later than the first date of expiry of the
extension period granted to the Reference Patent in a
Recognised Country.

Conditions for grant of an extension orderthe Patents
Law provides that the Registrar of Patents will grant an
extension order only upon fulfilment of the following
conditions t:

(1) The Material, the production process or use thereof,
a Medical Preparation containing such Material or a
process for the production of such Medical
Preparation or the medical equipment, have been
claimed in the Basic Patent and the Basic Patent is
in force.

(2) With respect to a Medical Preparationa Medical
Preparation containing the Material is registered in
the Registry of Medical Preparations.

(3) The registration according to (2) above is the first
registration which allows use of the Material in Israel
for medicinal purposes.

(4) No prior extension order has been granted in
respect of the Basic Patent or the Material.

(5) In the event that marketing approval has been
granted in the USA for the Medical Preparation, as
defined in (2) above, protected by the Reference
Patent, or for the medical equipment protected by
the Reference Patentif an extension order was
issued in the USA for such Reference Patent.

(6) In the event that marketing approval has been
granted in one or more of the countries listed in
part B of the first annex to the Patents Law
6
for the
Medical Preparation as defined in (2) above,
protected by the Reference Patent, or for the
medical equipment protected by the Reference
Patentif an extension order was issued in one of
those countries for such Reference Patent.

6 The list of countries includes: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxemburg, Netherlands, Portugal, Spain, Sweden and the United Kingdom.

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(7) The application for an extension order has been
filed in good faith.

(8) The scope of protection under the extension order
will not exceed that granted in respect of the Basic
Patent.

(f) Infringement
Any unlawful exploitation of an invention which is the
subject-matter of a registered patent, will be deemed to
be an infringement. The term exploitation of an
invention is defined in Section 1 of the Patents Law and
includes the following:

in relation to an invention which is a productthe
production, use, offering for sale, selling or
importing for the purpose of any of the aforegoing
acts;

in relation to an invention which is a processuse
of the process; and

in relation to a direct product of a processall
activities deemed to be exploitation of an invention
where the subject-matter of the relevant invention is
a product.

Section 1 of the Patents Law also provides that the
following activities shall not be regarded as exploitation
of an invention:

(i) any activity not being on a commercial scale as well
as devoid of a commercial nature;

(ii) experimental acts with respect to an invention for
the purpose of improving an invention or developing
another invention; and

(iii) experimental acts for the purpose of obtaining
marketing approval for the product after expiration
of the patent if the following two conditions are met:
(1) the said use was made for the purpose of
obtaining marketing approval in Israel or in any
other country which permits preparatory steps to be
taken for the purpose of obtaining marketing
approval prior to expiration of the patent; and (2) all
products manufactured within the framework of this
exception will not be used for any purpose other

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than obtaining the aforesaid marketing approval,
either during the patents term or thereafter.

(g) Remedies
The following remedies are available for patent
infringement:

(i) injunctive relief;

(ii) financial compensation (damages/account of
profits);

(iii) in some circumstances, punitive damages;

(iv) delivery-up; and

(v) destruction of goods.

2.5.1.2. R Re eg gi is st te er re ed d T Tr ra ad de e M Ma ar rk ks s

(a) Legislation
The protection of registered trade marks (which protection
also extends to unregistered well-known trade marks) is
governed by the Trade Marks Ordinance and by various
secondary legislation in the form of Trade Mark
Regulations.

(b) Nature of right
Trade marks may be registered for marks comprising
letters, numerals, words, devices or other signs or
combinations thereof, whether two or three-dimensional,
which are used or intended to be used by an applicant in
relation to goods manufactured or marketed by him. A
mark must be distinctive, either inherently or through use,
in order for it to be registered as a trade mark. Service
marks, collective marks and certification marks are also
registrable.

(c) How protected
Generally, trade marks are protected by registration at the
Israel Trade Marks Office, based on examination.
Recently, the State of Israel ratified the Madrid Agreement
Concerning the International Registration of Marks ( the
Madrid Protocol ). Accordingly, as of September 1,
2010, an Israeli citizen or national, or anyone having an
industrial or commercial factory in Israel, may file an
international trade mark application. Such request may
be based on an application or registration of trade mark in
Israel. Similarly, international applications filed by other

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members of the Madrid Protocol may designate Israel as
a country in which the trade mark will be protected. In
addition, trade mark applications may now be filed in
multiple classes.

A well-known trade mark may also be afforded protection,
even if it has not been duly registered. A well-known
trade mark is defined in the Trade Marks Ordinance as a
mark which is well-known in Israel and which is owned by
a person who is a citizen of a member country of the
WTO, or who has a permanent establishment there, even
if the mark is neither registered nor used in Israel; in
determining whether a trade mark is well-known in Israel,
shall include consideration of, inter alia, the degree to
which the mark is known in the pertinent public circles and
the degree to which it is known as a result of marketing
efforts. For the protection provided to unregistered trade
marks, see section 2.5.1.3 below.

(d) Registered users
According to Section 50(b) of the Trade Marks Ordinance
and based on relevant case law, authorisation to use a
registered trade mark shall not be valid (against third
parties) unless it has been registered with the Israel Trade
Marks Office. Use of a trade mark by a person whose
right of use has not been duly recorded, will not be
considered use by the proprietor and, thus, may give rise
to claims of non-use by a third partyentitling such third
party to file an application for the cancellation of such
trade mark on the ground of non-useand also might
lead to dilution of the relevant trade mark.

(e) Length of protection
Registration of a mark is effective for ten years from the
date of filing the relevant trade mark application. As of
September 1, 2010, following the expiry of the initial ten-
year period, the trade mark may be renewed for further
consecutive ten-year periods (rather than the previous
renewal term of fourteen years). However, the expiry
period of trade marks already registered on such date will
not be shortened.

(f) Use requirement
In general, there is no requirement to use the trade mark
prior to filing an application for its registration. However, a
trade mark which is not used is vulnerable to cancellation.
Section 41 of the Trade Marks Ordinance provides that
any person may apply for the cancellation of a trade mark,
if such trade mark was found not to have been used

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within a period of three years prior to the filing such
application. As of September 1, 2010, such application
may encompass all or portion of the classes of the trade
mark for which cancellation is being sought.
Nevertheless, it should be noted that, in the event there
was no bona fide intention to use the trade mark in
connection with the goods in respect of which it was
registered and that in fact no bona fide use was made of
the mark in connection with the goods in respect of which
it was registered, the mark may be cancelled (if an
application to that effect is filed) at any given time.

(g) Infringement
The following constitute acts of infringement by a person
not entitled thereto:

(i) use of a registered trade mark, or of a mark similar
to such trade mark, in relation to goods in respect of
which such trade mark is registered or to goods of
the same description;

(ii) use of a registered trade mark in advertising goods
of the class in respect of which the mark is
registered, or in respect of goods of the same
description;

(iii) use of a well-known mark, even if not registered, or
of a mark confusingly similar thereto, in relation to
goods for which the mark is known, or in relation to
goods of the same description; or

(iv) use of a well-known mark which is registered, or of
a mark similar thereto, in respect of goods which
are not of the same description, provided that such
use indicates a connection between those goods
and the owner of the registered mark and the owner
of the mark is likely to be harmed as a result of such
use.

Generally, when a mark is claimed to be infringing a
registered trade mark and such mark is not identical to the
trade mark, it must be proven that use of the mark may
mislead consumers with respect to the source of the
product bearing the mark. On the other hand, it is
accepted that when the mark is identical to the trade
mark, such proof is not required. However, in certain
comments (in obiter dictum) in judgments, the Supreme
Court questioned whether the likelihood of confusion due
to the allegedly infringing use should be proven for

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identical marks as well. The Court suggested that in
certain circumstances non-misleading use of a registered
trade mark, not being an attempt to gain an unfair
advantage, should not be considered as constituting an
infringement.

Use of a registered trade mark may also lead to criminal
sanction, if such use is done in a commercial manner and
may mislead a person regarding the origin of the product.

It is also a criminal offence to make misrepresentations
with respect to a registered trade mark or to claim that a
trade mark is registered, when in fact it is not.

Criminal liability may also arise for trade mark
infringement committed under the Merchandise Marks
Ordinance. This Ordinance prohibits, inter alia, applying
any false trade description (including, falsely applying a
trade mark) to goods.

(h) Remedies
The following civil remedies are available for infringement
of a registered trade mark:


(ii) damages/account of profits;

(iii) transfer of the goods that were produced by means
of the infringement or that were used as part of the
infringement activities, to the claimant's ownership,
in exchange for the product's value, as if the
infringement had not occurred;

(iv) destruction of goods; and

(v) costs.

Criminal proceedings may be brought by the proprietor of
the registered trade mark by filing a private criminal
complaint, including, if required, a request for a search
and seizure order. A conviction may well result in the
destruction of the relevant goods, including their
packaging materials.

2.5.1.3. U Un nr re eg gi is st te er re ed d T Tr ra ad de e M Ma ar rk ks s

(a) Legislation

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Unregistered trade marks are protected under the
Commercial Civil Wrongs Law, which includes the tort of
passing-off (see reference to passing-off in
section 2.5.1.12 below). Unregistered well-known trade
marks are also protected under the Trade Marks
Ordinance (see section 2.5.1.2(c) above).

(b) How protected
As stated above, a well-known trade mark may be
afforded protection under the Trade Marks Ordinance,
even if it has not been duly registered. Unregistered trade
marks may be protected by the tort of passing-off.

(c) Length of protection
Unregistered trade marks are protected for so long as the
proprietor thereof enjoys goodwill in the mark.

(d) Infringement
See section 2.5.1.12 below.

Criminal sanction may also be imposed under the
Merchandise Marks Ordinance in circumstances that
would give rise to a passing-off action. For infringement
of well-known trade marks see section 2.5.1.2(g) above.

(e) Remedies
The remedies available for infringement of unregistered
trade marks similarly apply for an action of passing-off
(see section 2.5.1.12 below).

For infringement of unregistered well-known trade marks,
the following civil remedies are available:

(i) injunctive relief; and

(ii) costs.

2.5.1.4. R Re eg gi is st te er re ed d D De es si ig gn ns s

(a) Legislation
Registered designs are governed by the Patents and
Designs Ordinance.

(b) Nature of right
The term design is intended to refer to any shape,
configuration, pattern or ornament applied to any article
by an industrial process or other industrial means and
whether manual, mechanical, chemical, separate or
combined which, in the finished article, appeal to and are

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judged solely by the eye, does not include any mode or
principle of construction, or anything which, in substance,
constitutes a mere mechanical device. A design must be
new or original. However, only local novelty is required.
It should be noted that according to a recent circular
published by the Registrar of Designs, during the course
of examining a design application, the examiner may, in
some circumstances, cite a design published on the
Internet as an Israeli publication, against the claimed
novelty of the design.

(c) How protected
Registered designs are protected by registration at the
Israel Patents and Designs Office, based on examination.

Registered designs are protected for an initial term of five
years, which may be extended by two additional periods
of five years each, up to a maximum protection term of
fifteen years.

(e) Infringement
The following constitute acts of infringement of the rights
in a registered design:

(i) attaching the design or any deceitful imitation or
blatant imitation thereof, for selling purposes, to any
object included in the category of merchandise in
which the design is registered, or doing anything
that enables a person to attach the design as
aforesaid, unless the registered owner has
expressly consented thereto in writing; or

(ii) advertising merchandise or offering it for sale,
knowing that the design or any imitation thereof
whether a deceitful or blatant imitationwas
attached to merchandise without first obtaining the
consent of the registered owner thereto.

It is a criminal offence to allege that a design is registered,
when in fact it has already expired, or has never been
registered at all. It is also an offence to make a
misrepresentation with respect to a design in the Register
of Designs.

(f) Remedies
The following remedies are available for infringement of a
registered design:

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(ii) financial compensation;

(iii) liquidated damages (however, this remedy is not
useful as the sum specified in the Patents and
Designs Ordinance has not been updated for many
years);

(iv) delivery-up (no direct authority exists to claim this
relief however it may be available in exceptional
circumstances); and

(v) costs.

2.5.1.5. U Un nr re eg gi is st te er re ed d D De es si ig gn ns s

Generally, no protection is granted to unregistered designs as
such. However, a design not capable of being registered may
enjoy copyright protection. In addition, unregistered designs
may be protected by the tort of passing-off and under the Unjust
Enrichment Law, subject to specific conditions (see the
references to passing-off and unjust enrichment in
sections 2.5.1.12 and 2.5.1.13, respectively, below).

2.5.1.6. C Co op py yr ri ig gh ht t

(a) Legislation
Until 2008, copyright was governed by the Copyright Act,
the Copyright Ordinance and various orders made
thereunder. As of May 25, 2008, the Copyright Act was
repealed and the Copyright Law came into force.
However, some aspects of copyright are still governed by
the Copyright Act, inter alia, infringing acts which occurred
prior to that date and the remedies therefor, determining
the ownership of works made prior to that date and the
transfer of, or licence granted in, copyright prior to that
date. In addition, many provisions of the Copyright
Ordinance were similarly repealed and replaced by
provisions of the Copyright Law.

In general, the Copyright Law does not dramatically alter
the law regulating copyrights per se. However, it has
adapted certain aspects of the law in accordance with the
legislator's view regarding the proper balance between
the conflicting interests of the public and the author, for
example, by expanding the definition of fair use. The
Copyright Law also adapts certain other aspects of the
law so as to ensure the State of Israel's compliance with

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international treaties, for example by including the right of
making available to the public, to the bundle of rights
associated with copyright (based on the WCT Treaty of
1996).

(b) Nature of right
Copyright protection is afforded to the author of any
original literary, dramatic, musical and artistic work fixed
in any form, and to the author of a sound recording (i.e.,
an article that preserves sounds, by allowing them to be
copied or played (e.g., records, tapes, etc.)). The
originality requirement for a work to be protected was
interpreted to be limited in scope; the work should only be
the result of, at least, minimal effort and bear some
original creativity. Literary works include works
expressed in writing, lectures, tables, compilations as well
as computer programs. Dramatic works include plays,
cinematographic works, musical-dramatic works,
choreography, and pantomime. Artistic works include
drawings, paintings, works of sculpture, engravings,
lithography, maps, charts, architectural works,
photographic works and works of applied art.

(c) Moral right
A moral right is afforded an author of a copyrighted work,
other than computer programs. A moral right in relation to
a work vests the author with the right: (i) to have his or her
name identified with his or her work, to the extent and in
the manner appropriate in the circumstances; and (ii) [to
demand] that no distortion, mutilation or other modification
shall be made to his or her work, nor shall any other
derogatory act be committed in relation to the work, where
any such act would be prejudicial to, or harm, his or her
dignity or reputation .

(d) How protected
Copyright emanates from the creation as such and no
registration or affirmative grant is required.

(e) Length of protection
Copyright protection generally exists from the date of the
works creation until seventy years after the death of the
author. Copyright in sound recordings, save for sound
recordings in a cinematic work, endures fifty years from
their creation. The copyright in anonymous and
pseudonymous works is protected for a period of seventy
years from the date of first publication of such works, or
for a period of seventy years from their creation, if such

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works were not published within seventy years of their
creation.

(f) Infringement
The acts that are deemed infringing vary, depending on
the type of work involved. Generally, copyright
infringement occurs by reproducing, broadcasting, making
available to the public, making a derivative work,
publishing an unpublished work or performing in public
the work, or any substantial part thereof, including
transferring it to a different medium. The test for
determining whether the part of the work copied is
substantial, and its copying thus amounts to infringement,
is qualitative, not quantitative.

Indirect copying of a work, which is not protected by
copyright, will not be considered an infringement, even if
works used as an intermediate step in creating such work
(e.g., drawings) are protected by copyright. Nonetheless,
the aforesaid copying may amount to unjust enrichment
(see section 2.5.1.13 below).

Dealing with infringing copies of a work also constitutes
an infringement of copyright, provided that the defendant
knew, or should have known, that the copied work
infringed upon the original work.

There are various fair dealing exceptions to copyright
infringement , which include private study, research,
criticism, review, etc. Other specific activities are allowed
for defined purposes and in certain cases are subject to
royalties.

Certain infringements are also considered criminal
offences, including, inter alia, making an infringing copy of
a work for commercial dealings, importing into Israel an
infringing copy for commercial dealings, etc. The
penalties for such offences range from fines to five years'
imprisonment.

(g) Remedies
The following civil remedies are available for copyright
infringement:


(ii) damages/account of profit;

(iii) liquidated damages;

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(iv) destruction of goods;

(v) delivery-up. In the event the court finds that the
plaintiff might use the infringing copies, it may order
the plaintiff to pay the defendant a sum as shall be
decided by the court; and

(vi) costs.

2.5.1.7. T Tr ra ad de e S Se ec cr re et ts s

(a) Legislation
Trade secrets are protected under the Commercial Civil
Wrongs Law.

(b) Nature of right
Trade secrets are protected, generally, provided that the
information: (i) is not generally known or readily
accessible; (ii) grants its owner a commercial advantage
over its competitors, due to its secrecy; and
(iii) reasonable measures have been taken to protect its
secrecy.

(c) How protected
Trade secrets are protected as such and no registration or
positive action is required.

The protection will remain for so long as the trade secret
continues to fall within the definition of such term in the
law (see paragraph (b) above).

(e) Infringement
Infringement upon a trade secret may occur if the trade
secret is obtained by undue means or is improperly used
or published. The Civil Wrongs Law provides that
reverse engineering (as such term is defined in the law),
in and of itself, shall not be considered an undue means.
In addition, publication of a trade secret may, in certain
circumstances, give rise to criminal liability.

(f) Remedies
The following remedies are available for infringement
upon trade secrets:


(ii) damages/account of profits;

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(iii) liquidated damages;

(iv) delivery-up;

(v) destruction of goods; and

(vi) costs.

2.5.1.8. A Ap pp pe el ll la at ti io on ns s o of f O Or ri ig gi in n a an nd d G Ge eo og gr ra ap ph hi ic ca al l I In nd di ic ca at ti io on ns s

(a) Legislation
Appellations of origin and geographical indications are
protected under the Appellations of Origin and
Geographical Indications Protection Law.

(b) Nature of right
An appellation of origin refers to the geographical name of
a country, region or locality contained in the name of a
product and intended to convey that such product
originates there and that its quality or properties are
essentially due to that geographical area, including its
nature and people. A geographical indication refers to an
indication which identifies, in Israel, a product as
originating from a geographical area of a member country
of the WTO or a region or part thereof, where a given
quality, characteristic or the reputation of such product is
essentially attributable to its geographical origin.

(c) How protected
Appellations of origin are protected by their registration
with the Israel Trade Marks Office. A foreign appellation
of origin should first be approved for registration in its
country of origin and thereafter sent by the International
Bureau to all members of the Lisbon Union (which may
still refuse protection). Geographical indications are
protected as such and no registration is available.

Local appellations of origin are protected for an initial term
of ten years from the date of filing the relevant application
therefor in Israel and may be extended for additional
periods of ten years each, without limitation, if the
Registrar of Trade Marks finds it is still being used as an
appellation of origin. The validity of a foreign appellation
of origin expires when it is no longer protected in its
country of origin, or if found by the relevant court or the
Registrar of Trade Marks that, despite registration, it is
invalid. A registered local appellation of origin may be

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struck-off upon the application of an interested person or
at the initiative of the Registrar of Trade Marks, if the
appellation has become a mere indication of type or
provenance or if the conditions which served as the basis
for the registration have ceased to exist. Geographical
indications are protected for so long as they are
considered as such.

(e) Infringement
Any unlawful use of a registered appellation of origin
constitutes an infringement even if the true origin is
indicated beside the appellation of origin and even if the
appellation of origin is translated or accompanied by
expressions such as kind, type, class, imitation or
the like.

Unlawful use of an appellation of origin will be considered
in the same manner as applying a false commercial
description under the Merchandise Marks Ordinance and,
accordingly, will amount to a criminal offence.

Unlawful use of a geographical indication occurs where
use of such indication with respect to a product not
originating from the specified region is likely to deceive
with respect to the true geographical origin of such
product. With respect to spirits, wine and alcoholic
beverages, liability arises, similarly as with respect to
appellations of origin, except that no showing of a
likelihood of deception is required.

(f) Remedies
The following remedies are available for infringement of
an appellation of origin and/or a geographical indication:

(i) injunctive relief; and

(ii) costs.

2.5.1.9. P Pe er rf fo or rm me er rs s a an nd d B Br ro oa ad dc ca as st te er rs s R Ri ig gh ht ts s

(a) Legislation
Performers and broadcasters rights are protected under
the Performers and Broadcasters Rights Law.

(b) Nature of right
A performer is a person who by acting, singing, playing
music, dancing or in any other way performs a literary,
artistic, dramatic or musical work. A broadcaster is a
person who, with lawful authority, makes broadcasts,

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either over the radio or on television. The rights conferred
on performers and broadcasters prevent others from
creating (without the consent of the performer or the
broadcaster, as applicable) recordings of the performance
or the broadcast, as applicable, copying such recordings,
broadcasting the performance, making subsidiary
broadcastings or dealing with infringing copies thereof.

Rights are also conferred on performances in a member
country of the WTO, but only regarding recordings on
phonograms and live broadcasts.

(c) How protected
The respective performers and broadcasters rights are
protected as such and no registration is required. A
performer also has a moral right in his work (see
reference to moral rights in section 2.5.1.6(c) above).

Performers rights are protected for fifty years from the
end of the year in which the original performance was
given. Broadcasters rights are protected for twenty-five
years from the end of the year in which the original
broadcast was made.

(e) Infringement
Taping, recording, copying, broadcasting or dealing with
infringing copies constitute an infringement of the relevant
performers and/or broadcasters rights. As with
copyright, fair dealing exceptions exist, such as: use for
the purpose of research, criticism, a review, etc.

It is a criminal offence to create an infringing copy of a
performance or a broadcast for commercial dealings, to
deal with infringing copies on a commercial scale or to
hold an infringing copy of a performance for a commercial
purpose. It is also a criminal offence to purport to give
consent on behalf of a performer without being duly
authorised to do so.

(f) Remedies
The civil remedies available under a copyright action
apply, mutatis mutandis, to performers and broadcasters
rights.

2.5.1.10. P Pl la an nt t V Va ar ri ie et ty y

(a) Legislation

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Plant varieties are protected under the Plant Breeders
Rights Law.

(b) Nature of right
A plant variety is eligible for registration if it is new,
distinctive and sufficiently uniform and stable as to its
fundamental characteristics.

(c) How protected
The right is granted, after examination, by the Israel Plant
Breeders Rights Council (a regulatory body appointed by
the Ministry of Agriculture) ( the PBR Council ) and
registered in the Plant Breeders Rights Registry in the
name of the breeder of the plant variety. Foreign
applications (from countries that are parties to the UPOV
Convention) may also be registered and a one-year
priority right may apply.

In general, the length of protection afforded under a plant
breeders right is twenty years from the date of
registration. The length of protection granted under a
plant breeders right in varieties of vines, fruit trees, forest
trees and any other perennial plant is twenty-five years
from the date of registration.

(e) Infringement
The holder of a plant breeders right may prevent any
other person from unlawfully utilising the variety in respect
of which the right was registered without such holders
consent. Utilisation of a variety includes, inter alia,
cultivation, propagation and marketing of the protected
plant variety. Protection is also afforded with respect to
essentially derived varieties.

A statutory experimental use exception exists with respect
to plant breeders rights.

Knowingly infringing upon a registered plant breeders
right constitutes a criminal offence. It is also an offence to
commit such infringement during the period between
publication of the plant breed and its registration.

(f) Remedies
registered plant breeders right:


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(ii) damages/accounts of profit;

(iii) punitive damages; and

(iv) costs.

2.5.1.11. I In nt te eg gr ra at te ed d C Ci ir rc cu ui it t T To op po og gr ra ap ph hy y

(a) Legislation
Integrated circuit topography is protected under the
Integrated Circuit Topography Law.

(b) Nature of right
Integrated circuit topography protection is afforded to the
creator of an original integrated circuit topography, if the
creator is an Israeli citizen or a resident or a citizen or a
resident of a member country of the WTO, or is a person
or corporation having a factory active in Israel for the
creation of topographies or for the manufacture of
integrated circuits on the date of creation of such
topography. Circuit topography is original when it
comprises one of the following: (i) the result of
independent development by its creator and, at the time
of its creation, was not commonly used amongst the
creators of topographies or manufacturers of integrated
circuits; or (ii) a combination of components that are
commonly used, if the combination as a whole meets the
requirement of originality referred to in (i) above.

(c) How protected
Integrated circuit topography is protected as such and no
registration is available.

The term of protection commences on the date of creation
and ends on the earlier of the following: (i) ten years from
the date on which the integrated circuit topography was
first lawfully sold or distributed commercially in Israel or
abroad; or (ii) fifteen years from the date on which the
integrated circuit topography was created.

(e) Infringement
The following acts, if performed without the authorisation
of the rights holder, will constitute an infringement:

(i) reproducing, whether by incorporation in an
integrated circuit or otherwise, a protected
topography, whether in whole or in part; or

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(ii) importing, selling or otherwise distributing for
commercial purposes a protected topography, an
integrated circuit in which a protected topography is
incorporated or an object containing such integrated
circuit, provided that such object contains a copy of
the topography created in contravention of
subparagraph (i).

There are various exceptions to infringement, such as:
any action involving unoriginal parts of a topography,
copying for private purposes, evaluation, analysis,
research or teaching. A further exception is the creation
of another original topography based on an evaluation or
analysis of the protected topography.

(f) Remedies
protected topography:


(ii) damages; and

(iii) costs.

2.5.1.12. P Pa as ss si in ng g- -O Of ff f

Goodwill may also be protected by the tort of passing-off (as
such term is defined in the Commercial Civil Wrongs Law). In
order to succeed in an action for passing-off, the plaintiff must
establish: (i) the existence of goodwill in the goods or services
which identify him as the source for the provision of the goods
or the supply of the services (e.g., in order to establish a claim
of passing-off regarding a product's package, the plaintiff will
need to prove that the public identifies the product in the
package with a specific source of goods); and (ii) a likelihood of
confusion, i.e., that the consumer may assume that he is buying
the goods of the plaintiff, when he is actually buying the goods
of the defendant. There is no statutory period limiting such
protection. For so long as the plaintiff enjoys goodwill in the
goods or services, such goodwill may be protected.

The following remedies are available for passing-off:


(ii) liquidated damages;

(iii) damages/accounts of profit;

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(iv) delivery-up, in exchange for the product's value, as if the
infringement had not occurred;

(v) destruction of goods; and

(vi) costs.

2.5.1.13. U Un nj ju us st t E En nr ri ic ch hm me en nt t

The Unjust Enrichment Law covers some aspects of unfair
competition. Protection on the ground of unjust enrichment
may be granted if the following three elements are established:
(i) enrichment on the part of the defendant; (ii) the enrichment
of the defendant emanates from the plaintiff; and (iii) the
enrichment of the defendant is unlawful or unjust.

On September 23, 1998, the Israeli Supreme Court rendered its
monumental judgment (Leaves to Civil Appeal 5768/94,
A.SH.Y.R Import Manufacture & Distribution et al. vs. Forum
Consumer Products Ltd. et al.) ( the Decision ) concerning the
inter-relations between the laws of intellectual property and the
Unjust Enrichment Law.

In the Decision, the majority held that the specific laws
establishing an intellectual property right do not preclude the
possibility of obtaining relief based on the Unjust Enrichment
Law, even where the plaintiff does not meet the criteria for the
establishment of the specific intellectual property right, or where
the plaintiff applies for a remedy where no recognised
intellectual property right governs the subject matter.

The majority also held that the mere copying of a product, does
not, in itself, establish a claim under the Unjust Enrichment Law
and that, in certain circumstances, where an additional
element exists it may be so considered. An additional
element exists where the copying amounts to unfair
competition. Without presuming to offer a comprehensive list
of factors for establishing whether copying amounts to unfair
competition, the Decision mentions the following criteria: the
novelty, uniqueness and importance of the copied work; the
efforts invested by both the creator and the copier; the intensity
of the copying; the mental state of the copier; the existence of
alternative methods for copying; a breach of fiduciary
relationship or commercial secret. Obviously, each case should
be individually considered in light of all of the specific and
relevant circumstances.

2.5.2. Does the country subscribe to international treaties? Describe.

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Israel is party, inter alia, to the following intellectual property treaties:

Agreement on Trade Related Aspects of Intellectual Property
Rights (TRIPS) ( the TRIPS Agreement );

Berne Convention for the Protection of Literary and Artistic
Works;

Brussels Convention Relating to the Distribution of Programme-
Carrying Signals Transmitted by Satellite;

Budapest Treaty on the International Recognition of the Deposit
of Microorganisms for the Purposes of Patent Procedure;

Convention Establishing the World Intellectual Property
Organization;

Convention for the Protection of Producers of Phonograms
Against Unauthorised Duplication of their Phonograms;

International Convention for the Protection of New Varieties of
Plants (UPOV Convention);

Lisbon Agreement for the Protection of Appellations of Origin
and their International Registration;

Madrid Agreement for the Repression of False or Deceptive
Indications of Source on Goods;

Madrid Protocol;

Nice Agreement Concerning the International Classification of
Goods and Services for the Purposes of the Registration of
Marks;

Paris Convention for the Protection of Industrial Property;

Patent Cooperation Treaty (PCT);

Patent Law Treaty;

Rome Convention for the Protection of Performers, Producers
of Phonograms and Broadcasting Organizations;

Strasbourg Agreement Concerning the International Patent
Classification;

Treaties entered into with the WTO; and

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Universal Copyright Convention.

The Conventions are not self-executing and rights are granted only
on the basis of domestic legislation, which may be enacted to
implement Israels undertaking to comply with the relevant provisions
thereof.

2.5.3. Are there substantive prior approvals by national investment boards?

The R&D Law

The R&D Law provides an incentive for obtaining grants for
R&D programs. These grants, which are offered by the OCS,
usually cover up to 50% of an approved program. The recipient
of a grant is obliged to pay the Israeli State Treasury royalties
on all income accruing from the product developed under an
approved program. The royalties are payable up to a
cumulative amount of 100% of the grant received; however,
where a permit has been given to transfer production rights
abroad, the ceiling of royalties payable may increase to up to
300% of the grant.

The R&D Law imposes restrictions on the transfer of know-how
developed in the framework of approved programs, ,
particularly, where such know-how is to be transferred abroad.

Following an amendment to the R&D Law, which came into
effect on June 7, 2005, it is permissible to transfer know-how
derived from R&D under an approved program and which is
neither the product developed under the relevant program nor a
right deriving therefrom, subject to receipt of an express permit
therefor and the fulfilment of certain conditions as set forth in
the R&D Law; prior to the said amendment, any such
contemplated transfer was prohibited. For example, the
amendment provides that, in most cases, upon the grant of
such permit, the seller will be obliged to refund to the OCS an
amount calculated according to a formula taking into account
the know-how purchase price and the amount invested by the
recipient of the grant, provided that the amount to be refunded
will not be lower than the amount of the grant. In addition, in
special and exceptional circumstances, a permit may be
granted to allow for the transfer abroad of part of the production
rights with respect to a particular product. However, any
transfer of production rights constituting an amount not
exceeding 10% of the overall original production scale, will only
require notification to the OCS, but may still be denied.

2.5.4. What are the notarisation requirements?

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No special notarisation requirements need to be complied with in the
area of intellectual property.

2.5.5. Are there regulatory guidelines for licences?

General

There is no statutory form of licence agreement. However, most
licence agreements are drafted using a common form and
contain the standard provisions which one would expect to be
included in this type of agreement.

Patents

The proprietor of a registered patent may grant an exclusive or
non-exclusive licence to another to exploit the invention for
which the patent was granted; the same holds true also with
respect to the proprietor of an invention for which a patent
application has been filed.

The licence shall not be effective against any third party, other
than the parties to the licence, unless it has been duly
registered in accordance with the provisions of the Patents Law.

A licence to exploit a jointly-owned patent may only be granted
with the consent of all of the patent owners. However, under
certain conditions and at the request of some of the patent
owners, the court may grant a licence to exploit a jointly-owned
patent.

Compulsory Licence (the Patents Law)

In 1999, the provisions of the Patents Law were amended to
comply with the TRIPS Agreement and, as a consequence, the
factors justifying the grant of a compulsory licence were
modified such that currently, only the supply of local demand for
the particular product is relevant (which demand can also be
met by the import of such product).

While there is no express legal obligation to exploit a patented
invention through manufacture or in any other manner, a
patentee who abuses his monopoly over his registered patent
may be faced with a compulsory licence being granted to a third
party for production of the invention.

A compulsory licence may be granted if the applicant
requesting the compulsory licence is able to demonstrate that
the demand for the product is not being fully satisfied in Israel
on reasonable terms, or that conditions imposed by the

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patentee for the supply of the product or the grant of the licence
for its manufacture or use are not fair in the circumstances of
the case and do not take account of public interest, and arise
essentially due to the existence of the patent.

Other circumstances giving rise to the grant of a compulsory
licence and under specified conditions, relate to a later
invention which cannot be exploited without infringing upon an
earlier patent.

According to the Patents Law, as amended in 1999 as
aforesaid, the Registrar of Patents shall also take the following
factors into account when dealing with an application for a
compulsory licence:

the applicants ability to remedy the faultbeing the
reason for requesting the compulsory licence;

public interest, which generally requires that inventions
that may be exploited in Israel either through their
manufacture or their import could be so exploited to the
greatest extent possible under existing circumstances and
without delay;

the right to reasonable remuneration, having regard to the
nature of the invention, for exploitation of the patented
invention;

protection of the rights of any person who exploits, in
Israel, the invention to which the application for the
compulsory licence relates whether by means of
manufacture or import, and of persons engaged in the
development of such invention;

the nature of the invention, the time elapsed since grant of
the patent and the steps taken by the patent owner or his
representative to exploit the invention in Israel either by
way of manufacture or import.

The application for a compulsory licence may be submitted only
after the later of: (a) three years from the date of grant of the
relevant patent; or (b) four years from the date of filing the
relevant patent application.

Compulsory licence proceedings are heard before the Registrar
of Patents. A compulsory licence is non-exclusive and, when
granting such licence, the Registrar of Patents shall determine
its terms, including the rate of royalties to be paid by the
licensor to the patentee.

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Trade Marks

Under the Trade Marks Ordinance, only the proprietor of a
registered trade mark may license its use to a third party. To
this end, the proprietor of a registered trade mark may authorise
a third party to make use of such trade mark with respect to all
or any of the goods for which the mark is registered. Any
licensing agreement shall not be valid (against third parties)
unless it has been duly registered with the Israel Trade Marks
Office. Use of a trade mark by a person which right of use has
not been duly recorded, will not be considered use by the
proprietor and, thus, may give rise to claims of non-use by a
third party and also might lead to dilution of the relevant trade
mark (see section 2.5.1.2(d) above).

A trade mark licensing agreement must include, inter alia,
details regarding the relationship between the licensor and the
licensee, including the extent of control held by the proprietor of
the trade mark over the use thereof by the licensee and the
applicable conditions or limitations .

Copyright

A licence granted by a copyright owner may be exclusive or
non-exclusive, or subject to certain limitations; may be for the
entire term of the copyright or for any part thereof; and may
grant any right or interest in the copyright. According to one
provision of the Copyright Law, no licence granted as aforesaid
shall be valid unless it is in writing.

There are two possible interpretations for the above
requirement, the first being that the requirement is constitutive,
so that any licensing of copyright will be void if not done in
writing; and the second being that the requirement is merely of
probative value so that any licensing of rights in copyright may
be done orally and even by conduct. It has not been clearly
and directly decided by the Supreme Court which interpretation
is the correct interpretation of the law and both interpretations
are supported by both the lower Israeli courts and scholars in
the field.

Compulsory Licence (the Plant Breeders Rights Law)

Under certain conditions, compulsory pharmaceutical licences
and compulsory agricultural licences may be obtained under the
Plant Breeders Rights Law.

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2.5.6. Are there specific exceptions or requirements relating to a particular
product(s)?

Specific laws apply to Medical Preparations and medical devices.
There are also specific laws regarding clinical trials. Thus, it is
important to check this issue on a case-by-case basis; for example,
under certain conditions, a patents term may be extended with
respect to Medical Preparations, Materials and medical devices (see
section 2.5.1.1(e) above). In addition, a patent will not be granted for
varieties of plants or animals, save for microbiological organisms not
derived from nature.

2.5.7. When are royalties from licences deemed to be excessive?

Generally, the royalty rate is at the discretion of the parties and there
are no limitations on the scope of royalty rates payable. However,
again, this issue should be checked on a case-by-case basis. For
example, as far as compulsory licences with respect to patents are
concerned, the Registrar of Patents determines the rate of royalties
payable having regard, inter alia, to the economic value of both the
licence and the patent. Similarly, regarding licences of musical
works, the Israeli courts have outlined general criteria for determining
the scope of royalties that will be deemed reasonable, taking into
consideration the fact that the body granting such licences is a
monopoly.

2.5.8. Do local antitrust or competition laws apply to licences?

In principle, Israeli antitrust laws apply to licences granted in respect
of intellectual property rights. Such licences may well be considered
restrictive arrangements, if they contain restrictions regarding use of
the relevant intellectual property rights, such as exclusivity, payment
of royalties, etc. However, Israeli law provides for general exclusions
and/or exemptions from which such licences may benefit.

Section 3(2) of the RTP Law provides that arrangements which only
grant a licence with respect to the right to use certain intellectual
property rights (i.e., patents, copyright, trade marks, designs,
performers rights and plant breeders rights), shall not be deemed
restrictive arrangementssee in this regard section 8.2.1 below
(including the conditions under which such exclusion is granted).

Licences which are not excluded, as aforesaid, may benefit from
certain Block Exemptionssee in this regard, section 8.2.1 below.

Licences to use intellectual property rights which contain restrictions
and are not excluded or exempt from being deemed a restrictive
arrangement, as referred to above, may, upon an application
requesting such exemption being submitted to the Antitrust Authority

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and subject to the conditions specified in Section 14(A) of the RTP
Law, be subsequently exempted.

For example, the Antitrust Tribunal has ruled that arrangements
between various Israeli recording companies and an umbrella body
regarding the assignment of the right of public performance of
musical works to the umbrella body and the enforcement of such
rights by said body through licensing, constitute restrictive
arrangements. The Antitrust Tribunal further ruled that those
arrangements do not fall within the exemption specified in
Section 3(2) of the RTP Law since they do not confer a licence in an
intellectual property right. Nonetheless, the Antitrust Tribunal has
temporarily exempted the arrangements subject to several conditions,
inter alia, that the licence be non-exclusive.

In addition, licences to use intellectual property rights (including
licences not deemed restrictive arrangements) may be further
scrutinised under the relevant provisions of the RTP Law applicable
to monopolies. Thus, in appropriate circumstances, licences to use
intellectual property rights, or undertakings included therein, may well
be deemed abuse of a monopolistic position.

2.5.9. What typical agreements do foreign corporations enter into with their wholly-
owned subsidiaries?

Of course, the answer to this question depends on the nature of the
subsidiarys activities. It is common for foreign corporations to
incorporate subsidiaries to carry out R&D activities in Israelin such
cases, the agreements would relate to the provision of R&D services
by the subsidiary to the foreign corporation, typically on a cost plus
basis. Under these circumstances, subsidiaries would also
commonly carry out distribution or agency activities and, accordingly,
the form of agreement would be either a distribution or agency
agreement. Clearly, as mentioned above, other forms of agreements
may be relevant depending on the nature of activities to be carried
out by the subsidiary.

3 3. . I IN NV VE ES ST TM ME EN NT T I IN NC CE EN NT TI IV VE ES S

Please note that, this Chapter 3 has been prepared to accord with the relevant
Israeli legislation in effect as at December 31, 2004. However, while finalising this
Guide, the Capital Investments Law (being the major legislation applicable with
respect to foreign investments in Israel) was substantially amended affecting, inter
alia, the scope of tax benefits and grants available to foreign investors willing to
invest in Israel (said amendment having been accepted by the Knesset on
March 29, 2005). In the circumstances, the aforesaid amendment to the Capital
Investments Law will be incorporated in the forthcoming update to this Guide. .

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3 3. .1 1. . E Ex xp po or rt t I In nc ce en nt ti iv ve es s o or r G Gu ua ar ra an nt te ee es s

3.1.1. Are there tax incentives for exports

Israel encourages investment by both Israelis and foreigners alike by
offering a wide range of incentives and benefits in order to achieve a
favourable balance of trade, boost revenues, maximise productivity in
the relevant industrial sectors, ensure healthy competition in the
relevant markets and facilitate overall growth, including, inter alia,
increasing exports. The main legislation regulating investments is the
Capital Investments Law. Under the Capital Investments Law as in
force until recently amended (see introductory comment above),
investment incentives are given by granting Approved Enterprise,
Approved Asset, Approved Investment or Approved Loan status,
as applicable, to investments made by domestic and foreign
companies, subject to such companies having duly complied with
certain criteria of the Investment Centre (one such criterion being a
minimum export rate).

The recipient of Approved Enterprise status ( an Approved
Enterprise ) (as granted by the Ministry of Industry, Trade and
Labour and the Investment Centre) may seek to adopt either the
grants course or the alternative tax benefits course, as the
mechanism for obtaining benefits under the Capital Investments Law.
In order to qualify for either course, a certain percentage of the
contemplated investment will need to be made by such recipient
(e.g., the investment of minimum paid-up share capital constituting,
generally, 30% of the aggregate investment).

The Grants Course

Under the grants course, the Israeli government provides grants
as participation in the partial financing of the purchase of
tangible fixed assets. The type and amounts of such grants may
vary, depending on the location of the manufacturing facilities
(for this purpose, Israel is divided into three regions, each of
which being attributed with its own particular array of benefits),
the total amount to be invested and certain other criteria and
such grants are not deemed to constitute income of the relevant
company but, rather, are deducted from the cost of the relevant
fixed assets. A company having an Approved Enterprise may
also be entitled to a reduced tax rate (i.e., 25% rather than
35%) with respect to the income generated by the Approved
Enterprise over a period of seven consecutive years,
commencing with the first year in which such company earned
taxable income (for an entity with a majority of foreign investors,
the rates of tax are lower since the proportion of foreign
investors would accordingly increase and the duration for
obtaining the tax benefits would be ten (rather than seven)

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years). In addition, an Approved Enterprise is eligible to claim
for accelerated depreciation deductions on tangible assets.

The Tax Benefits Course

A company may waive the right to receive an investment grant
and the consequent reduced tax rates and, instead, opt for the
alternative tax benefits course, allowing such company to enjoy
benefits in the form of tax exemptions and/or similar relief, other
than grants. It should be mentioned that this course is
generally available to only limited liability companies and that
the duration of tax benefits ranges from two years to ten years
(depending on the location of the manufacturing facilities),
commencing with the first year in which taxable profits are
reported. Just as with respect to the grants course, such
company may similarly enjoy accelerated depreciation
deductions in respect of its tangible assets.

Other Tax Incentives, Reliefs and/or Exemptions

Other tax incentives, reliefs and/or exemptions include the
following:

(a) Under the Capital Investments Law, the Minister of
Finance is empowered to grant tax exemptions to
international trade companies and their respective
shareholders, in most cases, for a period not exceeding
ten years. In order to qualify for such tax exemptions, the
international trade company must be registered in Israel
as a foreign company and must engage only in
international trading, unless the Investment Centre has
expressly given its approval that such company may
engage in such other business other than international
trading.

(b) As an incentive for furthering exports, the VAT Law
provides that, with respect to certain export transactions,
the rate of value-added tax ( VAT ) shall be zero, such
that the exporter will be exempt from VAT, on the one
hand, while being entitled to deduct the amount paid by
him as input tax, on the other hand (although such export
transactions are exempt from tax, they must be included
in monthly and/or periodic returns submitted to the Israel
tax authorities). Examples of different types of zero-rated
export transactions include the following:

(i) Export of tangible goodsthe sale of tangible
goods is zero-rated, if an export entry or other

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document has been approved for such purpose
(and subject to other specified conditions).

(ii) Export of intangible goodsthe sale of an intangible
asset (such as a patent, know-how, or copyright) to
a foreign resident is zero-rated (for such purpose,
foreign resident means: (1) an individual whose
permanent place of residence is located outside of
Israel; or (2) a body of persons incorporated or
registered outside of Israel and having no place of
business and/or activity in Israel, provided that the
asset, the subject of the sale, is sold to such foreign
resident purchaser (whether an individual or a body
of persons, as aforesaid) while located outside of
Israel).

(iii) Export of servicesthe rendering of services to a
foreign resident (as defined above), in general, is
taxed at a zero rate. Such services shall not be
deemed to have been rendered to a foreign resident
if the subject-matter of the agreement relates to the
actual rendering of services not only to the foreign
resident, but also to an Israeli resident located in
Israel, or to a partnership, most of the rights in
which vest in Israeli resident partners, or to a
company which is deemed to be an Israel resident
for Israeli taxation purposes. Likewise, such zero-
rated tax benefit will not be granted where the
rendering of services relates to an asset (including
rights) located in Israel. The VAT Law stipulates
certain other conditions and limitations which need
to be complied with in order to obtain the zero-rated
tax benefit.

(c) In addition, both the respective provisions of the
Acquisition Tax Law and the Customs Ordinance provide
for certain tax exemptions and benefits with respect to the
export of specific goods and services.

(d) Additional benefits are available under the Free Ports
Law, pursuant to which the ports located in Haifa, Ashdod
and Eilat were declared as free port zones. Authorised
enterprises in any of these ports are eligible for direct and
indirect tax benefits, in addition to any other benefits to
which such authorised enterprises may be entitled under
other encouragement laws. Indirect tax benefits apply
with respect to goods: (i) imported from abroad to the
relevant free port zone; (ii) manufactured in such free port
zone; or (iii) exported from the free port zone abroad,

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provided that such goods relate to the activity in which the
authorised enterprise engages in the relevant free port
zone. In order to qualify for such tax benefits, the
authorised enterprise must be owned by a company
registered in Israel (including a company registered in
Israel as a foreign company) or by a joint venture
company registered in Israel and must have obtained the
necessary approval confirming that it has been duly
registered and incorporated in a free port zone.

(e) The Free Zones Manufacturing Law contains several
exemptions with respect to the obligation to pay direct and
indirect taxes and also provides for other tax benefits in
respect of certain income derived or generated in a free
zone, as such term is defined in the Free Zones
Manufacturing Law. Entities eligible for such incentives
usually include private entities whose principal sphere of
activity relates to manufacturing or which engage in the
rendering of services abroad and do not engage in retail
sales in the free zone or elsewhere in Israel.

3.1.2. If so, are they limited to certain types of products?

Tax incentives under the Capital Investments Law are granted with
respect to tangible assets, including: buildings, machinery and
equipment, etc. and companies interested in obtaining such tax
incentives are required to comply with criteria laid down by the
Investment Centre. The aforegoing notwithstanding, such tax
incentives are not limited to types of manufactured or exported
products.

Tax incentives under the VAT Law are limited to certain assets or
services, as described in section 3.1.1(b) above.

3.1.3. Is export financing available from government or private sources?

Export financing is available from both governmental and private
sources. For example, the Ministry of Industry, Trade and Labour
has set up several funds known as Encouragement of Export Funds
specifically for the purpose of providing export financing.

3.1.4. If so, what forms of financing or guarantees are available?

Export financing is provided by the commercial banks in various
forms, each of which offers financing on terms and conditions
applicable to the purpose for which such financing is requested. In
addition, export financing may be obtained from a government fund,
as referred to in section 3.1.3 above.

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The Ministry of Industry, Trade and Labour manages a fund for the
promotion and/or furthering of marketing activities abroad. This fund
supports exporters by participating in the risks and expenses
associated with promotion of the relevant products or services on
overseas markets, and support is dependent on the volume of
exports and the exporters annual turnover. The participation by the
fund in financing the various promotional activities of the exporter
(such as: advertising, exhibitions, conferences, legal advice,
registration of intellectual property, product design, market survey,
locating a strategic partner, etc.) may be made either by way of a
grant or a loan. The fund may also engage a consultant to
accompany the exporter abroad and assist in the provision of
consultancy services in connection with the promotional activities.
However, the fund does not provide financing with respect to
manufacturing or packaging activities. In order for an exporter to
receive such financing or consultancy services from the fund, the
exporter must submit to the fund, inter alia, a proposed marketing
plan and any failure by the exporter to fully comply with such criterion
may result in either the exporter being obliged to repay the advance
on the grant already paid to the exporter by the fund or the exporter
being disqualified from obtaining grants from the fund for the
immediate succeeding year.
7

It should be mentioned that the Ministry of Industry, Trade and
Labour has established an additional fund to provide assistance to
export companies, subject to compliance by the relevant export
company with specific criteria. Such financial assistance is offered to
the export companies based on their volume of exports.

3.1.5. Is there any governmental insurance for exports?

Exports may be insured by private insurance companies or by the
Israeli Foreign Trade Risks Insurance Corporation Ltd. ( IFTRIC ).
IFTRIC, which was established in 1957, is a wholly-owned
Government Company (as such term is defined in the Government
Companies Law) and, thus, serves as the Israeli governments official
credit insurance institution. IFTRIC assists in the financing of the
Israeli exporters export of goods and services and encourages Israeli
export by insuring medium and long-term credit transactions and
investments abroad. IFTRIC offers Israeli exporters a range of
advanced insurance solutions protecting against political and
commercial risks, enabling those exporters to minimize risks and
raise financing. IFTRIC also provides Israeli exporters with updated
reliable information on macro-economic and political events in the
various countries in which such exporters respective customers are
located.
8

7 The information contained in this section 3.1.4 was obtained from the website of the Israeli Ministry of Industry,
Trade and Labour (www.moit.gov.il).
8 The information contained in this section 3.1.5 was obtained from the website of IFTRIC (www.iftric.co.il).

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3.1.6. Must a national be a participant in the enterprise in order for the investor to
benefit from these incentives?

Generally, in order to qualify for Approved Enterprise status under
the Capital Investments Law, the enterprise must be owned by a
company registered in Israel (including a company registered in Israel
as a foreign company), or by an Israeli joint venture company, or by a
foreign limited partnership registered in Israel the Israeli partners of
which are bodies of persons, or by other types of partnerships. The
Investment Centre may, in its discretion, approve other forms of legal
bodies. In general, the shareholders of such entities may be foreign
residents.

In order to qualify for benefits under the Free Ports Law, see
section 3.1.1(d) above.

With respect to entities eligible for incentives under the Free Zones
Manufacturing Law, see section 3.1.1(e) above.

3.1.7. Other Restrictions?

It should be mentioned that restrictions exist with respect to the
export of certain types of products, including, inter alia, weapons and
ammunition, live animals, plants and antiques as well as
technological knowledge or know-how developed with grants
provided by the OCS or the Israeli government.

3 3. .2 2. . G Gr ra an nt ts s, , S Su ub bs si id di ie es s o or r F Fu un nd ds s

3.2.1. Are grants and subsidies restricted by the type of activity?

(a) As specified in section 3.1Export Incentives or Guarantees
above, benefits are granted under the Capital Investments Law
to entities with Approved Enterprise status. In addition to the
various export projects referred to in section 3.1Export
Incentives or Guarantees above, such status may be extended
to include industrial enterprises, tourism projects, equipment
leasing firms, industrial buildings for leasing purposes, motion
picture productions and planning and contracting services, all
subject to such enterprises complying with the criteria of the
Investment Centre. It should be noted, however, that any of
such projects, conferred with "Approved Enterprise" status as
aforesaid, may, as a consequence, only be entitled to receive
partial financing in the form of grants or benefits.

(b) Benefits may also be granted to companies which engage in
R&D activities under the R&D Law. R&D grants, usually
constituting up to 50% of the approved R&D expenses (start-
ups may be eligible for increased participation grants), are

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available from the OCS. The grants are conditioned upon the
manufacture of the relevant project being performed in Israel
and the know-how remaining within Israel. However, a company
which manufactures outside of Israel may still be eligible for
grants upon receipt of the relevant approval thereto from the
OCS. Furthermore, the OCS will usually require that the
intellectual property be owned by an Israeli company and that
the know-how derived from an approved R&D program (which
is not the product developed under such program) is not be
transferred to another party outside of Israel, without its prior
written consent. Such company may be required to pay
royalties on any income derived from products developed as a
result of programs which received R&D grants, including from
services ancillary to such products.

(c) Alternative R&D grants may be obtained through numerous
funds established expressly for bi-national cooperation. For
example, the Israel-United States Binational Research and
Development Foundation participates in the financing of R&D
projects undertaken on a joint basis by Israeli and US
companies. Israel is also a member of the European Unions
Sixth Framework Program promoting joint IsraeliEU R&D
ventures.

(d) Under the Eilat Free Trade Zone Law and the regulations
enacted thereunder, Eilat and its surrounding areas were
declared to be a free trade zone and, thus, companies resident
in Eilat which engage in the sale of goods or provision of
services may be exempt from VAT (see, in this regard,
section 12.7.3 below). In addition, individuals residing in Eilat
are entitled to tax credits and employers are reimbursed for a
portion of the costs paid in Eilat attributed to labour. For
benefits granted under the Free Ports Law or under the Free
Zones Manufacturing Law, see section 3.1Export Incentives
or Guarantees above.

3.2.2. What is the process for obtaining approval for these grants or subsidies?

An entity seeking Approved Enterprise status, must submit the
relevant application to the Investment Centre. Together with the
application, the applicant must also submit a copy of its certificate of
incorporation, a confirmation of the ownership thereof, a balance
sheet and a business plan as well as explanations regarding its
proposed investment. Following receipt of the application and after
conducting the necessary economic survey, the Professional
Administration at the Ministry of Industry, Trade and Labour shall
prepare a professional opinion based on such survey. Once
prepared, the Management of the Investment Centre shall then
examine the professional opinion for the purposes of considering

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whether to approve or reject the application. If the application is
approved, the Investment Centre shall issue an Approved Enterprise
certificate.

In order to receive grants under the R&D Law, a company is required
to submit to the OCS, inter alia, an application form together with a
duly completed questionnaire and a proposed budget for the
contemplated program. A project under the R&D Law is defined as a
program, whether annual or perennial, pursuant to which know-how,
a process or a method for the manufacture of a new product or for the
material improvement of an existing product, or a new process or an
improvement of an existing process is to be developed .

Following receipt of the application together with the ancillary
documentation, the OCS shall prepare its professional opinion and
recommendation, as well as conduct a financial examination for the
purpose of considering the applicants ability to finance the
R&D project. The Research Committee shall then examine the
application and determine whether to approve or reject it. If the
Research Committee approves the application, it shall issue a
confirmation certificate specifying, inter alia, the R&D expenses
approved for the project, the approved grant and the period for
performance of the approved project. The Research Committee shall
also prepare an approved budget.

Upon receipt of approval from the Research Committee as aforesaid,
the applicant shall sign a letter of undertaking in accordance with the
confirmation certificate and which it must submit, together with the
approved budget and a report of its expenditures, to the research
fund established under the R&D Law. The manager of the research
fund shall then sign the confirmation certificate and pay the grant to
the applicant.

3.2.3. How long does it take to receive approval?

The procedure under the Encouragement of Capital Investments Law
and under the R&D Law may take several months, depending on the
relevant circumstances.

3.2.4. Can the investor receive loans from the government or governmental
agencies?

The R&D Law provides that the Research Committee may approve,
at the applicants request, a loan (instead of a grant) to the applicant
or to whomever shall invest in the applicants plant under a proposed
project. The loan shall be given pursuant to a loan agreement entered
into between the applicant or an investor, as applicable, and a bank
approved by the Minister of Finance.

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3.2.5. Must a national be a participant in the enterprise in order for the investor to
receive these grants or subsidies?

With respect to qualifying for benefits under the Capital Investments
Law, see section 3.1.6 above.

With respect to qualifying for benefits under the Free Ports Law or the
Free Zones Manufacturing Law, see section 3.1.1(d) above.

With respect to qualifying for benefits under the R&D Law, see
section 3.2.1(b) above.

3 3. .3 3. . N Na at ti io on na al l T Ta ax x I In nc ce en nt ti iv ve es s f fo or r F Fo or re ei ig gn n I In nv ve es st to or rs s

3.3.1. Are the incentives restricted by the type of activity?

Israeli taxation legislation and, particularly, the Capital Investments
Law, provides for various tax incentives applicable to foreign
investors, some examples of which include the following:

Various Benefits

(a) Benefits to foreign investment companiesa foreign
investment company (largely, a company in which foreign
residents invest in foreign currency and whose rights to
receive profits, or vote for and on behalf of, and appoint
officers in, such company exceed 25%) that is the owner
of an Approved Enterprise (see sections 3.1Export
Incentives or Guarantees and 3.2Grants, Subsidies or
Funds above) will be taxed at a lower corporate tax (i.e.,
10%25%, rather than the standard corporate tax rate
applicable to other Approved Enterprisesthe precise tax
rate payable by the foreign investment company being
dependent upon the rate of foreign investments in the
company) for a period of up to ten years and will also be
entitled to an exemption from all other taxes payable by it.
In addition, the rate of tax payable on dividends
distributed from the income of such Approved Enterprise,
may be approximately 15% (rather than 25%). Foreign
investment companies that own Approved Enterprises
may also be entitled to accelerated depreciation
deductions in respect of tangible assets (such as
equipment or buildings) used by the Approved Enterprise
in its business operations. Such accelerated depreciation
may reach 200% (for machinery or equipment) or 400%
(for buildings), in each case, of the regular deprecation
rates and is granted for a limited period of five years from
the date of first use by the Approved Enterprise of any
such assets. In addition, according to the alternative tax
course, the foreign investment company may choose to

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receive an exemption from tax for a period of two to ten
years, rather than opt for grants.

Generally, there are different types of foreign investment
companies, for example: (i) a foreign investment company
(as described above); (ii) a large foreign investment
company (a foreign investment company in which the
foreign resident investors are the holders of at least 49%
of all of the rights in such company and with respect to
which the amount of foreign investments total at least
US $10,000,000 and are worth at least two-thirds of its
share capital); (iii) an industrial foreign investment
company (a foreign investment company which is an
industrial company, or an Israeli resident company with
respect to which 70% or more of its income is derived
from the leasing of equipment for rental purposes or
industrial buildings designated for rental purposes (as
defined in the Capital Investments Law)); and (iv) a
foreign investment intensive company (a foreign
investment company which is an industrial company that
owns an Approved Enterprise, in which foreign resident
investors hold at least 74% of all of the rights therein and
in which the foreign investments total at least
US $20,000,000 and are worth at least two-thirds of its
share capital). Each such foreign investment company is
entitled to different tax treatments and benefits.

In addition to the aforegoing, the following types of
companies would also be entitled to reduced tax:

(1) a foreign resident company (being a company in
which the holding by foreign investors in one or
more of such companys rights is less than 25%
(thus not constituting a foreign investment
company)), is taxed on the income earned by an
Approved Enterprise in similar fashion to that
imposed on a foreign investment company, save
that the foreign resident company is obliged to pay
additional tax at the rate of 15% on its income (after
the deduction of corporate tax); and

(2) an international trade company (largely, a company
that is registered in Israel as a foreign company and
which engages principally in international trade
outside of Israel). An international trade company
and its shareholders may be entitled to certain tax
benefits with respect to corporate tax, individual
income tax and capital gains tax.

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Likewise, a foreign investment company which owns or
controls an Approved Enterprise located in Priority
Region A shall be entitled to an exemption from
corporate tax in respect of income earned by such
Approved Enterprise for a period of two years, subject to
no dividends being distributed on such income by the
foreign investment company.

In general, the duration of tax benefits available to a
foreign investment company is for a maximum period of
ten years (rather than seven yearssee paragraph (a)
above).

(b) Benefits in respect of an Approved Investmentcertain
tax benefits are available for income derived from an
Approved Investment (largely, an investment in foreign
currency by a foreign investor, in the paid-up share capital
of an Israeli company). If the investor of an Approved
Investment is an individualthen the rate of tax payable
in respect of the taxable income earned by such company
will not exceed 25%; and if the investor is a company
then such tax rate shall be 25% and such company will be
exempt from any other tax with respect to such income.
The tax benefits are restricted for a limited period (usually,
seven or ten years).

(c) Benefits in respect of an Approved Loanthe tax benefits
available in respect of Approved Investments will similarly
apply in respect of Approved Loans (largely, a loan in
foreign currency by a foreign resident to an Israeli
company, if the period for repayment of the loan is at least
seven years).

(d) Benefits for foreign investments in buildings for rental
purposesin general, a foreign resident (whether an
individual or a body of persons) which invests in foreign
currency in a building for rental purposes which is
deemed to be an Approved Asset under the Capital
Investments Law, is entitled to several tax benefits in the
form of reduced tax rates and accelerated depreciation
deductions, under specified conditions. If the owner of
the Approved Asset is a foreign resident individual, then
the rate of tax to be imposed with respect to the taxable
income generated from the sale or lease of a new building
for rental purposes, shall be 25%; if the owner of the
Approved Asset is a foreign investment company, then
the rate of corporate tax payable by it will be 10%, 15% or
18% (depending on the rate of investment by foreign
residents in such company) in respect of such taxable

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income and the shareholders of such foreign resident
company will pay tax at the rate of 15% in respect of
dividends distributed from such income. The rate of
corporate tax payable in respect of taxable income
generated from the sale of such new building (i.e., 10%,
15% or 18%) is dependent on the rate of foreign
investments in such company.

(e) Benefits regarding the sale of shares in a foreign
residents real estate associationa foreign resident shall
be exempt from land appreciation tax in respect of the
sale of shares in a foreign resident's real estate
association (largely, a company that is deemed to be a
real estate association (as defined in Chapter 14Tax
on Other Legal Bodies below), with respect to which all of
following criteria have been met: (i) all of its shareholders
on the date of sale of such shares are foreign resident
individuals; (ii) it has fifty shareholders or more; (iii) its
principal activity is the construction, sale or rental of
apartments; and (iv) it owns at least fifty apartments).
Likewise, a foreign resident shall be exempt from
purchase tax in respect of the purchase of shares in a
foreign resident's real estate association, if the purchase
was made directly by the association itself.

Other Tax Incentives

The Israeli taxation legislation provides certain other national
tax incentives to foreign investors. These tax incentives include
exemptions from and/or reduced tax rates with respect to
income tax, capital gain tax, VAT, etc., as briefly set out below:

(a) Income taxcertain tax incentives are offered on income
earned by foreign residents. For example, a foreign
resident is exempt from income tax with respect to income
generated from exchange rate differentials on a loan
made by him, save for a loan granted by a permanent
establishment incorporated by him in Israel.

(b) Interest on deposits in foreign currencyan exemption is
granted to a foreign resident for interest income earned by
such foreign resident from a deposit made by such foreign
resident in foreign currency in an Israeli banking
corporation, subject to the following: (i) the deposit was
not recordedand there is no requirement to record
samein the books of account of a permanent
establishment incorporated by the foreign resident in
Israel, and such interest income does not constitute
business income (or occupational income); (ii) the foreign

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resident has no Israeli partners which participated in the
making of such deposit; (iii) the foreign resident timeously
notified the Israeli tax authorities, by duly completing the
requisite notification form, of his status as a foreign
resident (i.e., prior to the beginning of the relevant tax
year, or within fourteen days from the date of making the
first deposit, whichever is the later); and (iv) the deposit
was not utilised for making a loan, or as security for any
such loan, by a banking corporation to the foreign
resident's relative or to a body of persons in which the
foreign resident is a controlling member, both of whom
are Israeli residents.

(c) Interest payable on a loan received in foreign currency
interest paid by an Israel resident body of persons to a
foreign resident which does not conduct business or have
a presence in Israel, in respect of a loan received by an
Israeli resident in foreign currency, shall be exempt from
tax, if the Minister of Finance or his designate has duly
approved such loan, subject to the following conditions
being met: (i) the loan serves one of the purposes
specified in the Capital Investments Law; (ii) a permit for
receipt of the proceeds of the loan, as provided in the
Currency Control Law, has been obtained; (iii) the lender
and the borrower are not relatives and neither of them is a
controlling member of the other; (iv) the loan was given by
a foreign financial institution; (v) the loan constitutes
suppliers' credit extended by the lender to the borrower;
or (vi) debentures traded over the counter or on an
exchange abroad were issued to the lender in return for
the proceeds of the loan.

(d) Foreign lecturerslikewise, a foreign visiting lecturer (a
foreign resident professor or teacher) or foreign expert (as
defined in section 17.4.2 below), who was invited to visit
Israel from abroad, is entitled to deduct certain expenses
in respect of the period of his stay in Israel (such period
not to exceed twelve months). Similar benefits are
granted to foreign sportsmen (see, section 17.4.2 below).

(e) Absence of double taxation relief certain tax reliefs are
also available to foreign residents where double taxation
relief is not available or recognised in their country of
residence.

(f) Capital Gains Taxcertain exemptions from capital gains
tax are applicable to foreign residents. A foreign resident
is exempt from tax on capital gains from the sale of
securities listed on the TASE, if the capital gain is not

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attributable to a permanent establishment in Israel. A
foreign resident is also exempt from tax on capital gains
from the sale of shares allocated to him during the 2003
tax year or thereafter, provided that such foreign
residents investment was made in a company which, at
the time of the allocation of shares, was a research and
development intensive company (as such term is defined
in the Income Tax Ordinance). There are other
exemptions that apply to foreign residents (e.g., a sale of
future transactions on the TASE, or an investment in an
exempt trust fund (a trust fund approved by the Israeli
tax authorities as a fund, the profits and income of which
are exempt from tax)).

In addition, a foreign resident is exempt from the payment
of capital gains tax with respect to: (i) the sale or
redemption of the assets in a trust fund comprising units
of foreign investments; or (ii) other profits earned by the
foreign resident as a consequence of the holding of such
units (a foreign resident trust fund is a trust fund whose
income and profits are exempt from tax and 90% or more
of its investments in each tax year constitute assets the
income in respect of which is exempt from tax if received
by a foreign resident), if the capital gains do not derive
from a permanent establishment incorporated by the
foreign resident in Israel and the provisions of the
Inflationary Adjustments Law do not apply to such foreign
resident. Likewise, a foreign residents fund (largely, a
trust fund whose units are issued to foreign residents only
and the financing for purchase of such units was made
only from the accounts of such foreign residents and the
profit and income in respect of which are taxable in
Israel), is exempt from capital gains tax in respect of the
sale of securities or futures traded on the TASE and/or
the sale of foreign securities (see sections 12.3Capital
Gains (Corporations) and 13.3Capital Gains
(Individuals) below) and is also exempt from tax on
interest and exchange rate differentials on deposits in
foreign currency and on dividends, interest and exchange
rate differentials on foreign securities.

However, a foreign resident company is not eligible to
receive any capital gains tax relief, reductions or
exemptions, notwithstanding its aforesaid status, if an
Israeli resident is a controlling member of such foreign
resident company (i.e., a shareholder who directly or
indirectly, alone or together with others, holds more than
25% or more of such foreign resident companys means
of control, or is directly or indirectly the beneficiary, or

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entitled to receive 25% or more of the income or profits, of
such foreign resident company).

(g) VATas for the exemptions from VAT in respect of a sale
of asset or rendering a service to a foreign residentsee
section 3.1Export Incentives or Guarantees above.

3.3.2. Are the incentives restricted by the duration of the activity?

Most of the incentives are not restricted by the duration of the activity,
unless the period of activity is extended as a consequence of the
foreign resident becoming an Israeli resident. The incentives
applicable to the deduction of expenses of the respective stays of
foreign experts and foreign sportsmen (see section 3.3.1(d) above) in
Israel are restricted in time and the relevant expert or sportsman, as
applicable, will not be permitted to deduct such expenses after the
elapse of one year.

3.3.3. What is the process of application?

With respect to tax incentives under the Capital Investments Law, the
application procedure would be done on a case-by-case basis,
examples of some of which are set out in section 3.2.2 above.

With respect to an exemption from tax on interest income deriving
from deposits, the foreign resident must declare his status as such,
either: (a) by no later than the commencement of the relevant tax
year; or (b) within fourteen days from the date of the first making of
the deposit, whichever is the later.

With respect to an exemption from capital gains tax, the foreign
resident must furnish a declaration (in a specified form) to the tax
authorities, attesting to his status as a foreign resident and as to his
entitlement to such exemption.

3 3. .4 4. . R Re eg gi io on na al l T Ta ax x I In nc ce en nt ti iv ve es s f fo or r F Fo or re ei ig gn n I In nv ve es st to or rs s

Are there tax incentives for the investor that exists only in certain
regions of the country?
Does the investor need to receive approval to be eligible for these
incentives?
Are the incentives restricted by the type of activity?
Are the incentives restricted by the duration of the activity?
What does the process of application involve?

There are no regional tax incentives for foreign investors, but only
national tax incentives, as detailed above.

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Please note that (and as a reminder), Chapter 3 above has been prepared to accord
with the relevant Israeli legislation in effect as at December 31, 2004. However,
while finalising this Guide, the Capital Investments Law (being the major legislation
applicable with respect to foreign investments in Israel) was substantially amended
affecting, inter alia, the scope of tax benefits and grants available to foreign investors
willing to invest in Israel (said amendment having been accepted by the Knesset on
March 29, 2005). In the circumstances, the aforesaid amendment to the Capital
Investments Law will be incorporated in the forthcoming update to this Guide. .

4 4. . F FI IN NA AN NC CI IA AL L F FA AC CI IL LI IT TI IE ES S

4 4. .1 1. . B Ba an nk ki in ng g/ /F Fi in na an nc ci ia al l F Fa ac ci il li it ti ie es s

4.1.1. What kind of financial institutions exist?

As will be described below, various types of banking corporations
exist in Israel: viz., banks; mortgage banks; investment finance
banks; merchant banks; financial institutions; and joint services
companies.

Israel has fifteen commercial banks, the five largest of which are:
Bank Leumi leIsrael B.M., Bank Hapoalim B.M., Israel Discount
Bank Ltd., The First International Bank of Israel Ltd. and Mizrahi
Tefahot Bank Ltd. In addition, the following banking corporations
have been established in Israel: four branches of foreign banks, two
mortgage banks, one financial institution and two joint services
companies.
9

In addition to the above-referenced banking corporations, the
following sources provide, inter alia, alternative financial, investment
and asset-management services and loans to investors: insurance
companies, pension funds, severance pay funds, mutual funds and
leasing companies.

4.1.2. Must the investor maintain a bank account in the country?

Local Bank Account

In general, an investor is not obliged to open a local bank
account. The decision to open a local bank account would
depend upon the nature of the investment being made and the
proposed activities to be performed in Israel.

Investment in the TASE

9 Some of the information contained in this section 4.1.1 was obtained fromthe internet site of the Bank of Israel
(www.bankisrael.gov.il).

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Foreign investors wishing to trade in Israeli securities do so
through local brokers. Foreign individual investors may open
an account with an Israeli bank, which is a member of the
TASE, or with a brokerage firm, enabling such foreign investors
to have direct access to local market research and analyses as
well as to asset-management services. Currently, the members
of the TASE comprise twelve Israeli banks, eleven Israeli
brokerage firms, two international brokerage firms, two foreign
banks and one foreign corporation recognised as a remote
member. Upon a foreign investors purchase of securities
through a TASE member firm, the foreign currency is converted
to NIS and the local bank account debited accordingly. Upon
the sale by such foreign investor of such securities, the
proceeds thereof are credited to the local bank account in NIS.
The foreign investor may elect to maintain the proceeds which
he receives from a sale of securities either in NIS or to have
them reconverted into foreign currency.
10

4.1.3. What are the requirements for opening a bank account?
11

In the case of an individual

In order to open an account at a commercial bank, the applicant
is required to furnish certain identifying details such as: name,
address, identity card number or passport number, date of birth,
names of parents, sex and citizenship (if not Israeli). In
addition, a photocopy of the applicants identity card or, if the
applicant is not Israeli, the first page of the applicants passport,
will also need to be furnished. Some banks accept only bank
account opening documents signed before an officer of such
bank.

In the case of a body corporate

The management of a company (usually its board of directors)
is the organ authorised to open a bank account on behalf of a
company. Accordingly, the decision to open a bank account
must first be adopted in a resolution duly passed by the board
of directors of the company. It should be mentioned that the
bank at which the account is to be opened may supply its own
form which includes the necessary decision and details for
managing the account as well as a lawyers certification
regarding the company, including with respect to its controlling
shareholders. In addition to a board resolution, the following
documents should be furnished to the bank:

10 Some of the information contained in this section 4.1.2 was obtained from the internet site of the TASE
(www.tase.co.il).
11 The source of the information contained in this section 4.1.3 was taken from the textbook (in Hebrew), R. Ben-
Uliel, Banking Law, General (1996) at pp. 139-143; and at pp. 197-200.

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(a) a photocopy of the companys incorporation documents
together with its certificate of registration (as obtained
from the Registrar of Companies, if a company is
registered in Israel) as well as a lawyers certification; and

(b) a list of the companys shareholders and directors as well
as the names of those persons who will have signatory
rights with respect to the account to be opened on behalf
of the company, all as certified by a lawyer.

It should be noted that according to the Prohibition on Money
Laundering Regulations, every bank is required to identify, in
person, the holder of the relevant bank account with such bank
as well as the authorised signatories of such account. In
addition, when opening a bank account, the customer is
required to declare whether such bank account will be operated
for himself or whether he will be acting as a trustee on behalf of
another with respect to such bank account and if acting as a
trustee, to provide necessary information about such other
person (the beneficiary).

4.1.4. What are the restrictions, if any, on the investors use of the account?

In general, there are no restrictions on the investor making use of
funds being maintained in the bank account in Israel.

However, it should be noted that the Prohibition on Money
Laundering Law requires financial institutions, inter alia, to comply
with disclosure and reporting obligations. In a nutshell, a financial
institution is required to disclose the identity of an applicant seeking
to receive financial services from it and to report to the relevant
authority specified in the Prohibition on Money Laundering Law
regarding any transaction that falls into either of the following
categories:

a transaction the value of which exceeds the amount specified
in the Prohibition on Money Laundering Law; and

transactions deemed to be unusual.

In addition, the Prohibition on Money Laundering Law imposes
certain reporting and disclosure duties on all persons located in Israel
who, other than through a recognised Israeli banking corporation,
ordinarily and/or from time to time receive funds from abroad or
withdraw funds from Israel.

4.1.5. What is the type of financial system in the country?
How is the banking system structured?

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Israel has a modern well-developed financial system that provides a
wide range of banking, financial and credit services. The banking
systems history dates back to 1903, upon the establishment of the
Anglo-Palestine Company. Subsequently, during the period of the
British Mandate in Israel and pursuant to legislation that was enacted
thereafter, the financial system in Israel grew and developed. After
the establishment of the State of Israel in 1948, legislation was
enacted regulating the establishment of the banking system and its
overall supervision by a central bankthe Bank of Israel.

In May 2010, Israel was invited to become a member of the OECD
Organisation, following a review process that lasted nearly three
years. This intensive process was conducted by 18 OECD
committees, which scrutinised Israels compliance with OECD
standards. The Israeli economy is expected to benefit from the
transformative effects of OECD membership, including, inter alia, the
encouragement of international investments in Israels economy.

The Banking Law, the Banking Ordinance, and the Bank of Israel Law
establish the banking systems basic structure and function.

The Banking Law

The Banking Law embraces a model of universal banking
according to which banks are permitted to participate in diverse
and varied financial activities, including dealing in securities.

The Banking Law distinguishes between the different types of
banking corporations which exist in Israel, namely, banks;
mortgage banks; investment finance banks; merchant banks;
financial institutions; and joint services companies. Each of
these banking corporations engages in a specific area of
financial activity.

Thus, for example:

a mortgage bank engages, inter alia, in the following
activities: receiving money deposits earmarked for the
grant of a loan; granting long-term credits to finance the
acquisition of immovable property or to finance
construction; and brokering financial and commercial
transactions within the sphere of its activities;

an investment finance bank engages, inter alia, in the
following activities: issuing securities and granting long-
term credits to finance investments in the fields of trade,
industry and agriculture;

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a merchant bank and a financial institution are banking
corporations that engage in similar activities to those of a
commercial bank, save for accepting monetary deposits in
current accounts;

a joint services company may only render services to
banking corporations. The purpose of a joint services
companys categorisation as a banking corporation is
largely to ensure that it will continue to remain under Bank
of Israel supervision.

The Bank of Israel Law

The Bank of Israel is the countrys central bank. Under the
provisions of the Bank of Israel Law, the Banking Law and the
Currency Control Law, the Bank of Israel has wide-ranging
responsibilities including, inter alia: regulating and directing
monetary policy with an emphasis on inflation stability, acting as
economic advisor to the Israeli government, regulating and
overseeing the foreign currency market and managing the
foreign exchange reserves, monitoring and analysing foreign
exchange activity, providing overall banking supervisory
activities, promoting financial stability, issuing currency, acting
as banker to the Israeli government and to all banking
corporations and representing Israel in international institutions
on a monetary scale.

It should be noted that the Bank of Israel Law emphasises the
importance of the independence of the Bank of Israel with
respect to the regulation and direction of the monetary policy.

In addition to the banking corporations listed above, financial
facilities may also be provided from alternative sources, such
as: insurance companies, pension funds, severance pay funds,
mutual funds and leasing companies.

4.1.6. Is there a stock market?

There is only one stock exchange in Israelthe TASEwhich was
established and commenced operation in 1953. In 1968, the Knesset
enacted the Securities Law, which created a uniform regulatory
framework for the TASEs activities and operations. The TASE
derivatives market opened in 1993 improving the investment
communitys ability to manage risk. In 1997, the fully automated Tel-
Aviv Continuous Trading system (or TACT) was introduced and as of
the end of 1999, all listed securities as well as derivatives are traded
on the newly-integrated trading platform.

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Since the mid-1990s the TASE has become a focus of interest for
international investors. The relative stability of the Israeli market
during the 2008 economic crisis and the prospects of Israels
growing, technology-driven economy have attracted some of the
worlds most distinguished investment houses to the region. In turn,
these investors have become active and influential participants in the
Israeli stock market.

The markets advanced regulatory framework is based on the
Securities Law, the provisions of which are far-reaching and
enforceable by the Securities Authority, thus providing investors with
the highest level of protection. The TASEs high regulatory and
technological standards have also been recognised by the
U.S. Securities and Exchange Commission ( SEC ), which has
designated the TASE as a competent offshore securities market.
Such recognition was achieved after review by the SEC of the
TASEs supervisory, reporting, clearing and settlement systems. The
TASE is an active member of both the International Federation of
Stock Exchanges (FIBV) and the International Options Markets
Association (IOMA).

The volume of shares being traded on the TASE extends to more
than 750 listed companies engaging in all industrial sectors, thus
offering broad opportunity for international investors. More than 50
TASE-listed companies are also listed on stock exchanges in other
countries, most notably those of the USA (e.g., the Nasdaq and New
York Stock Exchange). As a consequence of such dual listings, there
has been a considerable increase in such companies investor base
which has resulted in a vast improvement in the overall volume of
shares being traded on the TASE. The number of large-cap shares
has increased substantially in the past decade, mainly due to
privatisation. The stocks of the major Israeli banks and other
companies previously owned by the Israeli government are amongst
the most-liquid in the market.
12

4.1.7. Can the investor receive bank loans?

Local banks grant loans to investors in the ordinary course of
business. The terms of the loan depend upon the financial strength
of the investor/borrower.

5 5. . E EX XC CH HA AN NG GE E C CO ON NT TR RO OL LS S
1 13 3

5 5. .1 1. . B Bu us si in ne es ss s T Tr ra an ns sa ac ct ti io on ns s w wi it th h N Na at ti io on na al ls s, , R Re es si id de en nt ts s o or r N No on n- -R Re es si id de en nt ts s

12 Some of the information contained in this section 4.1.6 was obtained from the internet site of the TASE
(www.tase.co.il).
13 Some of the information contained in this Chapter 5 was obtained from the following internet sites:
www.justice.gov.il; www.mof.gov.il.

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5.1.1. How are nationals, residents and non-residents defined?

The pertinent Israeli law regulating exchange controls is the Currency
Control Law. Israeli residents are defined in the Currency Control
Law as comprising any of the following:

(a) an Israeli citizen, or a person located in Israel (including Judea,
Samaria and the Gaza Strip, but excluding those areas
controlled by the Palestinian Authority, the Area ) under an
immigrants visa or a permit for permanent residence (see, in
this regard, Chapter 16Immigration Requirements), provided
that during the previous twelve months such person spent at
least 180 days, whether consecutively or on an interrupted
basis, in Israel or in the Area;

(b) a corporation registered or required to be registered in a
register maintained under any law enacted in Israel or in the
Area, or a person, other than an individual, whose core activity
is in Israel or in the Area; or

(c) a person who meets the requirements prescribed by the
Minister of Finance and approved by the Knesset Finance
Committee.

A foreign resident is defined in the Currency Control Law as anyone
who is not an Israeli resident.

5.1.2. Are there restrictions on conducting business with nationals, residents, or
non-residents?

Under the Currency Control Law, a transaction in foreign currency or
with respect to foreign security to which an Israeli resident is a party,
regardless of whether the transaction takes place within, or outside
of, Israel, requires a permit. The Currency Control Law provides that
a transaction to which a foreign entity is a party (save for transactions
performed by tourists in the ordinary course) requires a permit, if it
was made within, or outside of, Israel and refers and/or relates to an
asset located in Israel. The Currency Control Law further provides for
the issue of general and class permits that obviate the need to obtain
additional consent from the Controller of Foreign Currency.

In May 1998, a General Permit reflecting a very significant
liberalisation of currency control policies was issued. With effect from
such date, virtually all current controls were lifted by the Israeli
government and as of January 1, 2003, all transactions in foreign
currency as well as in foreign securities are permissible.

5.1.3. Are there reporting requirements?

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With the lifting of currency controls, as aforesaid, all reporting duties
relating thereto were concomitantly expanded. The obligation to
report to the Controller of Foreign Currency extend to: Israeli
residents, financial brokers (including, inter alia, banks, providers of
currency exchange services and investment portfolio managers),
pension funds, benefit funds and insurers. Disclosure of information
and reporting obligations extend to performance of certain
transactions (including the transfer of money into and out of Israel
and the possession of money) involving Israeli residents and foreign
currency or between Israeli residents and foreign residents or
involving foreign residents and Israeli currency. The minimum
amount triggering a financial brokers duty to make the relevant report
(excluding an investment portfolio manager) is US $50,000 (in the
event the transaction is performed in foreign currency) or
NIS 200,000 (in the event the transaction is performed in Israeli
currency).

A financial broker (excluding providers of currency exchange
services) is also required to submit a report regarding the balances of
Israeli securities held on behalf of a foreign resident, or of foreign
securities held on behalf of an Israeli resident to the Controller of
Foreign Currency. In the event such balances exceed US $100,000
(or NIS 400,000), or the securities are held on behalf of a bank, an
investment portfolio manager, pension funds, benefit funds and
insurers, the identity of the person for whom the security is being held
together with details of the security must be reported.

Both Israeli residents and foreign residents are subject to reporting
requirements. An Israeli resident is obliged to inform the financial
broker of any transaction performed between him/her and a foreign
resident or of any transaction performed in foreign currency with
another Israeli resident. A foreign resident performing a transaction
in Israeli currency is obliged to inform the financial broker whether the
transaction was made with a foreign resident or with an Israeli
resident and the nature of the transaction (in the event it was made
with an Israeli resident).

5.1.4. Can the investor receive loans from nationals, residents or non-residents?

There are no currency control restrictions on loans being obtained
from, or granted to, Israeli residents or non-residents. However,
Israeli residents are obliged to report the terms of the loan (if the
amount thereof is equal to, or exceeds, NIS 400,000 (or
US $100,000)) within fifteen days of the loan being made or received,
as applicable.

5 5. .2 2. . I In nv ve es st tm me en nt t C Co on nt tr ro ol ls s

5.2.1. Are there restrictions on direct investments in the country?

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Subject to the aforegoing, there are no currency control restrictions
on direct investments in Israel.

5.2.2. Are there restrictions on indirect investments in the country? Must the
investor make declarations regarding the nature of his investment?

There are no exchange restrictions on indirect investments in Israel.
However, as mentioned above, reporting requirements apply, in
certain cases, both to Israeli and foreign residents. For example, a
foreign resident is obliged to report any acquisition of securities by
such foreign resident in an Israeli resident company which is
performed in exchange for the allotment of securities in such foreign
resident company.

5 5. .3 3. . M Mo on ne ey y T Tr ra an ns sf fe er r

5.3.1. Is there free determination of exchange rates?

Foreign currency is traded against the NIS between commercial
banks and customers and between the banks themselves on the
interbank market. The Bank of Israel is authorised to intervene in the
determination of exchange rates. However, in recent years, the Bank
of Israel has adopted a policy of non-intervention in the foreign
exchange market. The Bank of Israel publishes foreign exchange
rates based on supply and demand and on the strength of other
currencies in world financial markets. Parties to transactions which
are indexed or linked to foreign currencies are free to perform such
transactions at the exchange rate of their choice.

5.3.2. Are there restrictions on the transfer of money into or out of the country?

The Currency Control Law and the General Permit also apply to the
transfer of money into or out of Israel. Another pertinent law is the
Prohibition on Money Laundering Law, which imposes certain
identification and reporting obligations on financial institutions,
including banks, stock exchange members and providers of currency
exchange (see in this regard, Chapter 4Financial Facilities). The
aforesaid financial institutions are obliged to identify any person,
whether an individual or a company, wishing to obtain their services
and to report certain transactions to the Money Laundering
Prohibition Authority. The Prohibition on Money Laundering Law
imposes, inter alia, a duty on a person who enters or leaves Israel
with a sum of NIS 80,000 or more, to report such monies (including
cash, bankers cheque and travellers cheques) at the time of his
entry to Israel or departure therefrom. The aforegoing reporting
obligation also applies to a person transferring monies into or out of
Israel by mail or in any other manner. However, this reporting
requirement does not apply to the Bank of Israel, commercial banks

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or a person transferring monies into or out of Israel through a banking
corporation.

5.3.3. Are there restrictions on the remittance of profits abroad?

Subject to the provisions of the Prohibition on Money Laundering Law
and of the Currency Control Law specified above, the remittance of
profits abroad may be subject to the deduction of withholding tax.

5.3.4. Are there reporting requirements?

The reporting requirements under the Currency Control Law apply
also to the transfer of money (see section 5.1.3 above). In addition,
reporting requirements are imposed under the Prohibition on Money
Laundering Law (see section 5.3.2 above).

5.3.5. Can hard currency be taken out of the country?

Yes, however, the Currency Control Law provides that if an amount of
at least US $50,000 or NIS 200,000 has been transferred from an
Israeli residents account to a foreign residents account without the
Israeli resident informing the bank or the provider of currency
exchange services thereof, the utilisation of such monies shall be
limited to cash withdrawal only. See in this respect also section 5.3.2
above.

6 6. . I IM MP PO OR RT T/ /E EX XP PO OR RT T R RE EG GU UL LA AT TI IO ON NS S
1 14 4

6 6. .1 1. . C Cu us st to om ms s R Re eg gu ul la at ti io on ns s

6.1.1. Is the country a member of GATT?

Yes. Israel is a contracting party to the General Agreement on Tariffs
and Trade (GATT). Israel also played an active role in the Uruguay
Round, leading to the establishment of the WTO. The WTO
Agreement was ratified by the Knesset on January 15, 1995.

6.1.2. Is the country a member of the EEC?

Israel is not a member of the European Union. However, pursuant to
an agreement signed in November 1995, Israel is a participant in the
European Unions Research and Development Framework Programs.

6.1.3. Is the country a party to a regional free trade agreement?

Israel is party to regional free trade agreements with the following
countries/trade organisations:

14 Some of the information contained in this Chapter 6 was obtained fromthe internet site of the Israeli Ministry of
Foreign Affairs (www.mfa.gov.il) and from WTO Trade Policy Review on Israel, August 13, 1999.

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the European Union (EU)the agreement, which was ratified in
1976, was the first Free Trade Area Agreement (FTAA) entered
into by Israel. In 1995, this FTAA was replaced by a new and
expanded agreement. The agreement allows for all industrial
products and major agricultural products to be duty free and
also provides for economic cooperation between the various
member states and Israel;

the USAthe agreement was ratified in 1985 and allows, inter
alia, for all industrial products to be duty free;

European Free Trade Association (EFTA)the agreement was
ratified in 1993 and allows for all industrial products and certain
agricultural products to be duty free;

Jordanthe agreement entered into between Israel and Jordan
in 1995 constitutes a free trade and economic cooperation
agreement, within the framework of which the parties undertook
to cancel any existing economic embargoes and to take the
necessary steps towards achieving economic cooperation;

Canadathe agreement was ratified in 1997 and, with
immediate effect, exempted almost all industrial products from
customs duties;

the Czech Republic and Slovakiathe respective free trade
agreements were ratified in 1997. Customs duties with respect
to most industrial products were rescinded when these
agreements became effective. Today, all industrial products
are exempt from customs duties and tariff-rate quotas have
been imposed on certain agricultural products;

Turkeythe agreement was ratified in May 1997 and, with
immediate effect, customs duties with respect to most industrial
products were rescinded. Today, all industrial products are
exempt from customs duties and tariff-rate quotas have been
imposed on certain agricultural products;

Hungary (1998), Poland (1998), Slovenia (1998)the
respective provisions of the agreements entered into with each
of these countries provide for phased tariff reduction on
industrial products and tariff-rate quotas on some agricultural
products (similar to the provisions included in the FTAA with
Turkey, as referred to above);

Mexico (2000)the provisions of this agreement are similar to
those included in the FTAA with Canada, as referred to above;
and

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Romania (2001) and Bulgaria (2001)the respective
agreements entered into with each of these countries allows for
most industrial products to be duty free.

6.1.4. Does the Customs Department value the goods?

Prior to 1998, Israel followed the Brussels Definition of Value,
pursuant to which the value of imported goods was construed to
mean the value of the goods on the open market on the date of their
release from customs.

As part of its WTO commitments, Israel amended its pertinent
legislation, switching from the Brussels Definition of Value to the
transaction value, as a basis for customs valuation. For customs
purposes, transaction value is determined by the price paid or
payable for the relevant goods when they were sold for export to
Israel, adjusted to reflect certain costs not already included in the
price borne by the buyer. Such costs include purchase fees and
commissions, as well as other fees payable in respect of containers;
packaging; royalties and licences; transportation to the ports; loading;
unloading and handling; insurance, etc. The amount of such costs
are calculated based on objective data capable of assessment.

6.1.5. How are goods cleared through customs?

In line with its trade facilitation policy, Israel has developed an
integrated electronic foreign trade system to facilitate and simplify all
stages of the customs clearance procedure, from the initial shipment
of goods to payment of customs duties thereon. Customs clearance
procedures are the same for most-favoured nations (MFN) and
preferential imports. An electronic foreign trade system is now fully
computerised, with all customs brokers being able to gain access to
the database of, and be directly linked with, the customs authorities.
All imports are processed by computer. Inspection of imported goods
is based mainly on risk assessment and, to a much lesser extent, on
random selection. No provisions are available for clearance prior to
the landing of imports. The documentation can, of course, be
prepared in advance. Pre-shipment inspection is not a mandatory
requirement.

Goods brought to Israel may be left at the port or placed in public
bonded warehouses or other storage places approved by customs.

6.1.6. Are there applicable tariffs?

Israel has, since January 1988, adopted the Harmonised System
(HS) as a means for determining and classifying applicable tariffs and
the 1996 version of HS constitutes the current basis upon which tariff-
quotas are set in Israel.

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6 6. .2 2. . E Ex xp po or rt ts s

6.2.1. Are there restrictions on exports?

Controlled exports are included in the Annexes to the Free Export
Order. Annexes 14 contain a list of items with respect to which
export is prohibited under law (unless a special licence or permit has
been obtained), for various reasons, such as quality control and
standards for Israeli goods, compliance with international agreements
(including those regarding dangerous drugs and protection of plants
and animals) and goods falling within the scope of the security
authorities. Annex 5 details the countries to which exports are
restricted.

Israel prohibits direct export to countries that do not allow trade with
Israel or that have no diplomatic relations with Israel. Israel may also
impose trade embargoes under provisions of international
agreements. Israel also complies with United Nations resolutions
with respect to trade embargoes.

6.2.2. Are export licences required?

The pertinent Israeli legislation regulating exports is the Free Export
Order. The Free Export Order permits the export of goods which are
not prohibited, whether under such Order or any other order.

Unless otherwise prohibited in the Free Export Order or restricted in
any of the Annexes thereto (see section 6.2.1 above), the export of
goods is permitted without a licence. If the export of certain goods is
prohibited or restricted in any manner, such export may be allowed
only by obtaining a special licence. Israel maintains an export
licensing system, inter alia, with respect to certain food products and
fresh agricultural products for sanitary and quality control; diamonds
and certain precious stones; as well as certain tools. In addition, an
export monitoring system is in place for the export of waste (paper
and cardboard for environmental purposes). Licences are issued by
the relevant regulatory authority dealing with the specific subject-
matter for which the licence is sought (for example, the Ministry of
Industry, Trade and Labour has the authority to issue export licences
in respect of industrial products).

6.2.3. Are there applicable export duties?

Exporters can benefit from duty concessions on imported inputs, raw
materials and capital goods. In addition, exporters are exempt, in
most cases, from some indirect taxes, such as VAT (see 3.1Export
Incentives or Guarantees above). Moreover, the fees payable by
exporters for the use of ports and stevedores are less than those
payable by importers.

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6 6. .3 3. . F Fo or re ei ig gn n T Tr ra ad de e R Re eg gu ul la at ti io on ns s

Are there foreign trade regulations on the import or export of goods involved
in the business?

The main legislation pertaining to international trade is the Import and
Export Ordinance, which provides the legal basis for the regulation
and development of foreign trade. Most imports are now covered by
the Free Import Order, permitting the free import of all commodities,
save for those listed in Annexes 1, 2 and 5 thereto; these
commodities are subject to non-automatic licensing (Annex 1),
prohibition (Annex 5which deals with harmful drugs) or specified
conditions (Annex 2). The Customs Ordinance regulates customs
administration, control, documentation, warehousing, valuation,
payments of duties, drawback and legal procedures. The Customs
Order regulates imports with respect to a number of products.
Annex 1 thereto prescribes conditions for the import of specified
products, mainly agricultural products, dangerous chemicals, arms
and munitions, while Annex 2 thereto lists goods that may not be
brought into Israel. The Free Export Order permits the free export of
all products, save for certain listed products with respect to which an
export permit is required.

6 6. .4 4. . I Im mp po or rt ts s

6.4.1. Are import licences required?

Products subject to import licensing are included in Annex 1 to the
Free Import Order. As a general matter, most of these products
concern safety and security.

The customs tariff book contains a column indicating whether a
product is subject to licensing at the time of its import into Israel.
Licences are usually required for import of arms and ammunition,
vehicles, aircraft, vessels and associated equipment as well as for
live animals and animal products.

Licences are issued by any of the Ministry of Industry, Trade and
Labour, the Ministry of Agriculture, the Ministry of Health or the
Ministry of Transport, depending on the type of goods to be imported.
The validity period of licences varies, according to the type of
merchandise involved.

A special import regime applies to imports from countries that have
no MFN agreement with Israel or apply restrictions, de jure or de
facto, on imports from Israel (see section 6.4.4 below). Imports from
these countries are generally subject to licensing.

6.4.2. Are there applicable import duties?

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With most products from the United States, the European Union and
the European Free Trade Association receiving duty-free status in the
Israeli market, relatively few of Israels imports are subject to customs
duties.

Most imports, like domestic products, are also subject to purchase tax
and VAT, while certain items (such as fuels and tobacco) are subject
to additional taxes.

Israel levies VATcurrently at the rate of 16%on most products
sold in Israel, including imports. The VAT element is then
recoverable by the importer upon resale of the goods to consumers at
retail prices.

Purchase tax is levied on certain luxury items and consumer goods,
most notably, motor vehicles, electrical goods, alcoholic beverages
and tobacco. The purchase tax on imports is calculated, inter alia, on
the basis of the customs value thereof to which must be added
customs duties. Thus, certain costs, such as insurance and inland
freight charges, must be added to the declared value of such
imported product for the purposes of calculating the applicable
purchase tax to be imposed with respect to an imported product (and
in order to approximate the local wholesale price therefor). Importers
also have an alternative option of declaring the actual (and not
estimated) wholesale value of the relevant product (after deducting
specific costs applicable to the type of imported product).

6.4.3. Are there applicable import quotas?

During recent years, Israel has eliminated most of its import quotas,
save for those imposed on a few agricultural products, which are
catalogued in Annex 5 of the WTO Agreement on Agriculture and on
ozone depleting substances, under the Montreal Protocol.

6.4.4. Are there applicable import barriers?

There are a number of products, listed in Annex 2 to the Customs
Order, that may not be imported based on public morals, health or
safety considerations. Annex 5 to the Free Import Order deals with
drugs and prohibited chemicals in line with international obligations.

A special import regime applies to imports from countries without
diplomatic relations with Israel and which prohibit imports from Israel.
Imports from the 17 countries affected by the regime are generally
prohibited. These countries include: Afghanistan, Algeria, Bahrain,
Bangladesh, Iran, Iraq, the Democratic Republic of Korea, Kuwait,
Lebanon, Libya, Pakistan, Saudi Arabia, Sudan, Syria, Tunisia,
United Arab Emirates and Yemen.

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6 6. .5 5. . M Ma an nu uf fa ac ct tu ur ri in ng g R Re eq qu ui ir re em me en nt ts s

6.5.1. Must the product contain ingredients or components, which are found or
produced only in the country?

There is no such general requirement. However, there may be
specific requirements for special types of products.

6.5.2. Will the import of certain component parts be permitted only if they are to be
ultimately incorporated in a final product?

See 6.5.1 above.

6 6. .6 6. . P Pr ro od du uc ct t L La ab be el ll li in ng g

Are there applicable labelling or packaging requirements (e.g., multilingual
notices, safety warnings, listing of ingredients, etc.)?

In general, the marketing and labelling of products is regulated by the
Consumer Protection Order and regulations enacted thereunder.
According to the Consumer Protection Order, the marking of goods or
their packaging should be done either by printing, engraving,
stamping or by any other means (other than handwriting).

The marking must include the following details: the name of the
products and their commercial name; the registered trade mark (if
any); the name and serial number of the model (if any); the fact that a
product is a class B product or of an inferior quality, or is defective;
the fact that a product is reconditioned and the date of its
reconditioning; an indication as to the country of origin; the
manufacturers name and address; the importers name and address;
the content; and the weight and volume in metric units. While
Hebrew must be used in all instances, labels in English may be
added, provided that the printed letters are not larger than those
printed in Hebrew. Special labelling requirements apply to imports of
some consumer goods, paper products, handbags, musical
recordings, fertilizers, insecticides, chemicals, pharmaceuticals, some
food products, seeds and alcoholic beverages. Prior to 1995,
marketing and labelling requirements had to be complied with prior to
shipment of products to Israel. However, in 1995, the Ministry of
Industry, Trade and Labour allowed products to be labelled in Israel
(with the exception of cigarettes and tobacco).

Marketing and packaging of food products is governed by the
Consumer Protection Order (Food Products).

Other labelling and packaging requirements may be imposed with
respect to specific types of products (for example, drugs, cigarettes,
etc.).

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7 7. . S ST TR RU UC CT TU UR RE ES S F FO OR R D DO OI IN NG G B BU US SI IN NE ES SS S

7 7. .1 1. . G Go ov ve er rn nm me en nt ta al l P Pa ar rt ti ic ci ip pa at ti io on n

7.1.1. Will the government seek to participate in the ownership or operation of the
entity (e.g., depending on the type of activity involved)?

The Israeli government has, in recent years, expressed its desire to
decrease its participation in the private sector. To this end, the Israeli
government embarked on a policy, the ultimate aim of which was
privatisation of many of the government-held enterprises.
Accordingly, it is unlikely that the Israeli government will seek to
participate in an entitys ownership or operation.

However, over the last decade, in an endeavour to further boost the
Israeli economy and facilitate development in both the private and
public sectors, a novel method of encouraging joint collaboration with
entities engaging in both of these sectors was proposed and adopted
as a means of carrying out certain projects in the field of
infrastructure. The manner for implementing such joint collaboration
involves establishing Public-Private Partnerships (PPPs), between
entities from both the public and private sectors.

Broadly, PPP projects will entail entering into long-term cooperative
agreements between the public and private sectors (for the most part,
being large-scale and complex), pursuant to which the private sector
will provide f public infrastructure/products/services, while utilising the
partners relative advantages through the efficient allocation of risks,
resources and rewards.

7.1.2. If so, to what extent?

Notwithstanding the Israeli governments desire to reduce its
involvement in private enterprise, in order to promote, develop and
provide financial assistance to certain industries, the Israeli
government offers support and encouragement, inter alia, to industrial
R&D by awarding grants, loans, remissions, benefits or reliefs to
Israeli companies engaging in Israel in industrial R&D (see in this
regard, section 3.2Grants, Subsidies or Funds above).

7.1.3. What is the investors potential liability to partners, investors or others?

The extent of an investors liability to partners, investors or others
depends upon: (a) the scope of undertakings to be included in the
relevant agreements to be entered into with such partners, investors
or others; and (b) the nature of the activity to be undertaken by the
relevant parties. A foreign investor interested in investing in a local
enterprise should consult an Israeli lawyer prior to entering into an

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agreement in order to minimise his potential liability to the extent
reasonably possible.

7.1.4. Are there restrictions on capitalisation?

Generally, there are no restrictions on the capital structure of an
entity engaging in business in Israel. For example, the registered
share capital of a company is not usually subject to a minimum or
maximum threshold and capital structures may consist of more than
one class of shares. However, there are certain exceptions to this
general rulefor example, with respect to the operation of a bank or
an insurance company, where a minimum investment in equity is
usually required.

7.1.5. What are the investors tax consequences?

Ordinarily, there is no difference in the tax consequences of private
(as distinct from governmental) businesses and businesses having
governmental involvement.

However, under the Capital Investments Law (or other pertinent
Israeli law (see, in this regard, Chapter 3Investment Incentives)), in
an effort to encourage and further Israeli and foreign investment in
Israel, the Israeli authorities may provide certain tax benefits and
grants to specific business projects.

Moreover, besides providing grants, etc., the Israeli government may
participate in PPP projects or other specific projects or transactions
(e.g., BOT transactions) in an effort to encourage investment in major
enterprises in Israel. With respect to specific transactions, some
relaxation or relief (whether in the form of tax benefits or grants) may
be provided.

See also Chapter 12Tax on Corporations and Chapter 13Tax on
Individuals below.

7 7. .2 2. . J Jo oi in nt t V Ve en nt tu ur re es s

7.2.1. Are joint ventures permitted?

Conducting business by means of a joint venture is permitted in
Israel. The term joint venture is not expressly defined under Israeli
law but, for the purposes of this section 7.2, joint venture shall mean
a commercial venture between two or more separate legal entities
that pool their resources and carry on a specialised business activity
without establishing a separate legal entity, and instead rely solely on
the execution of a joint venture agreement (or cooperation) between
them.

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Accordingly and for the purposes of this section 7.2, one may
distinguish a joint venture from a partnership or a company, inter
alia, because a joint venture per se is not regarded as a separate
legal entity, with each partys liability thereunder limited to the scope
of its obligations in the joint venture.

For further details on the establishment of a joint venture company or
a registered partnership in order to conduct business in the form of a
joint venture, see sections 7.3 and 7.5, respectively, below.

7.2.2. If so, what is the registration or incorporation procedure?

There is no registration or incorporation requirement for a joint
venture. However, in the event that a joint venture company has
specifically been incorporated in order to operate the joint venture
business on behalf of two already existing companies, partnerships or
persons, the registration procedure for such joint venture company
will be similar to the registration requirements of a limited liability
companysee section 7.3.2 below. Similarly, with respect to a joint
venture partnership specifically incorporated in order to operate the
joint venture, the provisions of section 7.5Partnerships General or
Limited below will apply.

7.2.3. How long do these procedures take?

The time required to establish a joint venture will depend upon the
length of time it takes the parties to negotiate and agree upon the
terms and conditions of the joint venture agreement.

7.2.4. What costs and fees are involved?

Save for legal fees, no other costs are involved.

7.2.5. Must a national of the country or a related state (e.g., the EEC) be a
participant, manager or director?

There is no requirement that an Israeli citizen or resident be a
participant, manager or director of the joint venture and a foreign
national may be appointed to serve in the joint venture in any of the
aforegoing capacities. However, certain restrictions are imposed on
foreign investors serving in any such capacity in certain sectors, such
as telecommunications and broadcasting.

7.2.6. What is the investors potential liability?

The scope of the investors potential liability will depend upon the
contractual undertakings and the nature of the actual investment in
the joint venture. However, parties engaging in a joint venture should
avoid being called or regarded as a partnership (i.e., persons carrying
on business with the aim to achieve a profit), since establishment of a

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joint venture partnership is likely to result in one of the parties thereto
(in this case, the investor) being liable for the actions of the other
party (for further details on potential liability in partnerships, see
section 7.5Partnerships, General or Limited below).

A foreign investor wishing to conduct business in Israel through a
joint venture should consult an Israeli lawyer prior to entering into any
joint venture agreement in order to ensure that the investors liability
thereunder is limited to the extent reasonably possible.


There are no restrictions on the capitalisation of joint ventures and
the level of capitalisation required will be dependent upon the
commercial factors required to operate the joint venture.


As mentioned above, under Israeli law, a joint venture is not regarded
as a separate legal entity. Therefore, the tax consequences depend
upon the manner in which the joint venture is incorporated for
engaging in the particular business activities, as may be determined
by the parties to the joint venture. With respect to the tax
consequences for a companysee Chapter 12Tax on
Corporations below. With regard to the tax consequences for a
partnership or other legal bodiessee Chapter 14Tax on Other
Legal Bodies below.

7 7. .3 3. . L Li im mi it te ed d L Li ia ab bi il li it ty y C Co om mp pa an ni ie es s

7.3.1. Are limited liability companies permitted?

Establishment of a limited liability company, perhaps, the most
common formal structure through which business may be conducted
in Israel, is permitted in Israel.

As the term connotes, a limited liability company refers to the extent
of liability each shareholder in such company has, having regard to
the amount of share capital invested by such shareholder, while the
company itself retains unlimited liability for its debts. However, the
Israeli courts may pierce the corporate veil (i.e., impose obligations
on a companys shareholders) in some circumstances.

In general, under the relevant provisions of the Companies Law,
every person (it is permissible for a company to have a sole
shareholder) has the right to incorporate a company, provided that
the objects of the company do not contravene the provisions of the
Companies Law, are not immoral or do not conflict with public policy.

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A company is deemed to exist from the date of its incorporation, as
reflected in its Certificate of Incorporation (as issued by the Registrar
of Companies) and ceases to exist upon such company being wound-
up (whether voluntarily or compulsorily).

There are two main types of limited liability companies which may be
incorporated under the Companies Law including:

a public companya company whose shares are listed for
trading on an approved stock exchange or which were offered
to the public by way of a prospectus, as defined in the
Securities Law, or which were offered to the public abroad
under a public offering document as required by statute in the
relevant jurisdiction, and which are held by the public; and

a private companywhich is defined in the Companies Law as
a company that is not a public company.

A private company consists of two or three main organs: (a) the
General Meeting, which, inter alia, has the authority to amend the
companys articles of association and, usually, the authority to
appoint the companys directors; (b) the Board of Directors, which
must have a minimum of one director and whose primary function is
to formulate the companys policy; and (c) optionally, the general
manager, who may or may not be a member of the Board of Directors
and who is responsible for the day-to-day operation of the companys
affairs under the direction of the Board of Directors.

7.3.2. If so, how are they registered or incorporated?

Several documents need to be submitted to the Registrar of
Companies in order to register a company. Such documents (some
of which must be prepared in the Hebrew language) include the
following:

a copy of the articles of association (by-laws) of the company,
which shall include details such as: the name of the company;
the objects of the company; particulars relating to the registered
share capital; and particulars relating to limitation of liability. In
addition, the company may include in its articles of association
matters relating to the company or to its shareholders,
including: the rights and obligations of its shareholders,
provisions with respect to the management of the company, the
number of directors that may be appointed to the board and any
other matter which the shareholders deem necessary or proper
for inclusion therein;

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an application to the Registrar of Companies to register the
company, duly signed by the companys shareholder(s) and
whose signature is thereafter certified by a lawyer;

a written declaration by the first directors of the company,
setting forth, inter alia, their willingness to act in such capacity;

a written declaration by the shareholder(s) in which it is stated,
inter alia, that there is no legal restriction preventing such
shareholder(s) from incorporating the company;

in the case of a shareholder (which is a body corporate)
incorporated outside of Israel, a certified copy of such
shareholders documents of incorporation including a
confirmation that the foreign corporation is in good standing and
validly exists; and

in the case of a director who is not an Israeli resident, a certified
copy of the personal details of such director as appearing on
the relevant pages of his/her passport.

It should be noted that, inter alia, in order to avoid the registration
procedure set out above, an investor may elect to purchase a
company that has already been incorporated.


After the relevant documents have been filed with the Registrar of
Companies, registration of a new company usually takes
approximately two to three days.


A registration fee is due upon submission of an application to register
a company to the Registrar of Companies. Currently this fee is
approximately US $680.

7.3.5. Must a national of the country or a related state be a participant, manager or
director?

Generally, there is no requirement that the shareholders, manager or
directors of a company be Israeli citizens or residents and a foreign
national may be appointed to serve in any such capacity. However,
as mentioned in section 7.2.5 above, in certain sectors (such as
telecommunications and broadcasting) certain restrictions are
imposed on foreign investors for holding shares in Israeli companies
and in the case of certain types of companies, all or some of such
companies directors are required to be Israeli citizens or residents
(for example, external directors in an Israeli public company must be
Israeli residents, save that where the public companys shares, or

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part thereof, were offered to the public abroad, or are listed for trading
on a stock exchange abroad, then such public company may appoint
an external director who is not an Israeli resident).


Generally no capitalisation restrictions are imposed on private
companies (i.e., no minimum or maximum threshold is fixed for a
private companys registered share capital), save that either all or
none of a companys shares may have a par value.

Accordingly, the level of capitalisation will depend on the commercial
needs required to operate the company, save that with respect to
certain companies (which would include a bank or an insurance
company), a minimum investment in equity is usually required.

The relevant structure of share capital may include more than one
class of shares, each conferring different rights or restrictions on the
holder thereof, however, public companies may only list shares with
equal voting rights for trading on the TASE. A company may buy-
back its own shares without obtaining court approval, provided that
such company has complied with the two cumulative criteria for
distribution of dividends as specified in the Companies Law.


With regard to the tax consequences for incorporating, and engaging
in business through, a company in general, and through a limited
liability company, in particular, see, Chapter 12Tax on Corporations
below.

7 7. .4 4. . L Li ia ab bi il li it ty y C Co om mp pa an ni ie es s, , U Un nl li im mi it te ed d

7.4.1. What are the forms of liability companies?

Establishing an unlimited liability company is permitted in Israel.
Under the Companies Law, the shareholders liability with respect to
a companys obligations may be unlimited and should be expressly
stated as being so in the companys articles of association.

Broadly, an unlimited liability company is a company whose
shareholders bear unlimited liability. It is rare for unlimited liability
companies to be incorporated in order to conduct business.
However, certain professional groups, such as law firms (in the event
that the partners are interested in establishing a company) must, by
law, be incorporated as unlimited liability companies.

7.4.2. How are these companies registered or incorporated?

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Liability companies are formed and registered in the same manner as
limited liability companiessee section 7.3.2 above.


See response to section 7.3.3 above.



7.4.5. Must a national of the country be a participant, manager or director?

There is no requirement that the shareholders, manager or directors
of the company be Israeli citizens or residents and a foreign national
may be appointed to serve in any such capacity. However, certain
restrictions are imposed on certain professions, such as law, where
local qualifications may constitute prerequisites for serving as a
shareholder in such professional unlimited liability company.


The extent of liability of the companys shareholders has no
implications upon the tax consequences of the investor in such
company. With regard to the tax consequences for incorporating,
and engaging in business through, a company (limited and
unlimited)see Chapters 12Tax on Corporations and 14Tax on
Other Legal Bodies below.

7 7. .5 5. . P Pa ar rt tn ne er rs sh hi ip ps s, , G Ge en ne er ra al l o or r L Li im mi it te ed d

7.5.1. Are partnerships recognised or permitted?

Partnerships may be established in Israel. Partnerships are
regulated pursuant to, and in accordance with, the Partnership
Ordinance. Other than certain professional partnerships, the number
of general partners in a partnership may not exceed twenty.
Partnerships of lawyers or accountants may have more than twenty
members. Partnerships may be general or limited and (save for
certain exemptions) must be registered with the Registrar of
Partnerships if they intend to engage in business activities.

A registered partnership has separate legal identity and is able to
own real property, and sue and be sued in its own name.

7.5.2. Must a national of the country or a related state be a partner?

There is no requirement that the partners be Israeli nationals and
foreigners may serve as partners in an Israeli partnership, unless
certain specific restrictions are found to exist (inter alia, restrictions

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imposed on certain partnerships in specific sectors or professions,
such as law, where local qualifications may constitute a prerequisite
for serving as a partner in a partnership).

Foreign partnerships may operate in Israel, provided that the relevant
information with respect to the applicable foreign partnership is
submitted to the Registrar of Partnerships, including, inter alia, details
of the partners and the name of an Israeli resident who is authorised
to accept service of legal documents and notices on behalf of the
foreign partnership. In general, registration of a foreign partnership
may be effected in similar manner as registration of an Israeli
partnership.


A fee is payable to the Registrar of Partnerships upon formal
application being made to register a partnership. Currently, the fee
payable for registering a typical partnership is approximately NIS 500.


The Partnership Ordinance provides for two types of partnerships: a
general partnership and a limited partnership. The liability of the
partners formed under a general partnership is deemed to be joint
and several. Registration of a general partnership must take place
within one month of its incorporation.

A limited partnership must have at least one general partner and at
least one limited partner. The general partners are liable for all of the
debts and obligations of the partnership. The liability of the limited
partners is limited pro rata to the contribution made by such partner to
the partnership. Accordingly, the limited partners may not:
(a) participate in the management of the partnership; (b) be
authorised to undertake obligations on the partnerships behalf; or
(c) bind the partnership in any manner. If a limited partner fails to
comply with the aforegoing restrictions he may be exposed to, and
become liable for, the debts and liabilities of the partnership for so
long as he participates in management of the partnership. The
partnership agreement memorialising, inter alia, the relevant
obligations, undertakings, commitments and the partnership's other
agreed-upon terms and conditions must be filed with the Registrar of
Partnerships and must specify which of the partners will serve as
limited partners and which will serve as general partners. Approval for
the limited partnership must be received prior to the commencement
of operations and is subject to the approval of the Minister of Justice.


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With regard to the tax consequences of engaging in business in Israel
through a partnership, see Chapter 14Tax on Other Legal Bodies
below).

7 7. .6 6. . S So ol le e P Pr ro op pr ri ie et to or rs sh hi ip ps s

7.6.1. Can the investor be a sole proprietor?

It is permissible for an investor to operate in Israel as a sole
proprietor.

7.6.2. How is the sole proprietorship registered or established?

There are no statutory or registration requirements for establishing a
sole proprietorship (other than registering itself with the Israeli
taxation authorities for income tax purposes (if necessary) or in cases
where a permit to operate a business is required by law).

It should be noted that since the entry into force of the Companies
Law (on February 1, 2000), companies may be established with a
single shareholder. Accordingly, the incorporation and functioning of
a sole proprietor company are broadly similar, in all respects, to
companies having more than one shareholder (see section 7.3.2
above).

7.6.3. How long does this process take?

If the sole proprietorship is intended to be registered as a company,
with one shareholder, as mentioned abovesee our response to
section 7.3.3 above.


If a sole proprietor wishes to be registered as a company, the costs
and fees levied in section 7.3.4 above will apply.


Since the sole proprietorship business is not regarded as a separate
legal entity per se, in operating as a sole proprietor, the investor is
exposed to personal unlimited liability for all actions undertaken or
made pursuant to or in connection with the business, including all
debts associated therewith.


Strictly speaking, there are no restrictions on capitalisation and the
level of capitalisation will depend upon the commercial requirements
for operating the sole proprietorship.


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With regard to the tax consequences of an individualsee
Chapter 13Tax on Individuals below.

7 7. .7 7. . S Su ub bs si id di ia ar ri ie es s/ /B Br ra an nc ch he es s/ /R Re ep pr re es se en nt ta at ti iv ve e O Of ff fi ic ce es s

7.7.1. Can the investor establish a branch, subsidiary or representative office?

There are no restrictions under local law on the incorporation of a
local subsidiary of a foreign enterprise. In the event that the local
subsidiary is incorporated in Israel, Israeli law will apply to such local
subsidiary. However, as mentioned in section 7.2.5 above, in certain
sectors (such as telecommunications and broadcasting) specific
restrictions are imposed on foreign investors for holding shares in
Israeli companies.

Alternatively, a foreign company (a company registered abroad as
well as any body of persons registered or organised abroad, other
than a partnership) can maintain a place of business in Israel,
including a share transfer office or a share registration office,
provided that it has been registered in Israel as a foreign company
under the provisions of the Companies Law and the relevant
registration and publication fees have been duly paid.

7.7.2. If so, how long does registration or incorporation take?

The application for registration shall be submitted to the Registrar of
Companies within one month after the establishment of the place of
business, together with the following documents:

(a) a copy and a Hebrew translation, certified as prescribed by the
Minister of Justice, of the documents of incorporation of the
company or under which it operates, as required by the laws of
the state in which it was incorporated, including its articles of
association (by-laws), if any;

(b) a list of the companys directors;

(c) the name and address of a person resident in Israel, who is
authorised to accept, in the company's name, court documents
and legal notices to be served on the company; and

(d) a copy, certified as prescribed by the Minister of Justice, of a
written authorisation which empowers a person ordinarily
resident in Israel to act in the company's name.

If any change occurs in any of the documents referred to above, or in
the directors or in the name or address of one of the persons
enumerated in paragraphs (c) and (d) above, then the company shall
inform the Registrar of Companies within fourteen days of such

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change. A foreign company is required to submit an annual report to
the Registrar of Companies.

A foreign partnership may operate in Israel, provided that the
relevant information with respect to the applicable foreign partnership
is submitted to the Registrar of Partnerships, including, inter alia,
details of the partners and the name of an Israeli resident who is
authorised to accept service of legal documents and notices on
behalf of the foreign partnership.

Obviously, the choice of legal structure for engaging in business
activities in Israel depends on the nature and extent of such activities.


With respect to the incorporation of a local subsidiary, see response
to section 7.3.4 above.

With respect to the registration of a foreign company, the registration
fees will be those applicable for the registration of limited liability
companies as referred to in section 7.3.4 above.

With respect to the registration of a foreign partnership, the
registration fees will be those applicable for partnerships as referred
to in section 7.5.3 above.


Broadly, the tax consequences to be imposed on an investor will be
dependent upon the manner in which the relevant subsidiary, branch
or representative office, as the case may be, is incorporated in Israel
and engages in business.

For example, a local subsidiary will be taxed as a company, as
discussed in Chapter 12Tax on Corporations below. The taxation
of a branch or a representative office, as the case may be, will
generally depend upon the residence of the relevant company and
upon the nature and extent of its activities in Israel. If such company
is a resident of a country with which Israel is party to a double
taxation treaty, then the provisions of such treaty supersede the
relevant provisions of the local law. In this case, if the branch or the
representative office, as the case may be, will be regarded as a
permanent establishment (as such term is defined in the relevant tax
treaty), the income associated with the permanent establishments
activities in Israel will be taxed as Israeli income (i.e., the income of
the permanent establishment will be subject to Israeli companies tax
at the standard rate).
15
) In addition, further tax exposure may arise if

15 I.e., a tax rate of 34% for 2005 and a reduced tax rate for subsequent years, viz., 32% for 2006; and 30% for 2007
and thereafter.

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it is claimed that certain income of the foreign company (produced
outside of Israel) relates to the permanent establishment and is thus
subject to tax in Israel. Operating the branch/representative office
through a foreign subsidiary of the parent foreign company may
reduce potential tax exposure in certain circumstances. If the branch
or the representative office, as the case may be, is not considered a
permanent establishment, its business profits will usually not be
subject to tax in Israel.

Similarly, no branch tax is levied in Israel on transfers of profits (after
first deducting Israeli companies tax) from the branch to the parent
foreign entity, save in the case of an Approved Enterprise (as such
term is defined in the Capital Investments Law) under the control of a
foreign company in certain circumstances (see, in this context,
Chapter 3Investment Incentives above).

If the company is a resident of a country that is not party to a double
taxation treaty with Israel, then any business profits produced in
Israel may be subject to Israeli companies tax.

7 7. .8 8. . T Tr ru us st ts s a an nd d O Ot th he er r F Fi id du uc ci ia ar ry y E En nt ti it ti ie es s

7.8.1. Are trusts or other fiduciary entities recognised?

Israeli law recognises trusts which have been set up to manage or to
operate the assets of a grantor on behalf of the beneficiaries
thereunder and for any other purpose. However, the general view is
that a trust will not be considered a separate legal entity. A trust may
be created by law, by written agreement with a trustee or by a written
instrument of endowment.

7.8.2. If so, how are each defined?

A trust is defined in Section 1 of the Trust Law as

Linkage to any assets by virtue of which a trustee
is bound to hold the same or to act in respect
thereof, in the interest of a beneficiary or for some
other purpose.

7.8.3. What are the legal consequences of a transfer of assets to a trust or
fiduciary?

The trustee is obliged to hold, or act in respect of, the asset for the
benefit of a beneficiary or for some other purpose. The trust property
may not be tampered with, save for payment debts arising from such
property or arising as a consequence of activities performed by the
trust. The income of any trust property or any other asset or right for
which any trust property has been exchanged, shall also belong to
the trust.

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Where any action respecting the trusts requires registration in a
register maintained under any law, the trustee may notify the relevant
person responsible for the register of the trustees existence, and
such person shall make the appropriate recordal.

A trust has effect vis--vis any person who is aware or ought to be
aware of its existence and where notice of the trust has been
recorded, as referred to in section 7.8.3 above, vis--vis the entire
world.

7.8.4. Can the investor be a grantor, trustee or beneficiary?

There is no general statutory requirement that a grantor, trustee or
beneficiary, as the case may be, be an Israeli resident or citizen and,
therefore, a foreign national may serve as a trusts grantor, trustee or
beneficiary, as the case may be.

8 8. . R RE EQ QU UI IR RE EM ME EN NT TS S F FO OR R T TH HE E E ES ST TA AB BL LI IS SH HM ME EN NT T O OF F A A B BU US SI IN NE ES SS S

8 8. .1 1. . A Al li ie en n B Bu us si in ne es ss s L La aw w

8.1.1. Is the business subject to any alien business law?

There is no one statute addressing foreign investment in Israel or the
transaction of business by non-citizens of Israel (see section 2.1.3
above regarding certain restrictions on foreign investment).

Under the Trade with the Enemy Ordinance enacted by the British
mandatory government in 1939 and still in force, trade with a citizen
of a country at war with Israel is prohibited and assets of such a
countrys citizen situated in Israel may be impounded by the Israeli
government.

8.1.2. Are there registration or reporting requirements?

Depending on the area of business and form of business entity,
registration and reporting requirements may apply (see, e.g.,
Chapter 7Structures For Doing Business above, with respect to the
form of business entity). Although there are no exchange control
restrictions on direct or indirect financial investment in Israel, certain
reporting requirements by Israeli residents regarding transactions in
foreign currency exceeding certain thresholds apply (see
section 5.1Business Transactions with Nationals, Residents or
Non-Residents above). Under the Prohibition on Money Laundering
Law and regulations adopted thereunder, persons (including foreign
persons) having or opening bank, brokerage and other accounts have
the obligation to provide certain declarations regarding the ownership
(including the beneficial ownership) thereof to the banks, brokers and

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other entities at which such accounts are maintained (see
section 5.3Money Transfer above).

8 8. .2 2. . A An nt ti it tr ru us st t L La aw ws s

8.2.1. Do the entitys operations comply with antitrust laws?

Entities operating in Israel are subject to the RTP Law which, inter
alia, regulates mergers and acquisitions that meet or exceed relevant
notification thresholds (see section 8.2.2 below) as well as other
types of restrictive practices, such as restrictive arrangements and
monopolies.

Restrictive arrangements

A restrictive arrangement is defined in the RTP Law as an
arrangement made between persons who manage businesses,
according to which at least one of the parties imposes a
restriction on itself that is liable to prevent, or reduce,
competition between itself and all or some of the other parties
to the arrangement, or between itself and a person who is not a
party to the arrangement. Without derogating from the above
definition, a restrictive arrangement exists where there is a
restriction:

with respect to the price being requested, offered or paid;

with respect to the profits to be earned;

on the allocation of all, or part of, a market, by the location
of the business, or by the people, or categories of people,
with whom business is to be transacted; and

on the quantity, quality or category of assets or services in
a business.

At present, the position of the Israeli courts is that these
presumptions apply to both vertical and horizontal restrictions.
However, recent court decisions reveal a tendency to move
away from the per se definition of restrictive arrangements in
the RTP Law.

Broad definition of restrictive arrangements

The RTP Law broadly defines an arrangement to include all
types of agreements and understandings, whether made
formally or informally, orally or in writing, or whether or not such
agreements and/or understandings are legally binding or
enforceable.

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The RTP Law also applies to concerted practices and to
policies set by trade associations which impact on their
members, as well as to the conscious behaviour of a person
who, knowing of the existence of a restrictive arrangement,
adjusts his activities to conform with all, or part of, the
arrangement.

However, there are statutory exclusions and the RTP Law
provides for individual and block exemptions.

Exclusions

Section 3 of the RTP Law excludes a number of types of
arrangements. Major exclusions include the following
arrangements:

where all the restrictions are determined to be in
accordance with the law;

where all the restrictions concern the right to use certain
IP rights, subject to the following two conditions:

the arrangement is made between the proprietor of
the IP right and the recipient of the right to use; and

the IP right is registered as required by law;

an undertaking by an individual selling of the whole of his
business to a purchaser not to engage in the same line of
business. The undertaking must not conflict with
reasonable and established practices;

an arrangement between a company and its subsidiary;
and

an arrangement between a person who acquires an asset
or benefits from a service and the supplier, where all the
restrictions constitute an undertaking by the supplier to
supply those assets or services for marketing purposes,
only to the purchaser and a reciprocal undertaking by the
purchaser to acquire those assets or services only from
the supplier, provided that the supplier and the purchaser
are not competitors.

Exemptions

The RTP Law provides for individual and block exemptions

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Individual exemptionsan individual exemption from the
duty to have a restrictive arrangement approved by the
Antitrust Tribunal can be obtained from the Antitrust
Authority, provided that:

the restrictions in question do not restrict
competition in a substantial portion of the market
affected by the arrangement, or are likely to affect a
substantial portion of the relevant market, but do not
have a substantial effect on competition in that
market; and

the object (or essence) of the arrangement is not to
reduce or prevent competition and all the
restrictions are necessary for implementing this
object.

Block exemptionsunder the RTP Law, the Antitrust
Authority has issued several block exemptions, including
a block exemption for:

agreements whose effect on competition is minor;

joint ventures (this block exemption stipulates
conditions for exemption of a joint venture between
competitors that are more stringent than those
relating to joint ventures between non-competitors);

agreements relating only to the performance of joint
R&D activities;

exclusive purchase agreements;

exclusive distribution agreements; and

franchise agreements.

All other restrictive agreements should be brought before
the Antitrust Tribunal for its approval.

Applications for approval by the Antitrust Tribunal are
judicial proceedings, involving, for example, the filing of
statements of claim and the cross-examination of
witnesses and experts. These proceedings are generally
lengthy, time-consuming and costly.

Any restrictive arrangement is illegal and unenforceable, unless
exempted by the RTP Law or by block exemptions issued under

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the RTP Law or individually exempted by the Antitrust
Controller, or approved by the Antitrust Tribunal.

Monopolies and abuse of market power

The RTP Law regulates (mainly in Chapter Four thereof),
monopolies and abuse of market power. The Antitrust Authority
and the Antitrust Tribunal are the main relevant regulators. The
two main elements of the special statutory regime applicable to
monopolies are:

a declaration made by the Antitrust Controller on the
existence of a monopoly; and

special duties imposed on monopolies.

Declaration of a monopolythe RTP Law empowers the
Antitrust Controller to declare that a certain person or company
is a monopoly. However, this is only a declaration and the
provisions of the RTP Law relating to monopolies and
monopolistic duties will apply, without a declaration, to any
monopoly.

The RTP Law defines a monopoly as a concentration of a
market share that exceeds 50% (no proof of market power is
necessary). The main significance of the declaration is that it
can be used in any legal proceedings as prima facie evidence
of the existence of a monopoly. The Antitrust Controllers
declaration is also intended to be a warning sign to the
monopolist, reminding him of his special position in the market
and (although not necessary under the RTP Law) constitutes a
first step in intervention in the business conduct of the
monopolist.

Limitations imposed on monopoliesunder the RTP Law the
Antitrust Controller can demand in writing that a monopolist:

file an application with the Standard Contracts Tribunal for
approval of an existing or proposed agreement with
customers or suppliers. If the monopolist fails to comply
with the demand within a specified period, he will be
prohibited from making use of, or referring to, the
agreement; and

comply with the Standards Law with respect to any asset
or service manufactured, sold, imported or provided by
the monopolist, whose activity is subject to the standards
specified in the Standards Law.

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The RTP Law also imposes the following restrictions:

a monopolist may not unreasonably refuse to supply or
acquire the asset or service with respect to which he
holds the monopoly;

a monopolist may not abuse his position in the market in
any manner liable to reduce business competition or
injure the public.

The RTP Law specifies several categories of behaviour
that will be deemed an abuse of the monopolists position:

excessive or predatory pricing of the product under
a monopoly;

reducing or increasing the quantity of assets or
scope of services offered by the monopolist, outside
the framework of fair competitive behaviour;

discriminatory practices, which involve setting
different, discriminatory, terms for similar
transactions, which are likely to give certain of the
monopolists customers or suppliers an unfair
advantage over their competitors; and

tying agreements;

if the Antitrust Controller concludes that the existence of a
monopoly injures competition or the public (or that there
exists suspicion of significant injury being caused) he may
instruct the monopolist to take certain measures to
prevent the injury. The monopolist may file an appeal
with the Antitrust Tribunal; and

if the Antitrust Controller cannot prevent injury to
competition or the public by directing the monopolys
operations, he can file an application with the Antitrust
Tribunal for the dissolution of a monopoly into two or more
separate corporate bodies. To date, this sanction has not
been issued by the Antitrust Tribunal or applied for by the
Antitrust Controller.

Violations of the RTP Law

Violations of the RTP Law could, depending on the
circumstances, lead to orders and consent decrees by the
Antitrust Authority, criminal proceedings (that could impose
personal liability on the violators directors, managers and

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officers) and third party (including class action) civil proceedings
for damages. Instances of personal criminal liability and private
antitrust litigation have grown considerably in recent years.

8.2.2. Are there filing requirements?

Merger Control Filing

Once the merger threshold requirements are met (see below), a
merger notice (in the prescribed form) must be filed by each of
the parties to the merger.

Procedural thresholds

The RTP Law broadly defines a merger of companies as
including either:

the acquisition of most of the assets of a company by
another company; or

the acquisition by a company of shares in another
company that gives the acquiring company:

more than 25% of the nominal value of the issued
capital or the voting power; or

the right to appoint more than one-quarter, in
number, of the directors; or

the right to participate in more than one-quarter of
the companys profits.

The filing of a merger notice is only required if the merger falls
within the above definition and if any of the following conditions
are met:

as a result of the merger, the merged entity would be
considered a monopoly (that is, the market share of the
merged companies in the relevant market exceeds 50%).
The Minister of Industry, Trade and Labour may lower this
threshold for a particular market;

the aggregate sales turnover of the merging companies in
the fiscal year preceding the merger exceeded
NIS 150 million (approximately US $42 million) and the
sales turnover of at least two of the merging companies
exceeded NIS 10 million each (approximately US $2.8
million) during that year; or

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one of the merging companies is already a monopoly in
any relevant market.

A merger between non-Israeli companies is viewed by the
Antitrust Authority as falling within the scope of the RTP Law, if
all of these companies conduct business in Israel and meet the
above thresholds (with respect to their activities in Israel only).

Timing

There is no specific timing requirement. However, the parties
must obtain approval from the Antitrust Authority before closing,
or implementing any other action that might be considered
performance of the merger. Therefore, it is recommended to
file the merger notice as soon as possible.

The Antitrust Authority must review a merger notification within
thirty days after its receipt. Failure by the Antitrust Authority to
render a decision within such thirty-day period will be deemed
to constitute an approval of the merger. The Antitrust Authority
can request that the thirty-day period be extended if further
investigation is required.

Filing fees

There is no fee at present but, following an amendment to the
RTP Law (in effect as of 2002), filing fees may be imposed
under regulations enacted pursuant to such amendment.

Review of merger notices

The Economic Division of the Antitrust Authority primarily
conducts the review process. It considers the information
included in the merger notice and any accompanying letter, as
well as any other relevant public information. It can also ask
the views of interested third parties, such as competitors,
suppliers, customers and governmental Ministries.

It is common for the Antitrust Authority to request the notifying
parties to provide additional information. Once the Antitrust
Authority has concluded the information gathering process, the
Economic Division files an internal report containing its
recommendation. The report is then brought before the
Advisory Committee. The Advisory Committee can also
request the Antitrust Authority to provide further information.

The Antitrust Controller must consult the Advisory Committee
before clearing (or denying) a merger, although its advice is not
binding.

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If the Antitrust Authority intends to object to the merger, it will
usually hold an administrative hearing with the notifying parties.
The Antitrust Authority presents its views and gives the notifying
parties opportunity to comment. The notifying parties will be
allowed to provide further information or to provide the Antitrust
Authority with their arguments in light of the Antitrust Authoritys
intended objection of the merger.

In cases where the Antitrust Authority is of the opinion that the
merger should be conditionally approved, the Antitrust Authority
will usually approach the parties concerned with a draft of its
proposed conditions. The parties may then comment on the
proposed conditions in order to reach agreement.

Substantive test for merger approval

Under the RTP Law, a merger will be approved unless the
Antitrust Controller believes there is a reasonable danger that,
as a result of the merger:

competition will be substantially lessened; or

the public will be harmed by the price level, quality,
quantity or the regularity and terms of supply of a
particular asset or service.

Restrictive arrangements in merger agreements

Restrictions included in a merger agreement are not
automatically approved if the transaction is cleared, but, rather,
are reviewed separately by the Antitrust Authority and should
be dealt with by the parties accordingly. If the restrictions are
not excluded or exempt under a block exemption, the Antitrust
Authority should approve them. Under the RTP Law, in certain
circumstances, a non-compete covenant by a person who sells
a business in its entirety will not be deemed restrictive.
Although the Antitrust Authority did propose for public comment
a new block exemption for Restraints Ancillary to Mergers for
public comment, this block exemption is not yet in effect.

8 8. .3 3. . G Go ov ve er rn nm me en nt t A Ap pp pr ro ov va al ls s

Are government approvals required for the anticipated business? If so, how
long does this process take? What fees are involved?

If a merger or acquisition of a business is involved, see section 8.2
Antitrust Laws above for approvals that may be required from the
Antitrust Authority.

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For a discussion of government approvals with respect to benefits
that may be granted under the Capital Investments Law and/or the
R&D Law, see section 3.2Grants, Subsidies or Funds above.

Certain industries (e.g., banking, insurance, telecommunications,
etc.) require licences from the regulatory bodies for such industries in
order to operate in the Israeli market. The length of the process and
fees involved will depend on the industry and the proposed activities
in the Israeli market.

A business may be required to obtain other governmental approvals,
licences and permits, depending on the nature of the anticipated
activities (see section 8.6Licences/Permits below).

8 8. .4 4. . I In ns su ur ra an nc ce e

8.4.1. Must the enterprise carry insurance?

An enterprise is obliged to take out the following insurances: (a) with
regard to salaried employees, those portions of the employees
national insurance contributions and health insurance tax withheld by
the enterprise which must be paid and reported by the enterprise to
the National Insurance Institute on a monthly basis (see further in this
regard section 12.8.4 below); and (b) third party motor insurance with
respect to motor vehicles registered in the name of the enterprise. In
addition, it is customary and recommended for an enterprise to
procure further insurances, depending on the field of activity in which
the enterprise engages, such as: professional liability insurance
(usually taken out by law firms and chartered accountants) and
products liability insurance.

8.4.2. If so, what kind of risks must be insured?

Insurance of the motor vehicle to cover personal injuries incurred as a
result of use of the vehicle. Businesses voluntarily insure against a
wide array of other risks as well, such as professional negligence and
defective products.

8.4.3. Is there a state monopoly on insurance?

There is no state monopoly on insurance.

8 8. .5 5. . L Li ic ce en nc ce es s/ /P Pe er rm mi it ts s

8.5.1. Are licences or permits required for the anticipated activity?

Depending on the anticipated activity, a licence or permit may be
required. The Licensing of Businesses Law authorises the Minister of
Interior, in consultation with a number of different governmental

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Ministries, to require businesses to be licensed in order to protect
environmental quality (see section 8.3Environmental Regulations
above), public peace, safety and health as well as compliance with
planning and building and fire protection requirements. Pursuant to
said law, the Minister of Interior requires businesses operating in the
following general categories to be licensed:

health, pharmacy and cosmetics;

fuel and energy;

agriculture and livestock;

food;

water and waste;

miscellaneous commerce;

public entertainment, relaxation and sport;

vehicles and transportation;

security and protection services; and

industry, crafts, chemistry and minerals.

The Licensing of Businesses Law generally designates the local
authority as the licensing authority, although, depending on the
activity, approval from other governmental bodies may be required. If
the type of business is regulated by another enactment (e.g.,
banking, insurance, telecommunications, etc.), the licensing authority
may refrain from granting a licence as long as the business has not
been licensed pursuant to such other enactment.

New licences are required when ownership or control of a business is
transferred.

8.5.2. If so, how does the investor apply for and receive the necessary licence or
permit? How long does it take to receive the licence or permit?

The length of time to apply for and receive the necessary licence will
depend on the authority approving the licence and the nature of the
activity. Temporary permits may be obtained in certain
circumstances, pending receipt of the licence.

9 9. . O OP PE ER RA AT TI IO ON N O OF F T TH HE E B BU US SI IN NE ES SS S

9 9. .1 1. . A Ad dv ve er rt ti is si in ng g

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Are there restrictions on advertising?

There are wide-ranging restrictions on advertising in Israel.

Specific rules apply to adverts issued for certain products and
services such as foods, medicines and tobacco. Additional
regulations may apply depending on the medium used for advertising
and on the particular consumer group to which such products and/or
services are directed (e.g., minors).

Principally, an advertiser must ensure that the advert does not
contain any libellous or misleading material, is not discriminatory and
does not harm public policy.

The Israeli Broadcasting Authority and the Second Authority for
Television and Radio (two separate and unrelated governmental
bodies regulating Israeli radio and television broadcasts) prescribe
and regulate the standards for programme and advertising content.

9 9. .2 2. . A At tt to or rn ne ey ys s

9.2.1. Is it necessary to have local counsel?

There is no general requirement to appoint local counsel.
Nevertheless, it is highly recommended that specific advice from
Israeli counsel be obtained prior to entering into any transaction with
Israeli law aspects.

In addition, other than in exceptional circumstances, only Israeli
counsel may represent a party in any litigation proceedings initiated in
Israel.

9.2.2. How can local counsel be found?

It is always best to choose lawyers through personal
recommendation, or from an official legal practitioners guide.

9.2.3. How much are attorneys fees?

Most commercial litigation firms use a time-based fee structure;
usually fees range from US $100 to US $500 per hour, depending on
the seniority of the lawyer (articled clerks are employed by law firms
at a lower hourly tariff). Fees do not include out-of-pocket expenses
and VAT (currently 16%). The cost of complex litigation can extend
to hundreds and thousands of US dollars and maybe even higher, in
particularly large cases.

Some firms take cases on a contingency basis. Flat or task-based
fee agreements are not common in large commercial disputes. Fees

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for commercial disputes are not fixed by law, although the Israel Bar
Association does publish a non-binding regulation specifying
minimum fees (see www.israelbar.org.il).

9 9. .3 3. . B Bo oo ok kk ke ee ep pi in ng g R Re eq qu ui ir re em me en nt ts s

9.3.1. Bookkeeping requirements applicable to Companies

Israeli law imposes requirements on private and public companies to
keep accounting records and to prepare and disclose accounting
records.

9.3.2. Accounting Records

Every company is obliged to keep accounting records which are
sufficient to show and explain the companys transactions and in
order to: (a) disclose with reasonable accuracy, at any time, the
financial position of the company at that time; and (b) enable the
directors to ensure that the accounts comply with the legal
requirements.

Israeli law requires that accounting records be maintained at the
companys registered office in Israel for a minimum period of seven
years (the Companies Law).

9.3.3. Preparation and Disclosure of Company Accounts

In the case of private companies, a private company must prepare a
balance sheet, a profit and loss report and other financial reports,
according to Israeli generally accepted accounting principles in force
from time to time ( GAAP ), for each financial year. The companys
external auditor is required to audit the reports. The accounts must
also include a directors report. Where at the end of a financial year a
company is a group company, the directors must also prepare group
accounts (Section 172(a) of the Companies Law).

The accounts are subject to the overarching requirement that they
must show a true and fair view (Section 172(d) of the Companies
Law). The accounts must comply with the detailed rules regarding
the form and content of the balance sheet and profit and loss report.
Any additional information must be provided by way of notes.

A private company must file its accounts with the Registrar of
Companies within fourteen days of approval of the accounts by the
general meeting, or if no general meeting is convened by the
company, such accounts must be filed by the company within
fourteen days after their despatch to the companys shareholders.

If the accounts are not filed within the relevant time limits, a fine may
be imposed on the companys directors. If the company is so

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penalised and the fine is not duly paid, the Registrar of Companies
may request for the dissolution of such company.

With regard to public companies, under the Securities Law and
regulations enacted thereunder, a public company is obliged to file
with the Israeli Securities Authority additional reports (for example:
quarterly reports, immediate reports, etc.).

9.3.4. Accounting Principles; Rules of Standards

Since 1997, the Israel Accounting Standards Board ( the IASB ) has
been responsible for issuing accounting standards. Prior to 1997, a
committee of the Israel Institute of Certified Public Accountants was
empowered with such responsibility and standards issued by such
Institute, unless replaced by new standards of the IASB, continue to
remain in force.

A majority of the Israeli accounting standards are similar to the
international accounting standards published by the International
Standards Accounting Committee ( the ISAC ). In the absence of
specific Israeli standards or practices, the standards of the ISAC will
apply.

The major Israeli accounting principles concern the following:

a going concern;

the matching concept;

consistently applied accounting principles;

the recording of only realised profits and all losses; and

preparation of the financial statements on the basis of historical
cost.

9 9. .4 4. . B Bu us si in ne es ss s E Et th hi ic cs s/ /C Co od de es s

Are there certain business ethics or codes, which the investor must follow
(e.g., GAAP for accountants, etc.)?

A description of all relevant codes of practice is beyond the scope of
this Guide. The extent to which codes of practice may apply will
depend upon the nature of the business and its activities. However,
some of the codes which are likely to be applicable are briefly
mentioned below. With respect to accounting issues, see
section 9.3Bookkeeping Requirements above

Employment; Minimum Wages

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Equal pay, non-discrimination as to sex, colour, race and creed,
prohibition on sexual harassment, etc.

There are also numerous regulations covering a range of
specific issues, such as working time, maternity and parental
leave and health and safety issues in the workplace.

Public Companies

Companies whose securities are listed or traded on a
recognised investment exchange (in Israelthe TASE) or
companies whose shares are offered to the public by way of
prospectus and subsequently held by the public, are, in general,
subject to a higher degree of regulation than companies whose
securities are not publicly traded. These regulations include the
Rules of the TASE (which, inter alia, regulate the listing of new
securities on the TASE and the conduct of companies whose
shares are already so listed), the Securities Law and
regulations enacted thereunder. The aforegoing constituting
some of the rules applicable to companies whose securities are
publicly traded. Detailed consideration of the rules, however,
falls outside the scope of this paper and it is always advisable
to take appropriate legal and financial advice as to the
regulatory regime applicable to Israeli public companies.

9 9. .5 5. . C Co on ns su um me er r P Pr ro ot te ec ct ti io on n L La aw ws s

Are there consumer protection laws which apply to the investors
operations?

There is a range of Israeli law which regulates transactions with
consumers and which would apply in relation to the investors
operations involving consumers, whether directly through contracts
entered into with consumers or indirectly, or as a manufacturer or
supplier. We refer to some of these laws below:

The Consumer Protection Law

Under the Consumer Protection Law, as its name implies,
certain obligations are imposed on manufacturers, importers,
merchants and suppliers, the aims of which are: (a) to prevent
any misleading fact from being transmitted to consumers; (b) to
provide consumers with adequate disclosure regarding the
relevant transaction to be entered into with any such consumer;
and (c) to provide consumers with the tools necessary to enable
them to exercise their rights vis--vis any such manufacturer,
importer, merchant or supplier.

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It should be noted that the Consumer Protection Law offers
protection to consumers who purchase an asset or good or
receive services for their own personal or domestic purposes.

In addition, the Consumer Protection Law and the regulations
enacted thereunder include, inter alia, the following duties and
obligations:

the prohibition to enter into a transaction where the
consumer is being exploited having regard to: (i) his
intellectual ability or physical ability to perform the work;
or (ii) his lack of knowledge of the language of the
transaction;

the duty to disclose to the consumer any defects, inferior
quality or other fact which may materially reduce the value
of the asset and/or good;

the duty to disclose information such as the purchase
price and interest rate in credit transactions; and

the duty to provide the consumer with an option to receive
guarantees in return for advance payment.

Misleading Consumers

In practice, the Consumer Protection Law does not expressly
deal with misleading acts. The Consumer Protection Law
prohibits any act or omission which may result in the consumer
being misled. In addition to civil liability, the Consumer
Protection Law sets out a list of matters with respect to which a
misleading act or omission will be deemed a criminal offence,
such as: the quantity and type of asset, goods or services, the
weight and contents/ingredients, the delivery date, the identity
of the manufacturer, the importer or the supplier, the date of
manufacture and expiry, the type of warranty being offered, etc.

Hawking Transaction

A hawking transaction is defined as a transaction in which the
supplier visits the consumers home, place of work, etc., without
an invitation. Where a hawking sales transaction has been
effected, such transaction may be terminated within fourteen
days of the date of delivery of the relevant goods. If the
transaction involves the rendering of services, such transaction
may be terminated within fourteen days of signature of the
services agreement by the relevant parties thereto.

Selling Transactions via Mail, Telephone, etc.

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These types of sale transactions are defined in the Consumer
Protection Law as an approach to the consumer by a seller or
supplier via mail, telephone, radio, television, facsimile, etc., in
order to enter into a transaction without the actual presence of
the parties. When offering a product for sale, the seller must
disclose all pertinent details, including the sellers name and
address, the identity of the manufacturer, the country of
manufacture of the product, the purchase price being offered,
etc.

The consumer may terminate a transaction of this type within
fourteen days from the later of: (a) the delivery date; or (b) the
date of receipt of all information as required under the
Consumer Protection Law. The termination notice should be in
writing.

Should the consumer elect to terminate the transaction for
reasons other than that the product was defective or that the
information with respect thereto was misleading, the consumer
will be obliged to pay to the supplier/seller a fee, the rate of
which shall be the lower of: (i) 5% of the value of the
transaction; and (ii) NIS 100 (approximately US $30).

The above conditions under which a consumer may terminate a
transaction will, of course, not apply, inter alia, to products
having a short shelf life, products manufactured expressly for
the consumer, CDs, etc.

Limited-Period Transactions

In 2008, the Consumer Protection Law was amended in order
to prevent automatic extensions of contractual relations
between consumers and providers. The Law requires full
awareness of the contractual time period and the expressed
consent on the part of the consumer for its extension.
Furthermore, any provider must itemize bills and send the
consumer an itemized receipt once every six months reflecting
all payments the consumer made by a bank order or credit
card, unless the payments are fixed and never changed and the
consumer has not requested such a receipt. Violation of the
provisions entitles the consumer to damages.

Various services that are considered essential are specifically
exempted from the above amendment, such as gas services
and basic phone services. These can be automatically
extended and renewed, provided that the service provider
notifies the consumer of such renewal prior to the expiration
date.

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The Standard Contracts Law

The main purpose of the Standard Contracts Law is to protect
consumers from discriminatory conditions included in standard
contracts.

A standard contract is defined in the Standard Contracts Law
as a contract where all or part of its conditions have been
specified in advance by one party (i.e., the supplier) and which
will be entered into between such party and undisclosed
consumers (e.g., a software licensing agreement; contracts for
the rental of DVDs and videos, etc.).

The Standard Contracts Law sets out a list of discriminatory
conditions which ought not to be included in standard contracts.
Some worth mentioning include: a condition which exempts the
supplier from liability imposed on him under such law; a
condition which grants the supplier an unreasonable right to
terminate the contract; a condition which allows the supplier to
amend the contract without the consent of the other party, etc.
Discriminatory conditions, if proved to be included in a standard
contract, may be amended or even cancelled by the Israeli
courts.

The Commercial Civil Wrongs Law

The Commercial Civil Wrongs Law protects consumers, albeit
indirectly, by prohibiting a person from applying a false trade
description to goods, or supplying or offering to supply goods to
which a false trade description has been applied, or
misleadingly suggesting that a suppliers product or services is
actually that of another supplier. A trade description constitutes
an indication, whether direct or indirect and by whatsoever
means, with respect to specific goods in question or part
thereof. For further details in this regard, see, inter alia, section
2.5.1.12 above.

The Defective Products Law

The Defective Products Law provides that a manufacturer is
liable for compensating any person who has been physically
injured by a defective product manufactured by such
manufacturer. However, there are several exceptions to the
aforegoing, inter alia, where the defect was caused when the
product was no longer under the manufacturers control. The
manufacturer may not stipulate the terms of the Defective
Products Law, but he may seek indemnification from a third
party.

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9 9. .6 6. . C Co on ns st tr ru uc ct ti io on n

9.6.1. What are the costs of construction?

The costs of construction depend upon the purposes for which the
construction is required The approximate average standard costs
may be categorised as follows

for residential purposes: between US $900US $1,300 per
square metre built. The costs per square metre for constructing
luxury apartments could be double or even more;

for commercial purposes: US $800US $1,200 per square
metre built; and

for industrial purposes: US $750US $950 per square metre
built.

9.6.2. Are permits required for construction?

Under the Planning and Building Law, all construction projects require
a building permit prior to their commencement.

9.6.3. How is authorisation to construct obtained?

In order to obtain a building permit pursuant to the Planning and
Building Law and Regulations, the applicant is required to submit an
application to the relevant local licensing authority ( the
Application ). The Application must be signed by the following
persons: the owner of the rights in the relevant asset, the applicant,
the draughtsman, the structural planner, the contractor appointed to
carry out the works and the supervisor appointed to supervise works.

The following documents must be attached to the Application: maps
and various plans describing the construction areas, building plans
and documents describing the current status of construction in the
area as well as other appendices (as applicable), such as appendices
detailing transportation, drainage, fire safety and the like. In addition,
approvals obtained from the various utility companies with regard to
the preparation of suitable infrastructure so as to facilitate provision of
various services for the building (such as electricity, fire fighting, etc.)
must also be attached to the Application.

9.6.4. How long does it take to receive authorisation?

It usually takes between six months and up until one year to obtain a
building permit. One of the reasons for the delay stems from the fact
that the relevant local licensing authority may, after reviewing the
Application, return same to the applicant, together with its comments

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and may also request that certain modifications be made to the
Application (it should be noted that the submission and return of the
Application can occur repeatedly until the relevant licensing authority
is satisfied with the contents of the Application). It is only after the
applicant has complied with all of the requests and demands of the
local licensing authority, will the building permit be granted.

A delay in obtaining a building permit may also be caused by, inter
alia, the scope of the project for which the building permit is being
requested, the surrounding areas, applications for additional building
rights (by obtaining building relaxations deviating from directives
contained in the existing building plans), and the like.

Additional factors which could cause a delay include a backlog at the
relevant licensing authority and conflicts between the various
licensing authorities dealing with the same Application.

9.6.5. What fees are involved?

The amount of fees required for filing the Application, depends upon
the area in which the building permit is required and the purpose for
which the building is to be used (residential, commercial, industrial,
recreation, etc.).

With respect to a building for residential purposes, additional pricing
will be fixed according to the area for which the permit is being
requested. For example, the fee to be imposed on an applicant for a
building permit for residential purposes, will range between
US $1.00US $2.00 per metre built within the confines of the first
45 metres in the building.

The building tariff will increase proportionally with the size of the built
area, up to a maximum tariff for every metre built to be constructed
after the first 100 metres in the building (US $6.90US $8.30 per
metre).

It should be noted that the aforesaid sums relate only to the tariff for
filing the Application and do not include other fees and duties for
development of the area for which the owner of the asset may be
assessed, if required (such as: road paving, construction of a sewage
system, water infrastructure, drainage, etc.).

9 9. .7 7. . C Co on nt tr ra ac ct ts s

9.7.1. Can the investor freely enter into local contracts?

The origins of Israeli contract law are firmly rooted in the philosophy
that parties, including foreign investors, should be free to contract as
they choose. However, some areas of local law reflect strong public

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policy and could apply to a contract, irrespective of the choice of law.
These include

employment;

competition;

health and safety; and

consumer protection.

Other areas that might be subject to mandatory legal provisions
include

securities;

real property;

financial services; and

telecommunications.

9.7.2. Can contracts be governed by the law of another country?

Contracts formed in Israel can be governed by the laws of a foreign
jurisdiction.

It should be mentioned that the parties intention in choosing the
governing law should be bona fide and not, for example, in order to
avoid terms and conditions specified in Israel (in which latter event
Israeli law would apply notwithstanding the intention of the parties to
apply a governing law other than Israeli law).

9 9. .8 8. . P Pr ri ic ce e C Co on nt tr ro ol ls s

Are there applicable price controls?

With the exception of certain essential utilities, there are no directly
imposed price controls in Israel. Essential utilities such as water,
electricity, telecommunications, public transport, basic foodstuffs
(e.g., eggs, salt, flour, milk, etc.) are regulated by authorities which
are able to impose restrictions on prices charged to the applicable
system and end-users.

Competition law provisions relating to matters such as resale price
maintenance and predatory pricing can also affect a companys
pricing policy.

9 9. .9 9. . P Pr ro od du uc ct t R Re eg gi is st tr ra at ti io on n

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9.9.1. Must the entity register its product?

In general, there is no requirement to register all products with the
authorities in Israel. However, there are a number of exceptions to
this rule (e.g., with respect to drugs, medical equipment, etc.). In
addition, all products to be marketed in Israel must comply with local
regulations on health, the environment and labelling.

9.9.2. If so, how is registration obtained?

In order to obtain registration of a product, an application must be
made to the relevant governmental authority, together with the
relevant duly completed documentation.

9.9.3. How long does the process take?

The timetable for registration of a product, where necessary,
depends, inter alia, on the nature of such product and on tests to be
carried out by the relevant governmental authority.

9.9.4. Are there fees involved?

Where registration is necessary, fees are usually imposed, the scope
of which depends on the specific product.

9 9. .1 10 0. . R Re ed du uc ct ti io on ns s o or r R Re et tu ur rn n o on n C Ca ap pi it ta al l

Can capital be repatriated while the corporation is still ongoing?

Under the Companies Law, a company may acquire its own shares
thereby reducing its share capital. The shares so acquired by the
company (and for so long as they remain in the companys
ownership) are considered dormant sharessince no rights are
attached thereto. In addition, the acquisition by the company of its
own shares will be considered a distribution and, accordingly,
subject to certain conditions as prescribed therefor in the Companies
Law.

Loans may be freely repatriated in accordance with the express terms
of the relevant loan agreement.

Dividends may be freely repatriated subject to certain terms as
prescribed therefor in the Companies Law and subject, further, to
deduction of tax at source.

9 9. .1 11 1. . S Sa al le e o of f G Go oo od ds s

Are there restrictions on the manner, time or place of sale of goods?

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Under the Consumer Goods and Services Supervision Law a
governmental Minister may declare certain goods or services to be
under such Ministers supervision. Furthermore, a governmental
Minister may specify in an order conditions to be imposed with regard
to the manufacture, storage, transportation, distribution, purchase
price, etc., of certain goods or services. An example of such
restriction is the prohibition on the manufacture, import and sale of
dangerous toy products, i.e., toys which may cause bodily injury.

9 9. .1 12 2. . T Tr ra ad de e A As ss so oc ci ia at ti io on ns s

9.12.1. Are there trade associations that the investor can or must join?

In Israel several trade associations have been established which
relate to the various industrial sectors. Membership in any such trade
association is voluntary. Examples of trade associations include the
following:

The Manufacturers Association of Israel ( the MAI )
16

Since its establishment in 1921, the MAI is recognised as a
central force in the Israeli economy as a whole and in the
industrial sector in particular. The MAI constitutes a powerful
force in all decision-making at the macro-economic level,
including in matters relating to labour and foreign tradeboth at
the level of proposed parliamentary legislation, as well as in the
execution of laws.

The MAI is the sole representative body of all industrial sectors
in Israel (private, public, kibbutz and government industries)
and its membership comprises more than 2000 companies
which are either direct or affiliated members.

The MAIthe single body representing this forceis a full
partner in all decisions made by leaders of the economy at the
macro-economic level.

Israel Association of Electronic, Information and Software
Industries

This Association represents the electronic and software
industries, which account for more than 30% of Israels total
export of goods. Members originate from both the private and
government sectors. Also active within the framework of the
Association, or in collaboration with it, are: the Society of
Electronic and Information Industriesan independent and

16 The information relating to the MAI is based on data obtained fromthe website of the Israeli Ministry of
Industry, Trade and Labour (www.moit.gov.il).

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voluntary body that unites companies from all sectors of the
economy and subsidiaries of multinational companies, as well
as the Israeli Association of Software Houses.

Textile and Fashion Industries Association

The Textile and Fashion Industries Association numbers around
110 companies, employing thousands of workers.

The Association comprises secondary sections in various fields,
including: dyeing, military/security textiles, domestic textiles,
swimwear, underwear, apparel and raw materials.

The Directorate of the Association determines its overall policy
and method for dealing with macro-branch issues, as well as in
handling ongoing problems relating to the branch as a whole
and to individual plants, vis--vis the Ministry of Industry, Trade
and Labour, the Ministry of Finance, the Customs Authorities,
the Ministry of Defence, the Police Force and other relevant
bodies.

The Associations director and his staff, who are in constant
touch with the factories and relevant authorities, put policy and
management decisions into practice. Members of the staff visit
factories in order to learn, first hand, about individual and
overall problems, with the aim of solving such problems within
the framework of offered services.

Chemical, Pharmaceutical & Environmental Society

The Chemical, Pharmaceutical & Environmental Society
numbers approximately 130 companies all of whom are
involved in the various chemical fields, including:

basic chemicals;

fuel, oils and oil refining;

fertilizers;

decontaminants and disinfectants;

detergents and cosmetics;

human medications;

veterinary medications and products;

biotechnology; and

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disposable medical equipment.

In addition, the objectives of the Society are to represent the
interests of the industrial companies before the Israeli
governmental Ministries, administrative agencies and bureaus
and public officers and to promote organisational and
entrepreneurial activities for each sector.

Infrastructure Products & Consumer Goods Association

Representatives from twelve industrial branches, covering all
sectors (including the film sector) are members of this
Association. Each branch maintains its own institution, holds
periodic meetings and is run by democratically elected
management boards (comprising of chairmen and board
members).

The Association of Building Materials and Consumer Goods
Industries comprises approximately 270 members. Due to the
Associations wide range of branches, its large employment
force and weight of turnover in overall industry, the Association
represents a cross-section of the industry and is representative
of Israels industry problems and achievementsit is unique in
this regard.

The Association represents industry in all its various aspects,
before different public bodies and acts to promote and further
industry in Israel.

Food Industries Association

The Food Industries Association comprises approximately 140
members that represent this branchs principal output in Israel.

The Association carries out a variety of activities, covering
areas such as standards, legislation, foreign trade, local
marketing, export, quality control, industrial data, individual
attention to specific needs of plants and other relative issues for
promotion and development of this industry in Israel.

The Metal and Electrical Industries Association

The metal and electrical industries include a wide range of
products and technologies intended for: (a) military and civilian
use; (b) investments and infrastructure; (c) private and public
consumption; and (d) local export markets.

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The Metal and Electrical Industries Association comprises
approximately 430 members which manufacture an extremely
wide range of products at differing technological levels.

9.12.2. If so, are there fees involved?

Yes. In order to become a member of one of the above-referenced
associations, the investor will be required to pay an annual fee
usually based on the following two parameters: (a) the annual
turnover of the investor; and (b) the number of employees employed
by the investor.

9.12.3. Are there mandatory trade practices?

Other than: (a) the obligatory permits/licences required for engaging
in business in Israel in general; (b) compliance with the Israeli
commercial laws; and (c) compliance with customary practice for
engaging in business in Israel, there are no mandatory trade
practices in Israel.

It should be note that the Israeli courts widely apply the good faith
doctrine pursuant to which persons are obliged to engage in a trade,
conduct negotiations or enter into a transaction in an acceptable
manner and in good faith.

1 10 0. . C CE ES SS SA AT TI IO ON N O OR R T TE ER RM MI IN NA AT TI IO ON N O OF F B BU US SI IN NE ES SS S

1 10 0. .1 1. . T Te er rm mi in na at ti io on n

10.1.1. What costs are involved in termination?
How long does it take to terminate the business?
How is the investor's particular form of business treated in
termination?
Can the business be terminated without government approval or
intervention?
What are the obligations towards creditors, employees and others
upon termination?

See our general response in paragraphs (a)(h) below of this
section 10.1.1.

(a) General

The Companies Ordinance sets out in detail the procedures for
compulsory and voluntary winding-up (liquidation) of a
company; the liabilities of participants thereunder; the powers of
the court; and the functions of the official receiver, liquidator,
receiver, creditors and special managers in winding-up
proceedings.

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In certain circumstances, regulations allowing company
restructuring may be utilised instead of receivership or
liquidation (in this regard, see section 10.2
Insolvency/Bankruptcy, below).

Under the Companies Ordinance, the winding-up of a company
may be performed in any of the following ways:

by the court;

voluntarily; or

voluntarily, under the court's supervision.

It should be noted that voluntary winding-up does not interfere
with the rights of any creditor or contributor to cause the
company to be wound-up by the court, but the court has the
right to respond to an application for winding-up by a contributor
only if it is convinced that voluntary winding-up is likely to harm
the rights of contributors.

The duration of the winding-up proceedings depend on the
method adopted for winding-up the company (whether by the
court or voluntarily, as detailed below) and any complications
associated therewith which may arise, inter alia, from the
following:

the ability to achieve an arrangement with creditors;
and/or

the scope of the companys debts and the number of
creditors.

Upon a company being wound-up, whether by the court or
voluntarily, a notice to the effect that the company is being
wound-up shall be included in every invoice, order for goods or
on every letterhead bearing the company's name which is
issued by the company, whether by the liquidator of the
company or on the companys behalf.

A breach of any of the aforegoing requirements of the
Companies Ordinance will result in a fine being imposed on the
company and each of its officers or on its liquidator, all of whom
knowingly and with intent allowed or permitted such breach.

(b) Winding-up by the Court

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The relevant District Court (located in the area in which the
company's registered office or its core place of business is
located) may wind-up a company upon any of the following
occurrences:

a special resolution being adopted by a majority of 75% of
the companys shareholders resolving that the company
shall be wound-up by the court;

failure by the company to operate its business within one
year after its incorporation, or upon cessation of the
companys business activities for a period of one year;

the insolvency of the company;

where the court is of the opinion that it is just and
equitable for the company to be wound-up (e.g., upon it
being established that fraud was committed by the
companys founders against the investors; the companys
objects were found to be unlawful; the organs of the
company are unable to function; the company is unable to
reach its goals as set out in its documents of
incorporation, etc.)

In addition to the grounds for winding-up prescribed
above, the court may liquidate a public benefit company
when the company's activities violate the law of its
purposes or its by-laws; or when the person appointed to
investigate the company (according to section 345R of the
Company Law, in some conditions the Registrar of
Endowments may investigate the affaires of a company)
recommends that the company be wound-up.

An application to wind-up a company shall consist of an
application submitted by all or some of the following, whether
jointly or severally:

the company (in which event, a financial report setting out
the companys financial position must be filed together
with the application);

a creditor;

a contributory.

In addition, in certain circumstances as set out in the Companies
Ordinance, an application to wind-up the company, may be filed
by the Attorney General or the Registrar of Companies.

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Upon hearing a petition for winding-up, the court may dismiss it
with or without costs, or adjourn the hearing conditionally or
unconditionally, or make an interim order or any other order as
it deems appropriate.

The court may, both prior to and after an application for
winding-up has been filed, appoint the Official Receiver or any
other suitable person to serve as temporary liquidator on the
companys behalf.

Upon the issuance of a winding-up order, the company, or
whomever has been ordered to do so, must immediately send a
copy thereof to the Registrar of Companies and the Registrar of
Companies shall make an entry of such fact in the registry
pertaining to the company. The winding-up will be deemed to
commence on the date on which the application is filed with the
court.

It should be noted that the costs of the proceedingswhich run
until an order has been issuedwill be borne by the initiator of
the process. If the process was initiated by a creditor and the
relevant winding-up order has been granted, the court may
order that the creditor be reimbursed from the assets of the
company for all costs associated with the proceedings.

As soon as the winding-up order has been issued, the Official
Receiver shall ex officio serve as temporary (provisional)
liquidator for the company and he shall serve in such capacity
until he or another person is appointed permanent liquidator
and is able to act in such latter capacity. The Official Receiver
shall convene separate meetings of creditors and contributories
in order to decide whether or not to apply to the court

for the appointment of a liquidator instead of the receiver;

for the appointment of a review committee, which will
work together with the liquidator and, if so, to decide on
the members thereof.

The court may make any appointment and order necessary to
implement any decision made; if decisions made by creditors
and contributories conflict with respect to any issue, the court
shall intervene to decide on the conflicting issue and make an
order as it deems appropriate. The court may, with respect to
any matter relevant to winding-up, take into consideration the
needs of creditors and contributories, to the extent proven to it
by sufficient evidence.

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The directors are usually requested by the liquidator to prepare
a statement of affairs of the company. If requested to do so, the
directors must submit such report to the liquidator within twenty-
one days of the date of making his request.

(c) The Results of a Winding-up Order, or an Appointment of a
Temporary Liquidator, by the Court

As a consequence of the issuance by the court of a winding-up
order or the appointment by the court of a temporary
(provisional) liquidator over the company

no proceeding may be continued or initiated against the
company without first obtaining the courts consent and
subject to such conditions as shall be prescribed by it;

every transaction involving the company's assets and
every transfer of shares or change of status of the
company's shareholders implemented after the
commencement of winding-up proceedings are void
unless the court instructs otherwise;

every attachment, execution and other procedure carried
out in respect of the company's assets after the
commencing of winding-up proceedings shall be void for
all intents and purposes;

most of the authorities vested in the directors will be
withdrawn and transferred to the liquidator (unless
permitted otherwise by the court);

all of the companys employees will be dismissed, entitling
them to receive severance pay (in accordance with the
rules of preference applicable to creditors in winding-up
proceedings);

no derivative action shall be conducted on behalf of the
company.

As soon as possible after the issuance by the court of the
winding-up order, the court shall prepare a list of contributories
and order for all of the assets of the company to be collected
and utilised in order to satisfy the companys debts; in preparing
the list of contributories, the court may alter the register of
shareholders in any manner it deems necessary pursuant to
such order. The court may dispense with the list of
contributories, if it finds that it will not be necessary to make
calls for payment or in order to adjust rights between
contributories. In preparing the list of contributories, the court

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shall distinguish between contributories acting in their
respective personal capacities and contributories acting in a
representative capacity, either on behalf of others or being
responsible for the debts of such contributories.

In addition, the court may, at any time after the issuance of a
winding-up order, demand from any contributory whose name
at that time is included in the list of contributories and from any
trustee, receiver, banker, agent or officer of the company to
pay, deliver or transfer to the liquidator, immediately or within a
period of time as prescribed by the court, monies, assets or
books in his possession to which the company has a prima
facie right.

After the affairs of a company have been completely wound-up,
the court shall make an order that the company be liquidated
from the date of such order and the company shall accordingly
be deemed to be wound-up with effect from such date. The
liquidator shall inform the Registrar of Companies of such order
within fourteen days of the date of making such order and the
Registrar of Companies shall record the entry of the companys
liquidation in the register pertaining to the company.

(d) Voluntary Liquidation

Generala company may wish to be wound-up
voluntarily upon the occurrence of any of the following
events:

the period fixed for its existence in its articles of
association has expired, or an event has occurred
following which, in accordance with its articles of
association, the company must enter into voluntary
liquidation and the company in general meeting has
resolved to wind-up voluntarily;

the company adopting a resolution to be voluntarily
wound-up by a majority of 75% of those present;
provided that notice of the meeting (and of the
proposed resolution to be adopted) was sent
twenty-one days prior to the scheduled date of the
meeting;

the company adopting a resolution by a majority of
75% of those present that, in light of the companys
liabilities, it cannot continue with its affairs and that it
is just and proper that it be wound-up; provided that
notice of the meeting (and of the proposed resolution

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to be adopted) was sent seven days prior to the
scheduled date of the meeting.

A public benefit company may wind up by voluntary
liquidation under the provision of the Companies
Ordinance on condition that in addition to the
conditions mentioned above, before invitations were
sent for the General Meeting, a majority of the
Directors and a majority of the Audit Committee
members declared in an affidavit, submitted to the
Registrar and to the Registrar of Endowments at least
21 days before the invitations were sent, that they had
examined the state of the company's business, and
concluded that it will be able to pay its obligations in
full within one year after liquidation begins. .

It should be noted that upon a decision being taken by the
company to be voluntarily wound-up, the court may order
the winding-up proceedings to be continued under the
courts supervision according to its directives and subject
to conditions it will prescribe, all as the court deems
necessary or appropriate.

In the latter three cases only, the company is required to
publicise the appropriate notification of the winding-up in
Reshumot (the Israeli Gazette) within seven days of the
courts aforesaid decision.

Upon a company being wound-upwhether voluntarily or
under the courts supervisionthe Official Receiver or
any person qualified to file a petition for winding-up by the
court may request that the company be wound-up by the
court; the court shall then make an order for winding-up
on the basis of such petition only after satisfying itself that
the rights of creditors or contributories require that the
procedure for voluntary winding-up or winding-up under
the courts supervision be discontinued.

The results of voluntary winding-up

Once winding-up proceedings have commenced,
the company shall cease to conduct its affairs, save
for taking whatever action necessary so as to
ensure its orderly winding-up; however, the
company shall continue to maintain its status and
powers as a corporate body, notwithstanding any
contrary provision in its articles of association, until
it is finally liquidated.

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All transfers of the companys shares save for
transfers made to the liquidator or with his approval
and any change in the status of the companys
shareholders, will be considered unlawful, if any
such transfer or change is made after the
commencement of winding-up proceedings.

Upon the appointment of a liquidator to the
company, the authority vested in the directors shall
lapse, unless the company in general meeting or
the liquidator decides that the directors authority
shall continue and the extent thereof.

Although winding-up proceedings initiated against
the company do not cease, the liquidator or any
contributory or creditor may apply to the court with a
request to decide on any matter arising from the
winding-up, or that it utilise any of the powers
vested in it for the purpose of enforcing calls for
payment or for any other matter, as if the company
were about to be wound-up by the court and the
court may, if it finds just and expedient, respond to
the request in whole or in part, on terms it deems
appropriate, or make an alternative order on the
basis of such application, as it deems just.

An arrangement between a company about to enter into
liquidation proceedings or which is being wound-up
voluntarily and its creditors shall bind the companyif
such arrangement was adopted by way of an
extraordinary resolution (namely, a resolution passed by a
majority of 75% of the shareholders present)and its
creditors, if agreement thereto was received from three-
fourths of such creditors, in number and by value.

Every creditor and contributory may file an appeal before
the court against the arrangement within three weeks
after its finalisation and the court may, on such basis,
amend, change or approve the arrangement, as it deems
appropriate.

Manner of winding-upthere are two methods for
winding-up a company voluntarily:

Winding-up by the shareholders: winding-up by the
shareholders may be carried out upon a declaration
being made by the company's directors that they
have closely examined the company's state of
affairs and have reached the conclusion that the

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company will be able to pay all of its debts within
twelve months after the commencement of winding-
up proceedings ( declaration of solvency ). The
declaration of solvency must be delivered to the
Registrar of Companies prior to the despatch of
notices to convene a general meeting of the
company.

The company in general meeting shall appoint one
or more liquidators for the winding-up of its affairs
and the division of its assets and may also set the
remuneration to be paid to the liquidator(s).

The appointed liquidator shall have the identical
powers granted to a liquidator in winding-up under
the courts supervision, without needing to obtain
the court's approval thereto.

Similarly, the liquidator shall be vested with the
court's powers for the purposes of preparing the list
of contributories and for making calls for payment.
The liquidator shall also be responsible for paying
the company's debts and for adjusting the
contributories' rights amongst themselves.

Notwithstanding the appointment of the liquidator by
the company in a general meeting, the court may, if
it deems fit, remove a liquidator and appoint another
in his stead.

The liquidator may convene general meetings of the
company in order to obtain approval, by the
adoption of a special or an extraordinary resolution,
or for any other purpose as the liquidator deems fit
(the liquidator is, in any event, obliged to convene a
general meeting of the company at the end of the
first year after commencement of winding-up
proceedings and at the end of every subsequent
year, or at an earlier date thereafter as may be
convenient and he shall submit before the meeting
a report of his activities and of all transactions
performed by him, as well as a report on the
management of the winding-up during the previous
year).

After the company's affairs have been finally wound-
up, the liquidator shall prepare a report showing
how the winding-up was carried out and how the
company's assets were dealt with and, thereafter,

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the liquidator shall convene a general meeting of
the company in order to present and explain his
report.

The general meeting shall be convened by
publication of a notice in Reshumot, which shall be
published at least one month prior to the convened
meeting; the notice shall specify the date of the
meeting, its place and agenda.

Within one week after the convening of a general
meeting, the liquidator shall send to the Registrar of
Companies a copy of his report and notify him of the
date of the convened meeting.

If no quorum is present at the meeting, the liquidator
shall duly inform the Registrar of Companies that
the meeting was duly convened but no quorum was
present (thus obviating the need for sending a
report of the meeting) and, in doing so, the
liquidator shall be deemed to have complied with his
aforesaid obligation.

The Registrar of Companies, having received the
report together with any of the aforesaid
notifications shall forthwith record such documents
and three months after such recordal, the company
shall be deemed to have been liquidated; however,
the court may, upon application by the liquidator or
by any other person deemed by the court to be an
interested party, make an order postponing the
intended date of liquidation to a date it deems
appropriate.

In this latter case, the person, on the basis of whose
application an order was made, must deliver to the
Registrar of Companies a certified copy of the order
within seven days of the making of such order;
failure to do so will result in a fine being imposed on
such person.

Winding-up by creditors: if a declaration of solvency
is not submitted by the company's directors as
referred to above, the winding-up shall be carried
out by the companys creditors.

In this latter event, separate creditors and
shareholders meetings will be convened for the
purpose of appointing a liquidator. Notice of the

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creditors meeting shall be sent by mail and
published once in Reshumot and at least once in a
local newspaper distributed in the area in which the
company's registered office or its core place of
business is located.

The directors must submit to the creditors' meeting
a full report describing the state of affairs of the
company, together with a list of its creditors and an
estimate of their claims. In addition, one of the
directors must be appointed as chairman of the
creditors' meeting and be available to participate at
such meeting as chairman.

The creditors and the company may, at their
separate meetings, nominate any person to act as
liquidator on behalf of the companys affairs,
including with regard to the distribution of the
companys assets. If the creditors do not nominate
any person, the candidate nominated by the
company shall act as liquidator.

If the creditors and the company nominate different
candidates, the candidate nominated by the
creditors shall be appointed liquidator, however, any
director, shareholder or creditor may apply to the
court, within seven days of the date on which the
creditors' candidate was nominated and request that
it appoint the company's candidate instead of the
candidate nominated by the creditors, or that the
companys candidate serve together with the
creditors candidate, or that the court appoint
another person to act as liquidator.

Winding-up by creditors is different from that carried
out by shareholders in several other respects,
including:

the power to set the liquidator's remuneration
and the power to approve the continuation of
the directors' authority after the liquidator's
appointment shall not be decided by the
company in general meeting but rather by the
review committee (appointed by the creditors)
and if no such committee exists, such powers
shall be vested in the company's creditors;

if the liquidator's position becomes vacant, it
shall be filled by the creditors;

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whenever the liquidator is obliged to call
general meetings of the company, he will also
be obliged to call creditors' meetings.

(e) Liquidators Remuneration and Winding-Up Costs

The major costs to be incurred in liquidation proceedings
emanate from the remuneration payable to the liquidator. In
certain cases the liquidation may be carried out whilst the
company continues to operate (whether fully or partially). In
such cases, the liquidation process will naturally involve
operational costs, which may be substantial.

A liquidator will usually be paid either according to time spent
by him on the matter or based on a percentage of the value of
the assets which are eventually realised and distributed. This
rate of remuneration is subject to a published, approved scale.

All costs and fees properly associated with the winding-up,
including the liquidator's remuneration, shall be paid out of the
company's assets according to the ranking of priority, as set out
in section 10.1.1(h) below.

Other costs associated with the liquidation proceedings and
which may be incurred include: costs arising as a consequence
of the convening of creditors and shareholders meetings; the
mandatory publications in Reshumot and in daily local
newspapers; and fees payable to administrative authorities.
However, these ancillary costs are not significant.

(f) Breach by the Liquidator

Penalties (usually in the form of a fine) are imposed on a
liquidator who fails to comply with any of his obligations as set
out in the relevant provisions of the Companies Ordinance.

(g) Voidance of dissolution

After a company has been dissolved the court may, upon
application by the liquidator or by a person deemed by the court
to be an interested party, at any time following a period of two
years from the date of dissolution and on such conditions as it
deems fit, make an order voiding the dissolution; upon the
making of such order, it shall be possible to initiate any
proceedings against the company which would have been
possible, but for the dissolution of the company.

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An order voiding the dissolution may be granted in the following
circumstances:

the order will prevent inequity or injustice;

an unexpected occurrence (e.g., the location of assets or
money belonging to the company);

upon it becoming apparent that the liquidation process
was carried out in a fraudulent or deceptive manner; or

the applicant has a right of action against the company.

The person, according to whose application the order to void
the dissolution was made, shall deliver to the Registrar of
Companies, within seven days thereafter or within an additional
period allowed by the court, a certified copy of the order; failure
to do so shall result in a fine being imposed on such person.

(h) Priority of Debts

In winding-up proceedings, the companys debts will be repaid
in the following order of priority:

first, tax debts levied on the companys real estate;

second, holders of liens;

third, holders of debentures by virtue of a fixed charge
created by the company;

fourth, winding-up costs (including the liquidators
remuneration);

fifth, employee wages, up to a maximum sum, subject to a
published, approved scale;

sixth, any amount withhold by the company from wages
under the Income Tax Ordinance and not paid to the
assessing officer;

seventh, compulsory payments owed by the company;
taxes payable to the State Treasury; rent for a maximum
period of one year due to a lessor for office premises
and/or immovable property leased by the company;

eighth, holders of debentures by virtue of a floating
charge created by the company;

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ninth, other creditors; and

tenth, shareholders.

10.1.2. What are the tax consequences of terminating the business?
What are the tax consequences of termination?

In general, there are various options available for terminating a
business, with the tax consequences varying according to the
relevant procedure adopted to terminate the business, such as: the
liquidation of a company or a partnership (or other body of persons);
the cessation of business activities (for self-employed persons); or
the implementation of restructuring changes in the business activity
(e.g., company mergers or demergers). Included below is a general
description of the tax consequences ordinarily arising in the event of
the liquidation of an Israeli company.

Usually, if the shareholders of a liquidating company receive assets
of the company during the course of liquidation proceedings, then two
corresponding capital gains taxation events will be deemed to arise
as a consequence of: (a) the sale of assets by the liquidating
company to such shareholders ( the Liquidators Sale ); and (b) the
sale of shares (or other rights) by such shareholders to the liquidating
company ( the Shareholders Sale ). With respect to each such
taxation event, the following shall apply:

in the case of the tax event arising pursuant to the Liquidators
Salethe profits deriving therefrom shall be deemed a taxable
capital gain in the hands of the liquidating company;

in the case of the tax event arising pursuant to the
Shareholders Sale

the assets received by the shareholders from the
Liquidators Sale (including tax thereon as shall be borne
by the liquidating company in respect of the tax event
arising pursuant to such Liquidators Sale) shall be
deemed consideration in respect of the Shareholders
Sale;

the consideration to be taken into account for the
purposes of the calculation of capital gains tax shall be
the value of the assets received (usually the fair market
value thereof);

the capital gains derived by a shareholder shall be calculated
only after all of the assets of the liquidating company have been
distributed. If the distribution of assets as aforesaid is not
completed within two years of the date of commencement of

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liquidation proceedings, then such assets shall be deemed to
have been distributed upon the expiry of such two-year period;

in calculating the tax payable by the shareholders in respect of
the tax event arising pursuant to the Shareholders Sale, a tax
credit shall be granted pro rata to all of the tax paid by the
liquidating company upon the sale of its assets during the
course of the liquidation proceedings, in the ratio which the
value of assets received by the shareholders bears to the total
value of assets distributed to all of the shareholders, provided
that such credit shall not exceed the amount of tax for which
each shareholder is liable in respect of the capital gain derived
by such shareholder.

If a business is terminated or transferred together with inventory, then
such inventory shall be deemed to have been sold at its fair market
value.

With regard to the applicable rates of capital gains payable during the
course of the liquidation proceedings, including the tax rates payable
in respect of the chargeable inflationary amount and "profits available
for distribution", see sections 12.3Capital Gains (Corporations) and
13.3Capital Gains (Individuals) below.

Special tax exemptions and benefits also apply with respect to the
implementation of restructuring changes in a business (e.g., mergers
and demergers). In this regard, certain restructuring activities with
respect to a business (such as the transfer of assets to a company in
consideration for shares of such company, mergers or demergers of
companies) could be performed without incurring any tax liability,
under specified conditions. In addition, in several circumstances, the
liquidation of a real-estate company and the assignment of the assets
of such real-estate company undergoing liquidation proceedings may
also be exempt from tax (or subject to certain tax reliefs).

With respect to VAT liability, in general, every transfer of an asset by
a dealer (generally, a person/corporation that sells any asset or
performs a service in the ordinary course of business) is subject to
the payment of VAT. Likewise, if a dealer has ceased to operate his
business activity or has transferred ownership of his business to a
third party, while retaining an asset belonging to the business, then
such asset shall be regarded as having been sold two years following
the date of cessation or transfer (as applicable). The retention of an
asset by a dealer in the circumstances described above is regarded
as use for personal purposes and, upon the expiry of such two-year
period, the dealer will be liable to pay VAT in respect of such "sale".

However, it shall not apply on business assets which their total price
is lower than the amount prescribed for an exempt dealer. In addition,

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in case of real estate property, the Director may, at the dealer's
request, postpone the taxation to some other date according to
specific terms.

Notwithstanding the aforegoing, certain VAT exemptions and benefits
are available to a company in liquidation or to a company undergoing
restructuring activities, as described below:

In the event of a sale, without consideration, of all of the
business assets of a body of persons (that is registered as an
authorised dealer (as defined in section 12.7.2(a) below)) in the
course of liquidation proceedings, to holders of rights in such
body of persons who are also authorised dealers and if the
share of the assets so distributed is proportional to the share of
rights held by the shareholders in the liquidating body of
persons, then such sale shall be taxed at a zero rate; however,
the sale of assets by a former shareholder of the liquidating
body of persons shall be subject to VAT.

The sale of real estate by a financial institution or by a non-
profit organisation to a similar institution or organisation
undergoing restructuring activities (such as a merger or
demerger) in certain circumstances, shall be taxed at a zero
rate.

10.1.3. What are the tax consequences of termination?

See section 10.1.2 above.

1 10 0. .2 2. . I In ns so ol lv ve en nc cy y/ /B Ba an nk kr ru up pt tc cy y

10.2.1. What is the extent of the investor's liability in the event of insolvency or
bankruptcy?

Limited Liability Company

A shareholder will not generally be liable for the debts of the
company in the event of insolvency or bankruptcy, other than
for any unpaid amounts on the nominal value of its shares, or
for any guarantee or other collateral given by such shareholder
to creditors of the company, or otherwise as may be specified in
the companys articles of association.

However, as referred to in section 7.3.1 above, the Israeli
courts have the discretion to pierce the corporate veil in
circumstances where the shareholder has disregarded the
companys status as a separate legal entity.

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In addition, if the shareholder, in its capacity as a shareholder of
the general meeting, assumes the powers conferred on the
companys Board of Directors, such shareholder will be deemed
to have assumed the obligations and liabilities of the Board of
Directors in connection with the exercise of such powers, as
specified below.

A director will not generally be held liable for the debts and
actions of a company in the event of insolvency or bankruptcy.
Nonetheless, a director may be held personally liable for the
debts and obligations of the company in winding-up, for
knowingly participating in the fraudulent management of the
company with the aim of defrauding its creditors or others. As a
consequence, the director may face up to one years
imprisonment or may be prohibited from serving as a director or
a general manager, or from being involved, directly or indirectly,
in the establishment or management of a company, for a period
of up to five years.

The law specifies various criminal sanctions which may be
imposed on directors who commit certain defrauding acts or
omissions relating to the winding-up of the company towards
the company, its creditors, its liquidator or others.

In addition to the above, if it appears in the course of a
company's winding-up that any person who participated in its
promotion or foundation, or who was or is a director, abused or
retained any of the company's assets or committed any
misfeasance or unlawful act in any negotiation concerning the
company, the court may enforce upon such person the return of
the asset or demand payment of compensation.

Unlimited Liability Company

An unlimited liability company is a company with no limit on the
liability of its shareholders where the company is insolvent on
winding-up.

Ordinary Partnership

Each investing partner will generally be liable (in an unlimited
amount) in the event of insolvency or bankruptcy, jointly and
severally with the other partners, for the debts and obligations
of the partnership incurred during the period he served as
partner, including (a) the liability of the partnership for any loss
or injury caused by any wrongful act or omission of any partner
in the ordinary course of the business of the partnership or with
the authority of his co-partners; and (b) money or property that
has been misappropriated.

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Limited Partnership

The general partner(s) are liable for all of the debts and
obligations of the partnership in the event of insolvency or
bankruptcy, as with any partner in an ordinary partnership,
unlike the limited partner(s) whose liability is limited to the
amount it/they agreed to contribute to the limited partnership.

However, the limited partner(s): (a) are restricted from
withdrawing any part of their contribution from the partnership
for as long as it exists; and (b) may not participate in the
management of the limited partnership or have authority to
enter into any obligations on the partnerships behalf. If the
limited partner(s) fail to comply with the aforesaid restrictions
they may become liable for all of the debts and liabilities of the
limited partnership in the event of insolvency or bankruptcy, up
to the amount withdrawn (in the case of (a) above) and/or
incurred during the period in which they participated in the
management of the partnership (in the case of (b) above).

Joint Venture

In the event that the investor does not establish any of the
above-mentioned legal structures and, instead, relies on
execution of a joint venture agreement, the liability of the parties
to such agreement in the event of insolvency or bankruptcy will
be determined by their respective duties and obligations set
forth in such joint venture agreement. However, the parties will
need to take heed of the terms to be agreed upon and included
in such joint venture agreement, so as to avoid their
cooperation being deemed a partnershipi.e., persons carrying
on business jointly with the aim of reaping a profit.

Sole Proprietorships

An investor deciding to act as a sole proprietor will be
personally liable for all of the debts of the business in the event
of insolvency or bankruptcy.

10.2.2. What choices, if any, are available to the investor with regard to the
restructuring of the business?

Section 350 of the Companies Law deals with the granting of a freeze
on proceedings (moratorium) order. According to the said Section, in
cases where a compromise or an arrangement with the companys
creditors is proposed, the court has the authority to grant a freeze on
proceedings order with respect to all proceedings initiated against the
company.

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The purpose of such an order is to allow the company time to
rehabilitate and reorganise without creditors pursuing the company
and assets being seized. A freeze on proceedings order will only be
granted if the court is convinced that it will aid in the crystallisation or
approval of a rehabilitation plan. However if a person was harmed by
an ex parte freeze on proceedings order, then he may apply to the
court that gave the order for its revocation.

1 11 1. . L LA AB BO OU UR R L LE EG GI IS SL LA AT TI IO ON N, , R RE EL LA AT TI IO ON N A AN ND D S SU UP PP PL LY Y

1 11 1. .1 1. . E Em mp pl lo oy ye er r/ /E Em mp pl lo oy ye ee e R Re el la at ti io on ns s

What laws govern employer/employee relations?
Are there obligations to train employees?

Fundamental employee rights, such as minimum wage, paid leave,
sick pay, maximum work day and week, overtime, rest day, holiday
pay, notice for dismissal, severance pay, maternity leave, social
security and wage protection, are regulated by mandatory provisions
of law. The relevant laws apply to all employees (subject to very
specific exceptions). Further fundamental employee rights, such as
recreational pay and travel expenses to and from work, are protected
by extension orders of general collective agreements. These orders
similarly apply to all employees (again, subject to specific
exceptions). Other fundamental rights, such as pension, additional
salary and fringe benefits granted to employees in various sectors of
public institutions or private industries may be protected by general
and specific collective agreements. Generally, the rights of
employees pursuant to mandatory provisions of law, extension orders
and/or general and specific collective agreements, as aforesaid,
cannot be waived or derogated from. On the other hand, individual
work agreements may have the effect of vesting additional rights in
employees beyond these fundamental rights.

There are no general mandatory obligations to train employees,
though, needless to say, there are regulatory requirements pertaining
to various occupations and activities.

1 11 1. .2 2. . E Em mp pl lo oy ym me en nt t R Re eg gu ul la at ti io on ns s

Must the investor hire nationals of the country?
Is there a minimum wage?
Is there a maximum number of hours an employee can work each
week?
Is there a minimum number of vacation and sick days to be given?

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Under Israeli law, there is no obligation to hire nationals only.
However, in order to employ a foreign national, a work permit and
visa must be obtained (see section 11.5Labour Permits below).

Under the Minimum Wage Law, the minimum hourly wage is
NIS 17.93 (approximately US $4.00) and the minimum monthly wage
is NIS 3,335.18 (approximately US $775).

Under the Hours of Work and Rest Law, the maximum work day is
eight hours and the maximum work week is forty-five hours. Most
public institutions and many private industries and enterprises have
transferred to a five-day work week and, according to a general
permit, in such a case the work day may be extended to nine hours.
In addition, under an extension order of a general collective
agreement pertaining to all employees (subject to specific
exceptions), the work week has been shortened to forty-three hours.

Under the Paid Leave Law, the annual minimum paid leave
entitlement is fourteen days for each of the first four years of
employment. Such entitlement increases from the fifth year of
employment and thereafter, up to a maximum of twenty-eight days
paid leave per annum.

Under the Sick Pay Law, entitlement to sick leave pay accumulates at
a rate of one and-a-half days per month of employment, up to a
maximum of ninety days, less the number of days for which the
employee has already received sick pay according to law.

1 11 1. .3 3. . H Hi ir ri in ng g a an nd d F Fi ir ri in ng g R Re eq qu ui ir re em me en nt ts s

Must the investor employ a minimum number of people?
Must the investor employ a minimum number of nationals?
Must nationals hold certain positions in the company?
Are there rules to follow in hiring/dismissing personnel (e.g., notice)?
Does the investor have a continuing obligation towards dismissed
employees?

In general, Israeli law contains no requirements limiting or regulating
the number of employees to be employed by a company, nor
concerning an employees nationality or position in such company.

The main rules applicable to the hiring and dismissal of personnel are
those prohibiting discrimination on the grounds of sex, sexual
inclination, parenthood, personal status, age, race, religion,
nationality, country of birth, political views, military reserve duty or
disabled persons. In addition, collective agreements which apply to
certain sectors of industry prescribe procedures for hiring employees.

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Separate laws protect employees against dismissal or discrimination
on grounds of filing complaints for sexual harassment or exposure of
corruption in the workplace. Additional protection is afforded under
case law in the event of dismissal without a hearing or, if applicable,
without consultation of the employees representatives.

Under the Advance Notice for Dismissal and Resignation Law,
dismissed personnel are entitled to advance notice, amounting to one
month after the completion of one years service (a lesser notice
period applies during the first year of service). A personal
employment contract may prescribe a longer period of notice.

As a general rule, any employee who has been employed for at least
one year by a certain employer or in a certain place of work, is
entitled to severance pay upon dismissal. (In some cases,
resignation of an employee, e.g., because of illness, is treated as
dismissal for the purposes of severance pay entitlement.) Severance
pay is due at the rate of one months salary for each year of
employment with the same employer or at the same place of work.
Part of a years employment (after completion of the initial qualifying
year) entitles the employee to the proportionate part of a months
salary.

There is no mandatory pension scheme to which all employees may
participate or contribute. Pension and insurance schemes are
maintained and operated for employees in certain sectors of the
market. In the industrial sector, such schemes are usually
implemented based on the concept of joint monthly contributions
made by each of the employer and the employee. Upon termination
of the employment, the employee will receive payment either in the
form of an annuity or a lump sum. The responsibility for payment of
the pension is borne by the pension fund and not by the former
employer.

1 11 1. .4 4. . L La ab bo ou ur r A Av va ai il la ab bi il li it ty y

Is adequate skilled or unskilled labour available for the anticipated business?

The investor will find Israel to have an attractive labour force in the
various sectors of industry. Due to the many opportunities available
in Israel, it is common for students who, after completing their
secondary education and subsequent military service (which is
obligatory for both men and women in Israel), thereafter to pursue
tertiary education at recognised academic institutions or other higher
learning institutions or colleges located throughout Israel.

The labour force in Israel continues to expand through both natural
growth and immigration.

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According to official sources published by the Israeli Central Bureau
of Statistics, as of February 28, 2005, the average rate of
unemployment for 2004 was 10.4%.

1 11 1. .5 5. . L La ab bo ou ur r P Pe er rm mi it ts s

Are labour permits required?
If so, how are they obtained?
How long does the process take?
What fees are involved?

Employment of foreign workers requires both a special permit and
work visa.

Application for a work permit must be made with the applicable
department at the Ministry of Industry, Trade and Labour. The
application must be made in writing by the prospective employer and
must include, inter alia, details of the employer and the prospective
employee and of his/her skills, justifying the issue of a work permit to
a foreign worker. The following documents must be filed with the
application:

(a) the employing companys certificate of registration/business
licence;

(b) a copy of the employers Form 102 issued by the National
Insurance Institute;

(c) an explanatory letter, detailing the need to employ a foreign
employee instead of an Israeli resident/citizen;

(d) documents proving the employees education and training
(certificates, diplomas and resume);

(e) an affidavit signed by or on behalf of the employer testifying to
the accuracy of the details stated in the application and
confirming the efforts made to locate a suitable employee in
Israel (the affidavit constitutes an appendix to the application);

(f) a certificate by an attorney or an accountant certifying that the
person signing the affidavit is authorised to do so on behalf of
the employer;

(g) a document setting out the employees personal details and the
proposed terms of employment;

(h) a contract of employment (which would usually obviate the
need for submission of the documents referred to in
paragraph (g) above and paragraph (i) below);

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(i) a further affidavit by or on behalf of the employer (usually
requested at a later stage of the application procedure)
including an undertaking as to the minimum monthly salary to
be paid to the employee; and

(j) a confirmation by an accountant that the employer has the
financial resources to pay the employee the said monthly
salary.

Usually, it may be possible to obtain a work permit within 1-2 months
from the date that the application, in proper form and together with
the necessary supporting documentation, is filed.

Once the work permit has been issued, an application for a work visa
must be submitted (together with such work permit) to the Ministry of
Interior. If the application is accepted, the Ministry of Interior will then
issue a visitors work visa (B1).

The Foreign Workers Law is a comprehensive law regulating various
aspects of the employment of foreign workers in Israel. As of 2003,
the initial fee to be paid upon applying for a permit is approximately
US $116 and the annual fee payable for maintaining such permit is
US $930 (in agriculture the annual fee is lower). In addition, the
employer must procure medical insurance, provide other basic hiring
necessities (such as adequate lodging facilities) for the foreign worker
and may also be required to provide the authorities with appropriate
securities in order to ascertain that the employer has complied with all
legal obligations pertaining to the employment of foreign workers.
Under a law passed at the beginning of June 2003, employers of
foreign workers (save for specific exceptions) are obliged to pay to
the income tax authorities a levy of 8% in respect of the income paid
by an employer to a foreign employee during the relevant tax year.

1 11 1. .6 6. . S Sa af fe et ty y S St ta an nd da ar rd ds s

Are there safety codes that must be followed?

Numerous and detailed safety precaution measures are imposed
upon employers, in certain circumstances, by legislation. The main
act of legislation regulating the safety standards in a workplace is the
Work Safety Ordinance. In addition, various specific regulations
relating to health and safety in the workplace have been enacted.

1 11 1. .7 7. . U Un ni io on ns s

Are unions recognised?
What are the unions in the investors business?
What are these unions political affiliations, if any?

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Is there an obligation on the part of the employer to organise unions?
Are there mandatory collective bargaining agreements for the
business involved?

Unions are recognised for various aspects of labour law.

The major trade union in Israel is the Histadrut and this body
constitutes an umbrella for most of the trade unions in Israel.
Nonetheless, there are a few independent unions which are not
affiliated with the Histadrut, such as the Physicians Union.

Officially, the Histadrut is a non-political organisation.

There is no obligation on the part of an employer to organise a labour
union for its employees.

Several industrial branches are governed by general collective
agreements, the provisions of which have been extended to apply to
all employers and employees operating in that branch.

1 12 2. . T TA AX X O ON N C CO OR RP PO OR RA AT TI IO ON NS S

1 12 2. .1 1. . A Al ll lo ow wa an nc ce es s

12.1.1. What are the major allowances (e.g., capital cost depreciation)?

Broadly, an assessee can deduct all types of expenses which were
wholly and exclusively incurred during the tax year and which relate
to the production of income by such assessee, unless such deduction
is limited or disallowed.

12.1.2. What are the major deductible items?

Part of the permitted deductions is established by statute. Expenses
that are statutorily deductible include, inter alia, interest and linkage
differentials, depreciation, rent, repairs, bad debts, sums paid to
approved employee benefit funds (subject to maximum levels), costs
of preventing damage by natural causes (soil erosion, floods), air-raid
precautions, costs of preparing accounts, expenses connected with
payment of tax and R&D expenses.

Depreciation allowances are available, inter alia, for the following
assets: buildings (usually 2%4% per annum), machinery and
equipment, fixtures and fittings, motor vehicles (selected), mines and
quarries, aircraft, ships, water supplies and other utilities, agricultural
and forestry buildings and works, computer software, hardware,
patents, copyrights and know-how. With regard to goodwill, if the
goodwill was acquired after January 1, 2003, the assessee can, in

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certain circumstances, deduct same at the rate of 10% per annum (of
the original value).

12.1.3. What are the major expenses that are excluded from deductibility?

The major expenses that are excluded from deductibility are: private
expenses, capital withdrawn or a sum used as capital, the cost of
improvements, any loss or expense which is recoverable under
insurance or under a contract of indemnification, amounts paid as
income tax (including interest and penalties accruing thereon),
premiums paid by a company to insure the life of a controlling
member (a person who holds, directly or indirectly, at least 10% of
the issued share capital or the voting power of the company or the
right to receive at least 10% of the companys profits or the right to
appoint a director in the company), or expenses in respect of a
benefit granted by an employer to his employees which cannot be
attributed to a particular employee.

Capital expenditure will be taken into consideration on the date of
sale of the asset (having regard to the calculation of the capital gain)
and, until such date of sale, by way of depreciation.

1 12 2. .2 2. . C Ca al lc cu ul la at ti io on n o of f T Ta ax xe es s

How is the taxable base determined?

(a) In general, costs and income are recorded on an accrual basis.
A companys taxable income is usually based on the nominal
financial reports prepared by the company in accordance with
Israeli GAAP. Nominal figures are submitted to the tax
authorities and adjustments are made in accordance with the
applicable taxation laws in force in order to determine the
taxable income.

(b) Certain companies (usually, those without inventory), such as
professional companies (for example, law firms and firms of
chartered accountants) are entitled to calculate and report their
taxable income on a cash basis.

Until recently, most large-sized companies were required to
publish financial statements on the basis of inflation-adjusted
data, with disclosures to be made in the notes showing the
income statements on an historical basis and details of the
adjustments used to arrive at the inflation-adjusted figures. The
Israeli authorities are currently considering the option of
requiring assessees to report on the basis of nominal reports,
due to the low inflation rate in Israel over the past few years.

1 12 2. .3 3. . C Ca ap pi it ta al l G Ga ai in ns s

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12.3.1. What are the federal or national tax rates on capital gains?

(a) (i) Broadly, the sale of a capital asset is subject to capital
gains tax. When calculating the sum of capital gains tax
payable, certain basic principles need to be taken into
consideration. The term sale includes any direct or
indirect exchange, renunciation, disposition, transfer,
grant, gift and also any other act or occurrence as a
consequence of which an asset passes out of the control
of one person to another, excluding by way of inheritance.

(ii) For this purpose, an asset includes any property,
whether movable or immovable, as well as contingent or
vested rights in Israel or abroad, save for: movable
property held by an individual for his personal use,
inventory, rights in real estate and rights in real estate
companies (all of which are subject to land appreciation
tax (a tax similar to that imposed on capital gains)).

(b) An Israeli resident is liable to tax on capital gains accrued or
generated in Israel or abroad. In addition, a foreign resident is
liable to tax on capital gains accrued or generated in Israel
(unless such foreign resident is exempt from Israeli capital
gains tax). The place where capital gains was accrued or
generated shall be deemed to be in Israel, in any of the
following instances:

the asset being sold is located in Israel;

the asset being sold is located abroad and essentially
constitutes a direct or indirect right to an asset or to
tradeable securities or constitutes an indirect right to a
right in real estate or to an asset in a real estate company
located in Israel ( the property ), in respect of that part
of the consideration deriving from the property located in
Israel;

the asset comprises a share or any right relating to a
share in an Israeli resident body of persons; or

the asset comprises a right in a foreign resident body of
persons which constitutes essentially a direct or indirect
right to property in Israel, in respect of that part of the
consideration deriving from the property located in Israel.

(c) In Israel, only national tax is imposed on capital gains. The rate
of corporate tax on real capital gains (i.e., the capital gain less
the inflationary amount) is 25% with respect to that part of the
capital gain accruing after January 1, 2003; the applicable rate

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of corporate tax with respect to that part of the capital gain
which accrued prior to January 1, 2003 is the regular rate of
corporate tax applicable in respect of business income earned
by a company on the date of sale of the relevant asset.
17
If an
asset was purchased prior to January 1, 2003 and then sold
after such date, distribution of the accrued capital gains will be
made by employing the linear method: for example, an asset
purchased on January 1, 2002 for NIS 100 and thereafter sold
on January 1, 2005 for NIS 400, the method to be applied to
calculate the capital gains tax payable on such sale (assuming
that there was no inflation during that period) will be as follows:

capital gain: 300

part of the capital gain
until January 1, 2003: 100 (i.e., one-third)

after January 1, 2003: 200 (i.e., two-thirds)

capital gains tax: 100 X 34% + 200 x 25% = 84

Special rules apply to accrued depreciation.

(d) The tax rate on the inflationary amount is 10% with respect to
that part of the inflationary amount which accrued until
December 31, 1993 and is zero-rated with respect to that part
of the inflationary amount accruing after such date.

(e) Israeli income tax laws include several reliefs and exemptions,
the majority of which relating to the sale of shares and
securities. Such reliefs and exemptions (as generally described
in section 13.3Capital Gains (Individuals) below), usually
apply only to companies which are not subject to the
Inflationary Adjustments Law (largely, companies that do not
conduct business and do not deduct financing expenses).

(f) The rate of corporate tax on capital gains from the sale of
goodwill, for which acquisition no consideration has been paid,
is 25% (including that part of the capital gain which accrued
prior to January 1, 2003).

(g) In the event of a sale of shares in an unlisted Israeli company
by another company which is not subject to the provisions of
the Inflationary Adjustments Law, the seller will be entitled to an
additional inflationary amount, based on its proportional share

17 I.e., the rate of corporate tax for 2005 is 325%; such rate will be reduced for subsequent years as follows: for
200630% and for 2007 and thereafter30%.

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of retained earnings of the company. The tax rate on the real
capital gain, equal to the assessees share in the profits
available for distribution which accrued until January 1, 2003, is
10% and the tax rate on the real capital gain equal to the
sellers share in the profits available for distribution accruing
after January 1, 2003 is the same tax rate as that imposed on it
had the sum been received by the seller as a dividend, prior to
the sale of the shares (i.e., 0% if the seller is an Israeli company
for the purposes of corporate tax and if the profits available for
distribution derive from income generated or accrued in Israel,
or a tax rate of 25% in other cases). For the purposes of the
aforegoing, profits available for distribution are profits
accumulated in the company during the period between the end
of the tax year prior to the year in which the shares were
acquired (but not before January 1, 1996) and the end of the
tax year prior to the year in which they were sold, based on
certain methods of calculation.

(h) In general, and subject to the exemptions set out in
paragraph (j) below, in the event of a sale of tradeable
securities and tradeable futures listed on an approved stock
exchange, then, provided that: (i) the provisions of the
Inflationary Adjustments Law do not apply to the company
disposing of such securities; and (ii) no interest and linkage
differentials are claimed in respect of the relevant securities
being sold, the rate of capital gains tax to be imposed shall not
exceed 15%.

(i) In the case of foreign securities (usually, tradeable securities of
non-Israeli companies listed on an exchange located outside of
Israel) acquired by an Israeli company, then the tax rate on that
part of the capital gain accruing will range between 15% and
35% (the final tax rate will depend upon certain factors, such
as: the respective dates of purchase and sale of the relevant
asset and the type of securities being sold).

However, new legislation has been proposed which it is
anticipated will shortly be enacted into the Israeli taxation
legislation. The consequences of such new legislation is that
there will be a reduction in the rate of capital gains tax payable
in respect of income deriving from foreign securities (i.e., such
rate will be 15% in respect of shares and 25% in respect of
debentures and units held in trust funds with respect to income
accruing from 2005 and thereafter).

(j) Certain exemptions from capital gains tax are applicable to
foreign residents. A foreign resident is exempt from tax on
capital gains from the sale of securities listed on the TASE, if
the capital gain is not attributable to a permanent establishment

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in Israel. A foreign resident is also exempt from tax on capital
gains from the sale of shares allocated to him during the 2003
tax year or thereafter, provided that such foreign residents
investment was made in a company which, at the time of the
allocation of shares, was a research and development
intensive company (as such term is defined in the Income Tax
Ordinance). There are other exemptions that apply to foreign
residents (e.g., a sale of future transactions on the TASE, or an
investment in an exempt trust fund (a trust fund approved by
the Israeli tax authorities as a fund, the profits and income of
which are exempt from tax)).

(k) Capital gains accruing from the sale of rights in real estate in
Israel or rights in an Israeli real estate company ( real estate ),
are subject to appreciation tax (which is similar to capital gains
tax). The rate of corporate tax on the real appreciation
accruing after November 7, 2001 is 25% and that which
accrued prior to November 7, 2001 is the regular rate of
corporate tax applicable.
18
The rate of tax on the inflationary
amount is similar to that applicable to capital gains tax, as
referred to above. Calculation of the real appreciation tax (in
the event that the asset was acquired prior to July 7, 2001) will
be made using the linear method (i.e., the same method used
to calculate the capital gains tax as described in paragraph (c)
above).

(l) In respect of the sale of capital assets (rights in real estate or
other capital assets) that were acquired until 1960, the rate of
capital gains tax payable will range between 12%-24% (12% for
assets acquired until 1948 plus 1% for each year thereafter).
With effect from the tax year 2005, the aforesaid rate of capital
gains tax (and, in certain circumstances, that imposed on real
estate assets (i.e., appreciation tax)) shall be increased by 1%
per year, up to a maximum of 25% of the real capital gain.

(m) A foreign resident company is not eligible to receive any capital
gains tax relief, reductions or exemptions notwithstanding its
aforesaid status, if an Israeli resident is a controlling member of
such foreign resident company (i.e., a shareholder who directly
or indirectly, alone or with another, holds more than 25% or
more of such foreign residents companys means of control, or
is directly or indirectly the beneficiary, or entitled to receive 25%
or more of the income or profits of, such foreign resident
company).

12.3.2. What are the regional or state taxes on capital gains?

18 See footnote 19 above.

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No regional or state taxes are imposed on capital gains.

12.3.3. What are the municipal or local taxes on capital gains?

No municipal or local taxes are imposed on capital gains.

1 12 2. .4 4. . F Fi il li in ng g a an nd d P Pa ay ym me en nt t R Re eq qu ui ir re em me en nt ts s

12.4.1. When must the corporation file its tax return, if any?

A company is generally required to file a tax return annually, not later
than five months after the end of the tax year (i.e., until May 31 of the
subsequent calendar year). If the companys tax return is not based
on a complete set of double entry accounts, then it shall deliver the
return by not later than April 30 of each subsequent year. The tax
return must include details of the profits which are taxable, specify
each source of income and the amounts arising from the source, as
well as the special rates of tax applicable to that income. The
company must give details of asset disposals and any capital gains or
losses arising. Details of asset acquisitions must be given for the
purposes of calculating depreciation allowances and also for the
computation of additional allowances under the Inflationary
Adjustments Law.

12.4.2. When must the corporation pay its taxes?

Other than its obligation to make a monthly advance payment to the
tax authorities (see section 12.4.3 below), the company is obliged to
pay its taxes upon the submission of its tax return or within fifteen
days after delivery to the company of a notice of assessment from the
Israeli tax authorities.

12.4.3. Are taxes paid in instalments or annually?

Every assessee is required to make advance payments to the tax
authorities each month on account of the final tax due (usually, the
advance payment in respect of the relevant month constitutes 10% of
the amount of tax for which the company is liable in the determining
year and must be paid on the fifteenth day of each of the ten months
falling from February to November in each tax year). Another and
more popular alternative to determine the scope of the advance
payment is based on an agreed percentage of turnover. The
percentage is generally computed by comparing the turnover and tax
paid in the previous tax year.

1 12 2. .5 5. . M Mi is sc ce el ll la an ne eo ou us s T Ta ax xe es s D Du ue e

12.5.1. Is there a tax on capital?

In general, no taxes are imposed on capital in Israel.

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12.5.2. Is there a business licence tax?

All holders of business licences are subject to a fee payable to the
applicable local authority.

12.5.3. Is there an apprenticeship tax?

No apprenticeship or training taxes are imposed in Israel.

12.5.4. Are there other taxes? What are the filing and payment requirements?

The filing and payment requirements applicable to other taxes are as
follows:

Employers Tax

Non-profit organisations and non-profit companies ( public
institutions ) are subject to employers tax at the rate of 4% in
respect of salary payments to their respective employees (in
addition to wage tax for which they are liable) (see also
section 12.7.1 below with regard to VAT).

Stamp Duty

(a) In Israel, stamp duty is payable on various documents
executed in or outside of Israel, if the subject-matter
concerns: (i) any asset or other property situated in Israel;
or (ii) any act performed or about to be performed in
Israel.

(b) A document signed outside of Israel (for which Israeli
stamp duty is payable thereon) must be stamped within
thirty days of the date it enters Israel.

(c) Stamp duty of between 0.4%2% ad valorem is payable
in Israel with respect to general documents. In the event
that the value of the relevant subject-matter is stated to be
indefinite or of no specific value, then stamp duty of NIS 5
(approximately US $1.20) will be payable. In the latter
event, the stamp duty payable on the document will be
0.4%-2% ad valorem upon the value of the relevant
subject-matter becoming known.

(d) If two parties are required to execute an instrument (e.g.,
an agreement), then the parties shall be liable, jointly or
severally, to bear the stamp duty payable thereon, unless
one of the parties undertakes to pay such stamp duty, in
which event such party shall solely be liable to bear same.
With respect to certain documents, the Stamp Duty Law

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provides that the onus for the payment of stamp duty
vests on the party issuing the document (i.e., in the case
of a debenturethe person issuing the debenture; or in
the case of an allocation report submitted by a company
on the allocation of its sharesthe company).

(e) The major sanction imposed in respect of a document
which is not stamped, is that such unstamped document
may not be admissible as evidence in an Israeli court,
arbitration or in other proceedings before any judicial
authority; nor shall such unstamped document be
admissible by any public officer or office in Israel.
Another sanction which may be imposed is the
requirement to pay, over and above the applicable stamp
duty, a penalty due to the delay caused in paying such
stamp duty (the amount of such penalty being one-fourth
or one-half of the stamp duty payable).

(f) The Stamp Duty Law exempts certain documents (or
agreements) such as: (i) documents or agreements which
relate, in whole or in part, to the sale of rights in real
estate or of rights in a real estate company; or
(ii) compromise agreements certified by the court.

1 12 2. .6 6. . R Re eg gi is st tr ra at ti io on n D Du ut ti ie es s

12.6.1. Are registration duties due upon the incorporation of a company?

A registration fee is payable to the Registrar of Companies upon
incorporation of a company. As of 2002, the registration fee payable
is approximately US $500 (see section 7.3.4 above). Once
registered, a company is required to pay annual fees to the Registrar
of Companies the amount of which is approximately US $250.

Stamp duty of 1% ad valorem is usually charged on the issue of
shares.

It should be noted that a foreign company is required to appoint a
representative, having a permanent place of residence in Israel, to
act on behalf of such foreign resident company for tax purposes, in
cases where the foreign company has a business or activity in Israel.

In addition, according to the Companies Law, a foreign company may
maintain a fixed place of business in Israel, provided that it has been
registered in Israel as a foreign company under the relevant
provisions of the Companies Law and that the relevant registration
and publication fees have been duly paid.

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There is very little Israeli case law with respect to the questions as to
what type of business being carried out, or when the establishment of
a fixed place of business, will subject a foreign company to such
registration requirements (i.e., will the establishment of every office in
Israel require the foreign company to be registered as such in Israel,
etc.).

According to an old Israeli judgment,
19
the District Court held that a
foreign company which carries on business in Israel may be
considered as having established a place of business, if it conducts
its business activities in Israel through a regular, fixed place of
business (i.e., an office, a factory, etc.) or through a fixed place that
may be designated also for other purposes and, thus, will be obliged
to be registered as such at the Israeli Companies Registry. It was
also held that the submission of a power of attorney to an
agent/representative of the foreign company in Israel shall not, in and
of itself, subject the foreign company to the above registration
requirements.

The above registration requirements (if applied) include, inter alia, the
submission to the Israeli Companies Registry of an application for
registration within one month after the establishment of a place of
business to which must be attached copies of the foreign companys
organisational documents (in Hebrew), a list of the foreign companys
directors, details of a representative or of any person resident in
Israel who is authorised to receive notices on behalf of the foreign
company and a power of attorney given by such representative,
authorising him to act in Israel on behalf of the foreign company. In
addition, the foreign company is required to pay to the Companies
Registry a prescribed registration fee (as well as other fees) and is
also obliged to submit an annual report (in the prescribed form).

Registration of a foreign company may also give rise to certain tax
implications. In one case,
20
the Supreme Court of Israel decided that
there exists a strong link between the registration of a foreign
company with the Israeli Companies Registry and the establishment
of a place of business in Israel for tax purposes. Registration, itself,
appears to imply the maintaining of a place of business in Israel for
tax purposes.

12.6.2. Are registration duties payable upon an increase in capital or upon transfer
of the companys shares?

In general, stamp duty of 1% ad valorem is charged upon an increase
in capital or upon a transfer of shares.

19 Civil Appeal 2277/53 Dr. Ludwig Bendix v. Finance Trust R. G., District Judgments K. at p. 130.
20 Appeal Application 389/82 Pedavil Oil Diggers v. the VAT Manager, J udgments 37(1) 572.

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12.6.3. Are registration duties due upon a transfer of corporate assets?

Subject to that mentioned in this section 12.6 above, no registration
duties are due upon the transfer of corporate assets.

12.6.4. Are any other registration duties due?

Subject to that mentioned in this section 12.6 above, no other
registration duties are payable in Israel for incorporating a company
in Israel.

1 12 2. .7 7. . S Sa al le es s T Ta ax x o or r O Ot th he er r T Tu ur rn no ov ve er r T Ta ax x

12.7.1. What is the system of sales tax (e.g., VAT, cumulative)?

The major sales tax in Israel is VAT. VAT is an indirect tax based on
the consumption of goods and services and usually the end-customer
is the one who bears the payment of VAT. In general, VAT is
imposed in respect of the following: (a) the sale of an asset (not
including shares and tradeable securities); or (b) the performance of
a service, subject to one of the following conditions being met: (i) the
transaction is made by an authorised dealer in the ordinary course of
business ( transaction ); or (ii) the transaction entered into is an
occasional transactioni.e., a transaction involving an occasional
sale of goods or an occasional performance of services and which is
of a commercial nature only (or a transaction relating to a specific
sale of real estate); or (iii) the transaction involves the import of goods
into Israel. Thus, shares and tradeable securities as well as all rights
attaching thereto are excluded from the definition of an asset and
any sale thereof is usually not subject to VAT.

Financial institutions (i.e., banks, insurance companies, etc.) are not
subject to VAT (save for the sale of real estate rights) but, rather, are
required to pay wage tax and profit tax at a rate comparable to VAT
(namely, 8.5% in respect of wage tax and 8.5% in respect of profit
tax). Non-profit organisations are not subject to VAT but are obliged
to pay wage tax at a rate equal to one-half of the rate of VAT (i.e.,
8.5%).

12.7.2. Is input tax creditable against output tax?

VAT

(a) An authorised dealer (which term is defined, generally,
to mean a companyother than a non-profit organisation
or a financial institutionwhich sells assets or renders
services in the course of its business and that is lawfully
registered with the VAT authorities) is entitled to deduct
from the VAT for which it is liable the input tax included in
a tax invoice lawfully issued to him or as stated in an

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import entry or other document approved by the VAT
authorities, upon the following conditions being met:
(i) where the asset or service (or the use of either of the
aforegoing) is for the purposes of his business only; and
(ii) the deduction is made within six months (or such
longer period as shall be specified by the VAT authorities)
after the invoice was issued, etc. Every company and
person (including individuals) carrying on business in
Israel must be registered as an authorised dealer with the
VAT authorities.

(b) Generally, VAT is collected as soon as it is generated,
i.e., from the purchaser of the asset or from the person
receiving the service and thereafter transferred by the
seller or the service provider to the VAT authorities, after
the deduction of the input tax paid (provided that the
conditions specified in paragraph (a) above allowing such
deduction have been met).

(c) In light of the aforegoing, the ultimate consumer bears the
total VAT in respect of goods purchased, or services
received, by him. In other words, if the purchaser, or the
company receiving the services, is not an authorised
dealer, he/it may not be able to recover the VAT element
paid by him/it (the aforegoing, of course, would also apply
to foreign residents who are not registered in Israel for
VAT purposes, although transactions involving foreign
residents are, in many cases, exempt from VAT or zero-
rated).

Stamp Duty

With regard to stamp duty, see section 12.5Miscellaneous
Taxes Due above.

Purchase Tax

Another type of tax payable is purchase tax. Purchase tax is
imposed on the import or sale of certain types of goods (e.g.,
motor vehicles). The rates of purchase tax vary from one
product to another. The filing and payment requirements with
respect to purchase tax are similar to those prescribed for VAT.

Sale and Acquisition Taxes on real Estate Rights

A sale tax at the rate of 2.5% of the sale value is imposed on
the sale of real estate (including rights in a real estate
company) if the real estate asset being sold was purchased
prior to November 7, 2001. The aforesaid sale tax will not apply

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with respect to the sale of a residential apartment which was
used mainly for residential purposes or for the sale of a
residential apartment which constitutes a business inventory
(subject to certain conditions).

In addition, upon the sale of real estate rights, the purchaser
shall be liable to pay acquisition tax at the following rates:

residential units: 0%5%; and

other real estate rights: 5%.

In implementing a real estate transaction the parties thereto are
obliged to file a report within thirty days (in respect of a
declaration only) or fifty days (in respect of a declaration that
includes a self-assessment) after the date of sale. The sale
and acquisition taxes shall be paid within fifty days of the date
of sale if a self-assessment is submitted, or if the assessee files
a declaration without a self-assessment, within fourteen days
after the date on which the assessee receives an assessment
from the tax authorities. In certain cases, the date for payment
is postponed until the earliest of: (a) the date on which the
purchaser receives possession of the real estate; (b) more than
50% of the consideration has been paid; or (c) dispatch of an
irrevocable power of attorney to the purchaser.

12.7.3. What are the tax rates?

General tax rates applicable in respect of transactions (save for
transactions consummated in Eilat, for which see below)

(a) With respect to VAT, the applicable tax rates are as
follows:

(i) The rate of VAT in Israel is currently 17%. With
respect to non-profit organisations (see
section 12.7.1 above), the rate of wage tax is 8.5%
and with respect to financial institutions (see
section 12.7.1 above), the rate of wage and profit
tax is 17%.

(ii) Some transactions (for example, a transaction
involving the export of goods) are zero-rated. The
main zero-rated items applicable to transactions
pursuant to which the purchaser or the recipient of
the service is a foreign resident (as defined in
section 3.1.1(b)(ii) above), are as follows: (1) the
sale of tangible or intangible assets to a foreign
resident; (2) the rendering of services to a foreign

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resident (provided that the relevant service does not
relate to an asset or right located in Israel and such
service is not deemed to be actually rendered to an
Israeli resident); (3) special services to tourists (e.g.,
overnight accommodation; rental of private motor
vehicles).

(iii) Some transactions are exempt from VAT (for
example, rental transactions for residential
purposes for a period not exceeding twenty-five
years or a transaction involving the sale of an asset
for which input tax at the time of its acquisition or
import could not be deducted lawfully).

(iv) The main distinction between zero-rated
transactions and a transaction which is exempt is
that a dealer may deduct the input taxes paid in
respect of a zero-rated transaction, while input
taxes payable in respect of a transaction which is
exempt will not be credited or refunded by a dealer.

(b) With respect to the rate of acquisition taxes payable, see
section 12.7.3 above.

(c) With respect to the rate of stamp duty payable, see
section 12.5Miscellaneous Taxes Due above.

Eilat Free Trade Zone

The most-southern port and city in Israel is Eilat, which enjoys a
special status as a free trade zone as well as several tax
benefits. With respect to VAT, the following reliefs are
available:

(a) the import of goods to Eilat for the sale and use in Eilat is
exempt from VAT (save for certain specified goods);

(b) the sale of goods by a non-resident of Eilat to a business
in Eilat owned by an Eilat resident is zero-rated (save for
certain specified goods);

(c) the sale of goods located in Eilat by an Eilat resident for
consumption in Eilat is exempt from VAT (save for certain
specified goods);

(d) the sale of real estate located in the Eilat area, or of
shares in a real estate company both of which assets
relate to land located in the Eilat area, is exempt from
VAT; and

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(e) the rendering of services in Eilat by an Eilat resident is
exempt from VAT (if the services relate to goods or an
event taking place in Eilat).

12.7.4. What are the filing and payment requirements?

VAT

An authorised dealer is obliged to issue a transaction invoice to
a purchaser for each transaction (or part thereof), even if such
transaction is zero-rated or exempt from VAT. Likewise, a
person liable to VAT shall file a return every month, within
fifteen days after the relevant period for filing such return and
shall include therein all transactions made by him during that
month. When filing a return, such person shall also pay the
VAT payable in respect of the period during which such return
falls due.

A foreign resident having a business or activity in Israel and
therefore liable to pay VAT in Israel, is required, within thirty
days after the commencement of his business activities in
Israel, to appoint a representative, having a permanent place of
residence in Israel, to act on behalf of such foreign resident for
VAT purposes as well as for any and all income taxes payable
by the foreign resident to the Israeli tax authorities.

12.7.5. Other taxes

Local Municipal Taxes

Local taxes are paid to the applicable regional
council/municipality located throughout Israel and include
municipal rates (arnona), water and sewage rates and road
charges. The relevant municipality, in certain circumstances,
imposes additional charges such as development charges,
charges for erecting signboards, etc., and such taxes and
charges fund part of the activities of the various regional
councils/municipalities.

Betterment Levy

In the event that, as a result of modifications in the assignment
or building rights in respect of certain land (i.e., additional
building rights or a change in the designation of the land) there
is an increase in the value of the land, the owner of the land is
liable to pay betterment levy to the local or regional authority
(council/municipality) at the rate of 50% of such increase at the

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time of sale of the land or receipt of a building permit in respect
of such additional rights.

1 12 2. .8 8. . S So oc ci ia al l S Se ec cu ur ri it ty y a an nd d W We el lf fa ar re e S Sy ys st te em m C Co on nt tr ri ib bu ut ti io on ns s

12.8.1. Are social security contributions due?

The National Insurance Institute was set up in order to provide a
comprehensive system of social security benefits to Israeli residents.
The benefits are funded by the Israeli government and by national
insurance contributions made by both employers and employees on a
monthly basis. The benefits cover work accident insurance, payment
during certain periods of sicknesses, periods of disability and
unemployment, periods of reserve duty, etc. The system also
provides old age pensions, child benefits and medical care.

As of 1995, all Israeli residents are entitled to health services
included in a fixed basket of services and are liable to contribute a
specified sum in exchange for their entitlement to health insurance.

National insurance contributions and health insurance tax are
calculated as a percentage of the individuals taxable income. The
rates of contributions payable by Israeli residents each month to
cover national insurance and health insurance are as follows (correct
with respect to 2004):

Applicable Social
Security Benefit

Up to half the monthly average
wage (approximately US $800)

Total
More than half the monthly
average wage (US $800) up to the
maximum ceiling (approximately
US $8,000)

Total
Employer Employee Employer Employee
National Insurance
Contributions
5.93% 1.4% 7.33% 5.93% 5.58% 11.51%
Health Insurance
Tax
3.1% 3.1% 4.8% 4.8%
Total 5.93% 4.5% 10.43% 5.93% 10.38% 16.31%

The contributions are deductible, for tax purposes, by employers
(e.g., companies).

Generally, with respect to foreign employees seconded by a foreign
employer to Israel for a fixed period (i.e., on a temporary basis), it
should be noted that Israel is party to several Social Security
Conventions with other states, pursuant to which the contracting
states are responsible for resolving certain problems arising with
respect to the employment in Israel of such foreign employees (e.g.,
double-insurance; maintaining the pension entitlement in the
country of residence, etc.). In addition, health insurance contributions
(in effect in Israel since 1995) are excluded from most Social Security
Conventions and, therefore, most foreign employees seconded to

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Israel as aforesaid will not be required to pay health insurance
contributions in Israel nor receive health insurance benefits for the
duration of their employment in Israel.

12.8.2. Are retirement or pension contributions due?

Many employers provide their employees with pension/retirement
coverage under a Managers Insurance Policy or pension fund plan.
Such policy and/or plan provides insurance for the employee with
respect to life risks and certain other benefits and savings not
ordinarily covered under national insurance. In certain industries, the
employer is obliged to grant pension/retirement coverage to its
employees. For taxation purposes, the rates of monthly contributions
in respect of pension/retirement coverage which are made by an
employer on behalf of an employee, usually comprise:
(a) approximately 13.43%16% of such employees monthly salary
constituting the employers contribution thereto; and
(b) approximately 5%5.5% of such employees monthly salary
constituting the employees contribution thereto, up to a specified
ceiling.

12.8.3. Are unemployment insurance contributions due?

The payments constituting contributions to the National Insurance
Institute include payments to cover unemployment insurance.

12.8.4. What are the filing and payment requirements for any such contribution?

With regard to salaried employees, those portions of the employees
national insurance contributions and health insurance tax so withheld
by the employer are paid and reported by the employer to the
National Insurance Institute on a monthly basis.

1 12 2. .9 9. . S Sp pe ec ci ia al l T Ta ax x S Sc ch he em me es s

Are there particular tax consequences for doing business in the country?

(a) In general, foreign investments in Israel will be taxed in the
same manner as local investments.

Nonetheless, many exemptions, benefits and other reliefs are
available to foreign residents wishing to invest in Israel. Special
benefits apply to different types of investments, for example:
investments in listed securities; investment in the hi-tech
industry, venture capitals, etc. (see sections 3.3National Tax
Incentives for Foreign Investors and 12.3Capital Gains
above).

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In addition, subject to certain conditions, a foreign resident is
also exempt from tax on interest income deriving from deposits
in foreign currency held with banking corporations in Israel.

(b) Different types of programs are available for encouraging
investment in Israel and for providing financial assistance to
local industries. An example of such program includes the
involvement of the Israeli government (through the OCS) in
providing grants for investment in R&D activities. The grant is
calculated according to the percentage of investments to be
made by the investor in funding the R&D activities and subject
to other considerations.

(c) Certain benefits are granted to both local and foreign investors
under the Capital Investments Law. Such benefits are usually
in the form of grants or tax reliefs (see section 3.2Grants,
Subsidies or Funds above).

1 12 2. .1 10 0. . T Ta ax x o on n P Pr ro of fi it ts s

12.10.1. What are the federal or national income tax rates on profits?

Business Income

Only national income tax is imposed in respect of profits
generated in Israel. The rate of companies (income) tax in
respect of business profits is currently 35% (i.e., for the year
2004).
21
Such rate may be reduced for certain periods of time
as provided in the Capital Investments Law (see sections 3.1
Export Incentives or Guarantees and 3.2Grants, Subsidies or
Funds above).

Dividend Income

(a) With respect to dividendsif dividends are distributed by
an Israeli resident company to another Israeli resident
company, no corporate tax will be payable thereon if the
dividend so distributed originated from income generated
or accrued in Israel.

(b) Income obtained by an Israeli resident company in the
form of dividends originating from income generated or
accrued outside of Israel (i.e., dividends from an Israeli
resident company whose profits are earned abroad and
dividends distributed by a foreign company) are subject to
corporate tax at the rate of 25%, with the possibility of

21 The rate of corporate tax for 2005 is 34% and will be a reduced in subsequent years, viz., 32% in 2006 and 30%
from2007 and thereafter.

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receiving a tax credit in respect of the withholding foreign
taxes paid abroad on such distributed dividend.

(c) A company may elect or, pursuant to the provisions of any
applicable tax treaty in force, be entitled, to declare, that
corporate tax at the regular rate as specified above
(instead of 25%) shall apply to the grossed-up dividend
(as defined below) and thus enjoy the benefit of a credit
on the tax paid in respect of the income out of which the
dividend was distributed.

For the purposes of the aforegoing, the grossed-up
dividend means the amount of income received in the
form of a dividend to which there has been added tax
payable in respect of the income out of which the dividend
was distributed. For example: an Israeli company
received income in the form of a dividend from a wholly-
owned foreign resident subsidiary while the actual
dividend was derived from income produced outside of
Israel. The foreign subsidiary was required to pay tax in
its country of residence at the rate of 20% in respect of
the income (for example, 1,000), out of which the dividend
was distributed. On the date of distributing the dividend,
tax of 15% was withheld therefrom. The two possible
alternative tax consequences arising from the aforegoing
are as follows:

Possibility Aas a default:

The foreign subsidiarys income (out
of which the dividend was distributed) 1,000

The foreign corporate tax that was
paid abroad (20%) (200)
____
The sum of the dividend available for
distribution 800

The withholding tax in the foreign
country (15%) (120)
____
The net dividend 680

The company will be obliged to pay corporate tax at
the rate of 25% on the income from the distributed
dividend (due to the fact that the dividend was
derived from income generated abroad), but will be
entitled to a credit in respect of the withheld foreign
tax. Accordingly, the tax obligation will be:

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800 x 25% = 200
(120)
____
80

and the companys net income will be:

680 - 80 = 600

Possibility Bupon the assessees request:

The foreign subsidiarys income (out
of which the dividend was distributed) 1,000

The foreign corporate tax that was
paid abroad (20%) (200)
_____
The sum of the dividend available for
distribution 800

The withholding tax in the foreign
country (15%) (120)
____

The net dividend 680

The grossed-up dividend is: 800 + 200 = 1,000.
The sum of the grossed-up dividend will be deemed
to be the companys income and will be taxed at the
regular rate of corporate tax (35% for 2004), but a
credit will be granted in respect of the paid foreign
corporate tax and the withholding tax on the
dividend. Accordingly, the tax obligation will be:

35% x 1,000 = 350
200 + 120 = (320)
____
30

and the companys net income after deducting the
taxed dividend will be:

680 - 30 = 650

(d) An Israeli resident company may elect to choose to enjoy
the indirect credit on a distribution of dividends, if such
company holds at least 25% of the controlling interest (as
defined for the purpose of a controlled foreign company

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see Chapter 14Tax on Other Legal Bodies below) in the
foreign resident company distributing the dividend. An
indirect tax credit will also apply to income generated by a
subsidiary of the foreign resident companythe
distributor of the dividendif such foreign resident
company controls 50% or more of such subsidiary.

12.10.2. What are the regional or state tax rates on profits?

No regional or state tax rates are imposed on a companys profits.

12.10.3. What are the municipal or local tax rates on profits?

No municipal or local tax rates are imposed on a companys profits.

1 12 2. .1 11 1. . T Ta ax x T Tr re ea at ti ie es s

12.11.1. Are there any applicable tax treaties?

Israel has entered into tax treaties with more than forty countries,
examples of which include: the United States of America, the United
Kingdom, the Netherlands, Germany, France, Japan, China,
Switzerland, Turkey and many other countries.
22
The provisions of
any tax treaty in force supersede the provisions of any legislation
enacted in Israel with respect to the relevant taxation issue in
question.

Certain provisions of the tax treaties include tax-sparing relief
intended to protect the special tax incentives given by Israel to foreign
investors.

In general, the various withholding tax rates on dividends, interest
and royalties under the applicable tax treaties to which Israel is a
party, are as follows:

Country Dividend (%) Interest (%) Royalties (%)
Non-treaty countries 25 25 25
Austria 25 15 10
Belarus 10 10/5 10/5
Belgium 15 15 10
Brazil
22

15/10 15/0 15/10
Bulgaria 7.512.5 10/5 7.5
12.5
Canada 15 15 15

22 Israel has also signed tax treaties with Brazil, Croatia, Luxembourg and Ukraine but such treaties have not yet
been ratified.

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Peoples Republic of China 10 10/7 10
Croatia
22

Czech Republic 15/5 10/0 5
Denmark 25/15/5 25 10
Finland 25/15/5 25 10
France 15/10/5 10/5 10
Germany 25 15/0 5/0
Greece 25 10 10

Country Dividend (%) Interest (%) Royalties (%)
Hungary 15/5 25/0 25/0
India 10 10/0 10
Ireland 10 10/5 10
Italy 15/10 10 10/0
Jamaica 22.5/15 15/0 10
Japan 15/5 10 10
Luxembourg
22

15/10/5 10/5 5
Mexico 10/5 10/0 10
The Netherlands 15/10/5 15/10 10/5
Norway 25/15/5 25 10
The Philippines 15/10 10/0 Up to 15
Poland 10/5 5 10/5
Romania 15 10/5 10
Russia 10 10/0 10
Singapore 10/5/0 7 5
Slovakia 10/5 10/5/2 5
South Africa 25 25 15/0
South Korea 15/10/5 10/7.5/0 5/2
Spain 10 10/5 7/5
Sweden 15/5 25 0
Switzerland 15/10/5 10/5/0 5
Thailand 15/10 15/10 15/5
Turkey 10 10/0 10
Ukraine
22

15/10/5 10/5 10
United Kingdom 15 15 15/0
United States of America 25/15/12.5 17.5/10 15/10
Uzbekistan 10 10 10/5

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12.11.2. Are there any rules against treaty-shopping?

Israel has not enacted specific legislation concerning treaty shopping.
However, the Israeli tax authorities are deemed to have the authority
to deny benefits and reliefs under tax treaties, based on Israeli
general anti-tax planning provisions as embedded in Israeli tax laws.
Likewise, certain tax treaties include anti-tax planning provisions
which can be used also against treaty shopping.

1 12 2. .1 12 2. . T Te er rr ri it to or ri ia al li it ty y R Ru ul le es s

12.12.1. Where is the corporation subject to tax?

All income earned by Israeli resident companies is subject to tax in
Israel, regardless of whether such income was generated, derived or
accrued in Israel or abroad (i.e., their worldwide income). Likewise,
the income earned by foreign resident companies is subject to tax in
Israel if such income was generated, derived or accrued in Israel.

In general, Israeli resident companies are also subject to capital gains
tax on all gains generated or accrued on a worldwide basis. A foreign
resident company shall be liable to tax on capital gains generated or
accrued in Israel (see section 12.3Capital Gains above).

A company is defined as an Israeli resident for taxation purposes if:

it was incorporated in Israel; or

its business is managed or controlled in Israel.

12.12.2. Is the corporation subject to tax on its worldwide income?

(a) See section 12.12.1 above.

` (b) Certain rules have been adopted into Israeli taxation legislation
which determine the place where income is deemed to be
accrued or produced (similar rules have also been incorporated
into the relevant tax treaties), as follows:

(i) in respect of business incomethe place where the
income yielding business activity takes place;

(ii) in respect of income from business or from incidental
business of a commercial naturethe place where the
transaction or the business takes place;

(iii) in respect of income from an occupationwhere the
service is carried out;

(iv) in respect of work incomewhere the work is carried out;

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(v) in respect of interest, discount and linkage differentials
the place where the payor is located;

(vi) in respect of rent or property use feeswhere the
property is used;

(vii) in respect of a gain or profit, including royalties deriving
from an intangible assetthe place where the payor is
located;

(viii) in respect of a pension, usufruct or annuitythe place
where the payor is located;

(ix) in respect of income from agriculturethe place of the
asset that yields the income; and

(x) in respect of dividendsthe seat of the body of persons
distributing the dividend.

(c) (i) Notwithstanding the provisions of paragraphs (b)(iv) and
(viii) above, the place where income under the said
paragraphs was produced or accrued will be deemed to
be Israel, if the employer is: (1) the State of Israel; (2) an
Israeli local authority; (3) the Jewish Agency for Israel;
(4) the Jewish National Fund, Keren Hayesod or United
Israel Appeal; (5) a Government Company; (6) a
governmental authority or a body corporate established
under Israeli law, provided that the employment
relationship with the said employer commenced when the
employee was an Israeli resident.

(ii) Notwithstanding the provisions of paragraphs (b)(v), (vii)
and (viii) above, the place where the income was
produced will be deemed according to the following:

(1) in Israel, also when the payor is a foreign resident
if the payment constitutes an expense of the foreign
residents permanent establishment located in
Israel; and

(2) abroad, also when the payor is an Israeli resident
if the payment constitutes an expense of the Israel
residents permanent establishment located abroad.

(d) Broadly, according to the tax treaties to which Israel is a party,
business profits of a foreign resident company will be subject to
Israeli income tax only: (i) if the income is generated by and
attributable to a permanent establishment in Israel of such

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foreign resident company; and (ii) on that part of the income
attributable to the permanent establishment. (The term
permanent establishment is defined in the tax treaties.)

1 12 2. .1 13 3. . T Tr re ea at tm me en nt t o of f T Ta ax x L Lo os ss se es s

How are corporate tax losses treated?

(a) Certain principles apply facilitating a set-off of losses. Losses
arising from a trade or business may be set-off in the year in
which they are made against income from any other source
(interest, dividends, capital gains and the like). Where losses
are carried forward to subsequent years they may be set-off,
without any time limit, against income from a trade or business,
or capital gains and land appreciation from assets that serve
the business or the vocation, but not against income from any
other source. Tax losses cannot generally be carried back.
Profits or losses of one company may not be set-off against
those of another company, even if the other company is within
the same group of companies, except in certain cases of
industrial companies where consolidated tax returns have
been filed.

(b) Certain specific rules exist to facilitate a set-off of losses
suffered by an Israeli resident company outside of Israel.

(c) With respect to set-off of capital losses, the amount of the
capital loss incurred by a company in a given tax year shall be
set-off firstly against the real capital gain (including the real
appreciationthe real capital gain from the sale of real estate)
and thereafter against the chargeable inflationary amount (at a
ratio of 1:3.5 of the inflationary amount). If the capital loss from
the sale of an asset was incurred outside of Israel, then such
loss shall firstly be set-off against any capital gain derived
outside of Israel. Only capital losses which cannot be set-off as
aforesaid may be carried forward to the subsequent year,
without any time limit. Generally, no carrying back of capital
losses is permitted.

(d) In addition, certain specific rules permit set-off of capital gains
losses with respect to the sale of securities listed for trade on
an approved exchange by companies which are not subject to
the Inflationary Adjustments Law. Generally, such losses may
only be set-off against the real capital gain from the sale of the
identical class of securities due to the differing lower rates
applicable to such securities.

1 12 2. .1 14 4. . W We ea al lt th h T Ta ax x

Is there an applicable wealth tax?

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No wealth tax is imposed in Israel.

1 12 2. .1 15 5. . W Wi it th hh ho ol ld di in ng g T Ta ax xe es s

12.15.1. What are the rates of withholding tax on dividends?

The rate of withholding tax on dividends distributed to Israeli
individuals is 25%, save for dividends in respect of foreign securities
the rate of withholding tax for which may differ (i.e., 25% or 35%,
according to the date of distribution). Upon payment of the dividend
to the beneficiary, withholding tax at the aforesaid rate (or at a lower
rate, if so determined for such assessee), will be deducted by the
Israeli bank at which the amount of the dividend is to be deposited.

Dividends paid by an Israeli company to an Israeli resident company
are exempt from corporate tax, unless the dividend derived from
income generated by such Israeli company abroad (see
section 12.10Tax on Profits above).

In the case of dividends paid by an Approved Enterprise (see
section 3.3.1(a) above), the rate of withholding tax may be reduced to
15%.

12.15.2. What are the rates of withholding tax on royalties?

The rate of withholding tax on royalties is, generally the same as that
imposed in respect of corporate tax.
23
Royalties generated in Israel
are treated as part of the regular taxable income of a company.

12.15.3. What are the rates of withholding tax on interest?

Various withholding tax rates have been fixed in respect of payments
of interest income, which are dependent upon the residency status
and type of person receiving such interest income payments. For
example, interest income payments to foreign resident companies are
usually taxed at the rate of 25% (unless the foreign resident has been
exempted from tax (e.g., with respect to interest income on certain
deposits in banking corporations)) and interest income payments to
Israeli companies are usually taxed at the rate of 35%. In respect of
interest on foreign securities received by Israeli residents from a
foreign resident, the rate of tax payable on such interest income may
differ (i.e., 35% or 15%). Therefore, the rates of withholding tax
payable in respect of interest income will differ (i.e., 35%, 25%, 15%
or zero) from one case to another, largely due to the residency status
of the company receiving the interest income and the type of activity
or asset from which such interest income was derived. It should also

23 I.e., the rate of withholding tax on royalties is 34% for the tax year 2005 and will a reduced rate for subsequent
tax years, viz., 32% for 2006; and 30% for 2007 and thereafter.

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be noted that the obligation to withhold tax is imposed also on
financial institutions (e.g., banks).

12.15.4. What are the rates of withholding tax on profits realised by a foreign
corporation?

With respect to profits realised by a foreign company, the rate of
withholding tax in respect of payments to such foreign company will
be the standard corporate tax rate,
24
unless the tax authorities have
determined a lower withholding tax rate. The obligation to withhold
tax vests on the payor, including a financial institution (e.g., banks)
effecting payment to the foreign company.

1 13 3. . T TA AX X O ON N I IN ND DI IV VI ID DU UA AL LS S


What are the major allowances?

There are two types of individual assessees: (a) self-employed
individuals, including an individual partner in a business or
partnership ( self-employed individuals ); and (b) employees.

Self-Employed Individuals

Self-employed individuals are entitled to allowances and
deductions similar to those to which companies are entitled
(see in this regard section 12.1Allowances above).

Employees

Usually, business allowances are not deducted by the
employee but, rather, by the employer. The major deductions
that an employee may enjoy include: (i) payments to provident
funds and/or pension funds within certain limits and based on
specified conditions; (ii) life insurance premiums; (iii) rent paid
by an employee who, due to work requirements, was obliged to
relocate and reside temporarily elsewhere; and (iv) membership
fees to a professional association connected with the
employees particular employment.

Donations

A taxpayer may enjoy a tax credit of 35% of the amount
donated by him to recognised public institutions, provided that
the amount of the donation is not less than NIS 370

24 I.e., the rate of withholding tax on profits is 34% for profits earned in the tax year 2005 and will be a reduced rate
for subsequent tax years, viz., 32% in 2006; and 30% in 2007 and thereafter.

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(approximately US $86) and the aggregate tax credit available
for donations does not exceed 30% of the taxable income of the
assessee for the relevant tax year or a ceiling of NIS 2,156,000
(approximately US $501,395), whichever is the lower.



Israeli resident individuals are obliged to pay income tax on their
worldwide income which was produced or accrued from any of the
following sources:

business and vocation;

employment;

dividends;

interest and linkage differentials;

benefits;

residential property and land;

profits derived from other assets;

agriculture;

patents and copyright; or

gains and profits from any other source.

Israeli resident individuals are also obliged to pay capital gains tax
and real estate taxes, as shall be discussed more fully below.

The amount of income tax imposed on individuals is calculated using
a grading system of taxation (up to a maximum tax rate of 49%) at
the rates specified in section 13.13Tax on Income below. Israel
has also adopted a tax credit system which entitles Israeli residents
to deduct, in the form of a credit, specified amounts from the tax
payable by them.

In general, an Israeli resident is entitled to 2
1
/
4
tax credit points
(equivalent to an annual tax payment of NIS 4,806 (approximately
US $1,118)). Each tax credit point represents NIS 2,136
(approximately US $497) in respect of the tax year 2004. Higher tax
credit points are awarded to a working woman or a working woman
with children and other similar social circumstances.

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Individuals usually pay the income tax due by them on a cash basis.
Income tax payable by Israeli employees on salary income is made
on a cash basis, usually by way of withholding tax by the employer.
Self-employed individuals may calculate the tax payable by them on
an accrual basis and applies in particular where the business of the
self-employed individual includes the sale of inventory.

A spouses income in Israel is calculated on a joint basis, however
there are exceptions to this rule pursuant to which certain income of
the spouse is calculatedfor taxation purposesseparately. For
example, income from personal exertion or deriving from a profession
or employment is usually calculated separately if the spouses income
is not dependent upon the income of the other spouse.

Foreign resident individuals are liable to pay income tax in Israel on
income produced or accrued in Israel from the sources referred to
above.

In addition, special rules apply to foreign resident individuals for
determining the place where the income was produced or accrued.
For example: (a) in respect of business income, the place where the
income yielding business activity takes place; (b) in respect of interest
or royalty payments, the determining place will be where the payor is
located; and (c) with respect to dividends, the determining place will
be the headquarters of the company distributing the dividend.


Are capital gains taxable?

(a) (i) Broadly, the sale of a (capital) asset is subject to capital
gains tax. When calculating the rate of capital gains tax
payable, certain basic principles need to be taken into
consideration. The term sale includes any direct or
indirect exchange, renunciation, disposition, transfer,
grant, gift and also any other act or occurrence as a
consequence of which an asset passes out of the control
of one person to another, excluding by way of inheritance.

(ii) An asset includes any property, whether real or
movable, as well as contingent or vested rights in Israel or
abroad, save for movable property held by an individual
for his personal use, inventory, rights in real estate and
rights in real estate companies that are subject to real
estate taxes as detailed in section 13.7Real Estate
Taxes below.

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(iii) Capital gains earned by an Israeli resident individual from
the sale of an asset in Israel or abroad is subject to capital
gains tax.

(iv) A sale of immovable property is subject to appreciation
tax and other land taxes payable on the appreciation (i.e.,
the capital gain) accruing on the land or the sale value
thereof (depending on the type of tax), as more fully
referred to in section 13.7Real Estate/Habitation Tax
below.

(b) An Israeli resident is liable to tax on a capital gain accrued or
produced in Israel or abroad. A foreign resident is similarly
liable to tax on a capital gain accrued or produced in Israel.
The place where the capital gain was generated or accrued
shall be deemed to be in Israel, in any of the following
instances:

the asset being sold is located in Israel;

the asset being sold is located abroad and, essentially,
constitutes a direct or indirect right to an asset or to
inventory or constitutes an indirect right to real estate or to
an asset in a real estate company located in Israel ( the
property ), in respect of that part of the consideration
that stems from the property located in Israel;

the asset comprises a share or a right relating to a share
in an Israeli resident body of persons; or

the asset comprises a right in a foreign resident body of
persons which constitutes essentially a direct or an
indirect right to property located in Israel, in respect of that
part of the consideration that stems from the property
located in Israel.

(c) In Israel, only national tax is imposed on capital gains. The
individual tax rate on real capital gains (i.e., the capital gain
less the inflationary amount) is 25% with respect to that part of
the capital gain accruing after January 1, 2003; the applicable
tax rate with respect to that part of the capital gain which
accrued prior to January 1, 2003 is the marginal income tax rate
(up to a maximum tax rate of 49%). If an asset was purchased
prior to January 1, 2003 and then sold after such date, the
division (for the purposes of calculation of the tax liability) of the
accrued capital gains will be made by way of the linear method:
for example, with respect to an asset purchased on January 1,
2002 for NIS 100 and thereafter sold on January 1, 2005 for
NIS 400, the method for calculating the capital gains tax

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payable on such sale (assuming that there was no inflation
during that period and that, for the sake of convenience, the
marginal income tax rate is 50%) will be as follows:

capital gain 300

until January 1, 2003: 100 (i.e., one-third)

after January 1, 2003 200 (i.e., two-thirds)

capital gains tax: 100 X 50% + 200 x 25% = 100

Special rules apply to recovered depreciation.

(d) The tax rate on the inflationary amount is 10% with respect to
that part of the inflationary amount which accrued until
December 31, 1993 and zero-rated with respect to that part of
the inflationary amount accruing after such date.

(e) The individual tax rate on capital gains from the sale of goodwill
for which acquisition no consideration has been paid, is 25%
(including that part of the capital gain which accrued prior to
January 1, 2003).

(f) In the event of a sale of shares in an unlisted company, the
seller (i.e., the assessee) will be entitled to an additional
inflationary amount, based on such sellers proportional share
of retained earnings of the company. The tax rate on the real
capital gain, equal to the sellers share in the profits available
for distribution which accrued until January 1, 2003, is 10% and
the tax rate on the real capital gain equal to the sellers share in
the profits available for distribution accruing after January 1,
2003 is 25%. For the purposes of the aforegoing, profits
available for distribution are profits accumulated in the
company during the period between the end of the tax year
prior to the year in which the shares were acquired (but
occurring not before January 1, 1996) and the end of the tax
year prior to the year in which they were sold, based on certain
methods of calculation.

(g) If in the case of a sale of tradeable securities and tradeable
futures listed on a recognised stock exchange no interest and
linkage differentials are claimed in respect of the relevant
securities and under certain specified conditions, then the rate
of capital gains tax to be imposed shall not exceed 15%.

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(h) In the case of a sale of foreign securities (usually, tradeable
securities of non-Israeli companies listed on an exchange
located outside of Israel), the tax rate may differ (i.e., it may be
15%, 25% or 35%, according to the date of sale of such
securities and the type of securities being sold).

(i) Israeli income tax laws include several reliefs and exemptions
which apply to capital gains tax imposed on individuals, for
example: (i) gifts made to relatives or to other individuals if the
tax authorities are satisfied that the gift was made in good faith;
(ii) gifts to the State of Israel or certain public institutions;
(iii) under certain circumstances, a sale of assets located
outside of Israel by new Israeli residents (olim) who only
recently became Israeli residents.

Certain exemptions from capital gains tax apply to foreign
residents. A foreign resident is exempt from tax on capital
gains from the sale of securities listed on the TASE, if the
capital gain is not attributable to a permanent establishment in
Israel. A foreign resident is also exempt from tax on capital
gains from the sale of shares allocated to him and subsequently
sold during the 2003 tax year or thereafter, provided that such
foreign residents investment was made in a company which, at
the time of the allocation of shares, was a research and
development intensive company (as such term is defined in the
Income Tax Ordinance). Other exemptions may also apply to
foreign residents (e.g., a sale of future transactions on the
TASE, or an investment in an exempt trust fund (a trust fund
approved by the Israeli tax authorities as a fund, the profits and
income of which are exempt from tax)).

(j) Capital gains accruing from the sale of rights in real estate in
Israel or rights in an Israeli real estate company ( real estate ),
are subject to appreciation tax (which is similar to capital gains
tax). The individual tax rate on the real appreciation accruing
after November 7, 2001 is 25% and that which accrued prior to
November 7, 2001 is the marginal income tax rate (up to a
maximum tax rate of 49%). The tax rate on the inflationary
amount is similar to that mentioned above with regard to capital
gains tax. Determination of the real appreciation tax prior to
and after July 7, 2001 will be made using the linear method.

(k) In respect of the sale of capital assets (rights in real estate or
other capital assets) that were acquired until 1960, the tax rate
will generally range between 12%-25% (12% for assets
acquired until 1948 plus 1% for each year thereafter).


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13.4.1. When must the individual file a tax return, if any?

Generally, every individual over the age of 18 is required to file an
annual tax return. Likewise, an individual foreign resident who
receives chargeable income is also required to submit a tax return.
Certain other circumstances exist under which an individual is
required to submit a return, such as: on a sale of real estate rights, or
Israeli residents who created trusts during the relevant tax year.

However, certain significant exemptions apply to the submission of a
return so that a substantial portion of Israeli resident individuals are
not actually required to submit a return. For example, the following
individuals are usually exempt from submitting a tax return:

an Israeli individual resident all of whose income in the tax year
to which the relevant tax return applies originated from salary,
rental income or some other types of income (such as income
earned in the form of interest), or from a combination of any of
the aforegoing, if the total annual income from the aforegoing
sources does not exceed a specified ceiling (approximately
US $115,000 per annum for salary and a lower ceiling in
respect of other types of income). In light of the aforegoing,
most employees in Israel do not currently submit tax returns;

a foreign resident whose income was derived from or produced
in Israel, if the tax payable thereon was withheld and, provided
that, the income originated from one of the following sources:
(a) a business or profession carried out in the course of the tax
year over period(s) not exceeding a total of 180 days; (b) salary
or pension (e.g., annuities); or (c) payments of interest, linkage
differentials, dividends, royalties or rental; and

a new resident or returning resident (who remained abroad for
more than ten years and who is entitled to special tax reliefs),
may, in certain circumstances, be exempt from submitting a tax
return for a limited period.

If an individual is required to submit a tax return, then the date for
submitting same must be not later than four months after the end of
the relevant tax year (i.e., until April 30 of the ensuing year in which
the income was generated). If an individuals tax return is based on a
complete set of double entry accounts, then such individual is
required to submit the tax return by not later than May 31 of each
year.

13.4.2. When must the individual pay his taxes?

In general, most individuals must pay their taxes when they submit a
tax return. Self-employed individuals are required to make advance

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payments of income tax based, usually, on the turnover of their
business. The rate of advance payments would depend on the type
of business and would take into account different levels of operating
costs. Withholding tax deducted at source from payments may be
set-off against advance payments of tax. At the end of each tax year,
individuals are requested to file a return and pay any excess tax
owing after deduction of the advance payments. Likewise, taxes with
respect to certain types of income (such as employment income) is
usually withheld (e.g., by the employer).

Regarding capital gains tax, an individual is required to make an
advance payment at the rate of 25% (or a lower rate, if so determined
by the tax authorities) of the capital gain, within thirty days after the
date of sale of the capital asset.

1 13 3. .5 5. . I In nh he er ri it ta an nc ce e a an nd d G Gi if ft t T Ta ax x

13.5.1. Does the individuals presence in the country subject him to inheritance or
gift tax?

No inheritance tax or gift tax is imposed, or payable, in Israel.

13.5.2. What kind of assets are subject to tax?

N/A

13.5.3. What are the tax rates?

N/A

13.5.4. Are allowances available?

An individual is exempt from capital gains tax in respect of the
transfer of an asset or the giving of a gift to a relative, as well as the
giving of a gift to any other individual, if the tax authorities are
satisfied that the gift was given in good faith. An exemption from
appreciation tax (tax on capital gains deriving from the transfer of
rights in respect of real estate) is also permitted, in the event of the
transfer, without consideration, of a right in real estate by an
individual to his relative (e.g., spouse, parent, grandparent, child,
etc.).

However: (a) the recipient of an inherited or gifted capital asset or
real estate will be subject to capital gains tax (or, if applicable, land
appreciation tax), on the subsequent sale of such asset, taking into
account the acquisition value and date of purchase thereof by the
testator or transferor of the gift; and (b) the recipient of an inherited
apartment may, in certain circumstances, be exempt from the
obligation to pay appreciation tax on such apartment on the date of
sale thereof. In light of the aforegoing, the recipient (whether the heir

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or transferee of the gift) of the asset shall also be liable to capital
gains tax or (land) appreciation tax in respect of the capital gain (or
appreciation) accruing from the date of acquisition by the transferor
until the date of actual sale thereof by the transferee.

13.5.5. What are the payment and filing requirements?

N/A

1 13 3. .6 6. . M Mi is sc ce el ll la an ne eo ou us s T Ta ax xe es s D Du ue e

13.6.1. What are the miscellaneous taxes to which the individual may be subject?

An individual may be subject, inter alia, to the following taxes, levies
and other duties (over and above those taxes, levies and duties
expressly referred to in this Chapter 13, namely, income tax, capital
gains tax, real estate taxes, VAT, national insurance contributions
and health insurance tax):

Local Municipal Taxes

Local taxes are paid to the applicable regional
council/municipality located throughout Israel and include
municipal rates (arnona), water and sewage rates and road
charges. The relevant municipality, in certain circumstances,
imposes additional charges such as development charges,
charges for erecting signboards, etc., and such taxes and
charges fund part of the activities of the various regional
municipalities/councils.

Betterment Levy

In the event that, as a result of modifications in the assignment
or building rights in respect of certain land (i.e., additional
building rights or a change in the designation of the land) there
is an increase in the value of the land, the owner of the land is
liable to pay betterment levy to the relevant local or regional
authority (council/municipality) at the rate of 50% of such
increase.

13.6.2. What are the filing and payment requirements?

Betterment levy is generally paid at the time of sale of the land or
receipt of a building permit in respect of additional building rights.

1 13 3. .7 7. . R Re ea al l E Es st ta at te e/ /H Ha ab bi it ta at ti io on n T Ta ax x

Is the individual subject to real estate or habitation tax?

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(a) In general, an individual is subject to real estate taxes in the
event of the sale or purchase by such individual of real estate.

(b) There are three types of taxes (excluding betterment levyfor
which see below) applicable to the transfer of rights in real
estate. The major applicable tax, appreciation tax (see
section 13.5.4 above), applies to the capital gains accruing in
respect of the real estate right or of the shares in a real estate
company. The applicable tax rates of appreciation tax are as
follows:

in respect of the real appreciation accruing after
November 7, 200125%;

in respect of the real appreciation which accrued prior to
November 7, 2001the individuals marginal income tax
rate (up to a maximum of 50%);

in respect of the transfer of old assets (i.e., real estate
rights acquired prior to April 1, 1961), the tax rate will
range between 12%24% (12% for assets acquired until
1948 plus 1% for each year thereafter); and

in respect of the inflationary amount0%10% (see our
related discussion on capital gains tax in section 13.3
Capital Gains above).

(c) The calculation of appreciation tax in respect of an asset that
was purchased prior to November 7, 2001 is calculated on a
linear basis due to the different tax rates in effect prior to and
after such date.

(d) Special exemptions apply on certain sales of real estate rights,
one major exemption being with respect to the sale, under
certain conditions, of residential apartments that are used
mainly for residential purposes. The conditions under which an
exemption would apply include, inter alia: (i) where the
apartment was used primarily for residential purposes during a
specified period; (ii) where the seller sells all of his rights in the
apartment; (iii) where the seller did not sell another residential
apartment similarly exempt from appreciation tax during the four
years preceding such sale; or (iv) where the residential
apartment constitutes the sellers only residential apartment in
Israel (under certain conditions).

In addition, other exemptions (or deferrals from the payment of
tax) apply, inter alia: (1) in the event of a transfer of real estate
rights in the form of a gift to a relative; (2) upon certain transfers
of real estate rights to companies from individuals holding rights

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in such companies; or (3) upon the unification and partition of
real estate.

(e) Another tax which might be imposed on the sale of a real estate
right is sale tax. Sale tax at the rate of 2.5% of the sale price is
imposed on the sale of real estate and of rights in a real estate
company (usually excluding residential apartments owned by
individuals and apartments that constitute part of a business
inventory) which were purchased prior to November 7, 2001. In
general, transactions that are exempt from appreciation tax
(see above) are similarly exempt from sale tax. With respect to
real estate acquired after November 7, 2001 and which is
subsequently sold, such sale will not be subject to sale tax.

(f) In addition, upon the sale of a real estate right, the purchaser
shall be liable to pay real estate acquisition tax at the rate of
0%5% of the sale price for residential apartments and
acquisition tax at the rate of 5% in respect of other real estate
rights. Certain reliefs are available with respect to acquisition
tax, such as: if the purchaser is an immigrant or a disabled
person (under certain conditions).

(g) Parties to a real estate transaction must file a report with regard
to the relevant transaction within thirty days (for submitting a
declaration on the transfer only) or fifty days (for submitting a
declaration together with a self-assessment of the taxes due)
after the date of sale. The taxes must be paid not later than the
end of the thirty-day period (if only a declaration is submitted) or
the end of the fifty-day period (if the parties to the transaction
submit a declaration together with a self-assessment) or within
fourteen days after receipt by the assessee of an assessment
from the tax authorities. In certain circumstances, the date for
payment is postponed until the date on which: (i) the purchaser
receives possession of the real estate; (ii) more than 50% of the
consideration for the sale has been paid; or (iii) the purchaser
receives an irrevocable power of attorney to register the real
estate rights in the name of the purchaser.

(h) Usually, no VAT is imposed on any transfer of real estate rights
by individuals, unless the real estate constitutes a business
inventory or an asset used in the business of the seller or the
purchaser, as the case may be, or in other specified cases.

(i) Local taxes (e.g., arnona) and betterment levy are also imposed
on real estate (see section 13.6Miscellaneous Taxes Due
above).

1 13 3. .8 8. . S Sa al le es s T Ta ax x

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Does the individual pay sales tax?

Certain sales taxes in Israel also apply to individuals. The principal
sales taxes are VAT, purchase tax and customs and stamp duties as
more fully detailed below. Similarly, sales taxes are imposed on the
sale or purchase of real estate rights (see section 13.7Real
Estate/Habitation Tax above).

VAT

In general, the sale of an asset (real estate or goods, but
excluding securities) or the rendering of a service in the course
of a business ( transaction ) made or performed in Israel and
the import of goods are subject to VAT. VAT is also imposed
under certain other circumstances (i.e., in a transaction relating
to the sale of land which is not used by the seller in the course
of his business dealings to certain purchasers).

Broadly, the applicable rate of VAT is 17% of the value of the
transaction. Some transactions are VAT-exempt or zero-rated
(such as transactions between Israeli residents and foreign
residents in specified conditions and transactions involving the
implementation of certain structural changes to a business and
other restructuring activities).

Likewise, authorised dealers (as defined in section 12.7.2(a)
above and which term includes including individuals who sell
assets or render services in the course of their business) are
entitled to deduct the VAT paid by them when purchasing inputs
for the business or transaction (under certain conditions, on the
basis of a transaction invoice and within a certain period),

An authorised dealer is obliged to issue a transaction invoice to
a purchaser for each transaction (or part thereof), even if such
transaction is zero-rated or exempt from VAT. Such authorised
dealer is required to file a return every month, within fifteen
days after the relevant period for filing such return and shall
include therein all transactions made by him during that month.
When filing a return, such dealer shall also pay the VAT
payable in respect of the period during which such return falls
due.

A foreign resident who engages in business or has a presence
or activity in Israel and is liable to pay VAT in Israel, is required,
within thirty days after the commencement of his business
activities in Israel, to appoint a representative, having a
permanent place of residence in Israel, to act on behalf of such
foreign resident for VAT purposes as well as for any and all

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income taxes payable by the foreign resident to the Israeli tax
authorities.

Purchase Tax

Other types of sales taxes payable are purchase tax and
customs duties. Purchase tax is imposed, generally, on the
import or sale of certain types of goods (e.g., motor vehicles).
The respective rates of purchase tax and customs duties vary
from one product to another.

Sale and Acquisition Taxes on real Estate Rights

See section 13.7Real Estate/Habitation Tax above.

Stamp Duty



13.9.1. Are contributions to social security due?

With regard to the circumstances under which national insurance
contributions and health insurance taxes are payable by employers
and employees, respectivelysee section 12.8.1 above (including
the table in section 12.8.1 depicting the rates of such
contributions/taxes, which apply to both companies (i.e., employers)
and individuals (i.e., salaried employees)).

The rates of contributions payable by self-employed individuals,
unemployed and unself-employed individuals each month to cover
national insurance and health insurance are as follows (correct with
respect to 2004):

Applicable Social
Security Benefit
Unemployed and Unself-Employed Individuals
(the rates are calculated in respect of certain fixed amounts)
Self-Employed Individuals
Up to half the
average wage
(approximately
US $800)
More than half the
average wage (US $800)
up to the maximum ceiling
(approximately US $8,000)
Up to half the
average wage
(approximately
US $800)
More than half the
average wage (US $800)
up to the maximum ceiling
(approximately US $8,000)
National Insurance
Contributions
4.61% 10.4% 6.72% 10.62%
Health Insurance
Tax
4.8% 4.8% 3.1% 4.8%
Total 9.41% 15.2% 9.82% 15.42%

52% of the above-mentioned contributions are tax deductible.

13.9.2. Are contributions to the welfare system due?

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The payments constituting contributions to the National Insurance
Institute include payments for unemployment insurance.

13.9.3. If so, what are the payment and filing requirements?

With regard to salaried employees, those portions of the employees
national insurance contributions and health insurance tax so withheld
by the employer are paid and reported by the employer to the
National Insurance Institute on a monthly basis. Self-employed
persons are generally required to file and pay such contributions on
an annual basis, but they are also required to pay advance payments
during the relevant tax year.

1 13 3. .1 10 0. . S St to oc ck k O Op pt ti io on n, , P Pr ro of fi it t S Sh ha ar ri in ng g a an nd d S Sa av vi in ng gs s P Pl la an n

13.10.1. Is there taxation of stock option plans?

(a) In Israel, a special tax treatment applies in relation to employee
stock option plans ( ESOPs ) that may reduce the rate of tax
payable in respect of benefits gained by an employee to 25%.
Taxation pursuant to ESOPs is payable by Israeli employees
employed by Israeli companies or by foreign companies that
employ Israeli employees, whether directly or indirectly, through
an Israeli subsidiary. If a company has set up an ESOP and is
duly registered with the tax authorities, the tax treatment in
respect thereof would apply to such companys employees and
officers, but would not apply to its controlling members (being
persons or entities holding 10% or more of the share capital,
voting rights or rights to share in the profits of, such company,
or having the right to appoint a director in such company).

(b) Under Israeli income tax laws, there are three different courses
of tax treatment available with respect to ESOPs specifically
established by an employer company for its employees: (i) the
qualified capital gains course; (ii) the qualified work income
course; and (iii) the non-trustee course. The employer may
choose to grant options or to issue shares to its employees by
adopting any of the above courses. However, certain
restrictions apply should an employer wish to substitute a
course already selected by it with any other course.

Qualified Capital Gains Course

The qualified capital gains course applies where the
options or shares are allocated to a trustee (usually a
lawyer or an accountant) who then holds the options so
allocated and/or shares so issued upon exercise of such
options, as applicable, for a period of two to three years.

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The employees income deriving from the allocation of
shares/options in the employer company is usually not
subject to tax at the time of allocation, but will be subject
to tax upon the earlier to occur of: (i) the sale of the
options/shares by the trustee; or (ii) the transfer of such
options/shares from the trustee into the name of the
employee. The employees aforesaid income shall be
deemed a capital gain (and not work income) having
regard to the value of the benefit and capital gains tax at
the rate of 25% shall be payable by the employee.

Under the qualified capital gains course, the allocating
company may not be allowed any tax deduction in respect
of the rights attaching to the options and/or shares to be
issued to its employees.

Qualified Work Income Course

The options/shares shall be deposited with a trustee (as
stated above, usually a lawyer or an accountant) for a
minimum period of 12 years. The employees income
deriving from an allocation of such options/shares in the
employer company shall generally not be subject to tax at
the time of allocation, nor shall the employee be subject to
tax at the stage of exercise of the options into shares.
The employee shall be subject to regular income tax (up
to a maximum rate of 49%), national insurance
contributions and health insurance taxes (approximately
10%) in respect of the benefit gained by the employee
upon the earlier to occur of: (i) the sale of the
options/shares through the trustee; or (ii) the transfer of
the options/shares from the trustee into the name of the
employee. The trustee and/or the employer company are
obliged to withhold the national insurance contributions
and health insurance taxes in respect of such income.

In general, in certain circumstances under the qualified
work income course, the allocating company will be
allowed to deduct the said benefit gained by the employee
from the options/shares and at such time the employee
will be obliged to pay the applicable tax.

Non-Trustee Course

Under the non-trustee course, the options are granted
directly to the employee without the involvement of a
trustee.

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The employees income deriving from the allocation of the
options/shares will be taxed as work income at the time of
allocation and will be taxed again as capital gains income
upon realisation of such options/shares (i.e., the date of
sale of such options/shares to a third party).
Notwithstanding the aforegoing, if the allocated options
are not listed for trade on an exchange, the employee's
income shall not be subject to tax on the date of allocation
but, rather, will be liable to tax as work income on the date
of realisation (i.e., upon the sale of the shares or options)
at the marginal tax rate, up to a maximum of 49%, in
addition to national insurance contributions and health
insurance taxes (if applicable).

With respect to employees who cease to be Israeli residents, a
special treatment would apply in respect of all of the three tax
courses specified above.

Certain rules also apply with respect to payment and reporting
requirements to which both the company and the trustee are
subject.

13.10.2. Is there taxation of profit sharing plans?

Profit sharing plans are taxed at the rate ordinarily imposed in respect
of work income.

13.10.3. Is there taxation of savings plans?

Savings plans are taxed at the rate ordinarily imposed in respect of
work income.

1 13 3. .1 11 1. . T Ta ax xa at ti io on n o of f B Be en ne ef fi it ts s i in n K Ki in nd d

What is the rate of taxation on benefits in kind (e.g., automobile, housing and
utilities, education, etc.)?

Under Israeli income tax laws, an employee is subject to income
taxover and above that payable in respect of his regular salaryon
all refunds, allowances or benefits received by the employee from his
employer, including: uniforms, payments for the upkeep of a vehicle,
reimbursement of telephone bills, trips abroad.

The Israeli courts have ruled that if any benefit or allowance refund
given to the employee by his employer is designated for the benefit
of the employee (for example, participation in the employees
payments for the education of his child), then such refund shall be
regarded as work income. However, if the benefit or allowance
refund is designated principally in favour of the employer, then such
refund shall not be regarded as work income. The courts have also

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established certain parameters and indications for determining
whether a benefit or allowance refund is for the benefit of the
employee or in favour of the employer.

The tax rate on income from benefits in kind which are regarded as
work income, is the marginal tax rate applicable to the employee in
respect of work income.

1 13 3. .1 12 2. . T Ta ax xe es s o on n D Di iv vi id de en nd ds s

Are dividends taxable regardless of their form?

Dividends distributed to an individual are taxable, regardless of their
form, with the tax rates varying according to the source income from
which the dividend was declared. In general, the tax rate payable on
dividends is 25%. If dividends distributed to Israeli individuals derive
from foreign securities (as such term is defined in section 13.3
Capital Gains above), then the rate may differ (35% or 25%)
according to the date of distribution of such dividend. Likewise, a
reduced tax rate of 15% is payable for certain periods in respect of
dividends distributed by an Approved Enterprise under the Capital
Investments Law (see section 3.3.1(a) above).

Applicable tax treaties may exempt the dividend from withholding tax
or reduce the rate of withholding tax payable.

In addition, certain rules apply in Israel to a controlled foreign
company ( CFC ) in respect of investments made or transactions
entered into with Israeli residents located abroad. In this regard, an
Israeli resident who is a controlling member (an Israeli resident who,
directly or indirectly, alone or together with another, holds at least
10% of the means of control in the CFC during the relevant tax year)
shall be treated as if he had received his proportional share of the
unpaid profits by way of a dividend ( Deemed Dividend ) and shall
be subject to tax at the rate of up to 25% in respect of such Deemed
Dividend. For further details with regard to CFC transactions, see
Chapter 14Tax on Other Legal Bodies below. Similarly, a special
tax treatment applies also with respect to dividends distributed by
foreign occupational companies (see Chapter 14Tax on Other
Legal Bodies below).

1 13 3. .1 13 3. . T Ta ax x o on n I In nc co om me e

13.13.1. What are the federal or national tax rates on income for residents?

In Israel only national tax is payable on income. The income tax
rates in respect of the income of an individual (whether a self-
employed individual or an employee) constituting work income and
certain other income generated from personal exertion or in respect
of all chargeable income of an individual who has not reached the

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age of 60, are as follows (please note the figures below are
approximations only):

For the 2005 tax year:

Under recently adopted tax reforms, the chargeable income tax rates
of an individual who has not reached the age of 60 were reduced
(when compared with the equivalent tax rates for the 2004 tax year)
and are stated to be as follows (please note that the figures below are
approximations only and may be subject to further amendment):

T Ta ax xa ab bl le e I In nc co om me e ( (N NI IS S) ) R Ra at te e o of f T Ta ax x
up to 37,800 10%
from 37,800 to 49,560 17%
from 49,560 to 132,480 26%
from 132,480 to 236,520 37%
from 236,520 to 409,680 39%
more than 409,680 49%

With respect to other types of income earned by individuals and
which do not derive from personal exertion (for example, rental
payments, interest or other passive income) and provided that such
individuals have not reached the age of 60, the income tax rates are
as follows:

up to 132,480 30%
from 132,480 to 236,520 37%
from 236,520 to 409,680 39%
more than 409,680 49%

For the 2006 tax year and thereafter:

up to 37,800 10%
from 37,800 to 49,560 17%
from 49,560 to 132,480 26%
from 132,480 to 236,520 34%
from 236,520 to 409,680 37%
more than 409,680 49%

With respect to other types of income earned by individuals and
which do not derive from personal exertion, as referred to above,

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and provided that such individuals are under the age of 60, the
income tax rates are as follows:

up to 132,480 30%
from 132,480 to 236,520 34%
from 236,520 to 409,680 37%
more than 409,680 49%

Notwithstanding the aforesaid rates, special tax rates apply to certain
types of income under specified conditions, such as: rental from a
residential apartment (usually, 0% or 10%); rental income from
abroad (15%); the sale of a patent (up to a maximum of 40%);
income from gambling or lotteries (25%); dividends (15%, 25% or
35%as the case may besee section 13.12Taxes on Dividends
above); income from interest or discount payments (10%, 15% or
35%, as the case may be).

The aforesaid tax rates do not take into account the deduction of
personal tax credits and do not include national insurance
contributions and health insurance taxes.

13.13.2. What are the federal or national tax rates on income for non-residents?

In general, the national tax rates on income for foreign residents are
similar to those applicable to Israeli residents. However, foreign
residents may be entitled to certain reliefs and exemptions in respect
of certain sources of income (see section 3.3National Tax
Incentives for Foreign Investors above).

13.13.3. What are the regional or state tax rates on income for residents?

No regional or state taxes are levied on Israeli residents.

13.13.4. What are the regional or state tax rates on income for non-residents?

No regional or state taxes are levied on non-residents.

13.13.5. What are the municipal or local tax rates on income for residents?

No municipal or local taxes are levied on Israeli residents.

13.13.6. What are the municipal or local tax rates on income for non-residents?

No municipal or local tax rates are levied on non-residents.



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13.14.2. Are there any rules against treaty-shopping?

Israel has not enacted specific legislation concerning treaty shopping.
However, the Israeli tax authorities are deemed to have the authority
to deny benefits and reliefs under tax treaties, based on Israeli
general anti-tax planning provisions as embedded in Israeli tax laws.


13.15.1. Where is the individual subject to tax?

The income of an Israeli resident individual is subject to Israeli tax on
his worldwide income, regardless of whether such income was
produced or accrued in Israel or abroad. Income earned by a foreign
resident individual is subject to tax in Israel, if such income was
produced or accrued in Israel.

An individual is defined as an Israeli resident for tax purposes if his
life is centred in Israel.

In order to determine the place where an individuals life is centred,
there need to be taken into account such individuals family,
economic and social ties, including:

his place of permanent residence;

the place where he and his family dwell;

his permanent place of business or the place where he is
employed;

the place of his active and substantive economic interests; and

the place where his activity in organisations and various
institutions takes place.

It is assumed that the individuals life is centred in Israel in a tax year
if: (a) he spent 183 days or more in that tax year in Israel; or (b) he
spent thirty days or more in Israel in that tax year and the total period
of his stay in Israel in the tax year and in the preceding two tax years
amounted to 425 days or more. Such assumption may be refuted
both by the individual and by the tax authorities.

In general, Israeli resident individuals are also subject to capital gains
tax on all gains generated by them on a worldwide basis. A foreign

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resident is subject to tax on capital gains accrued or produced in
Israel.

With respect to foreign resident individuals, Israel has special rules
for determining the place where the income was produced or
accrued. For example: (i) in respect of business income, the place
where the income yielding business activity takes place; (ii) in respect
of interest or royalties, the place where the payor is located; and
(iii) in respect of dividends, the seat of the company that distributes
the dividend.

13.15.2. Is the individual subject to tax on his worldwide income?



Is the individual subject to tax based upon his wealth?
If so, what are the rates?
Are there any allowances available?
What are the payment and filing requirements?

No wealth tax is levied on an individual in Israel


13.17.1. Is salary subject to a withholding tax at source?

Salary Income

In Israel, any person who pays, or is responsible for paying
work income (salary), including retirement compensation that is
not exempt from tax, shall, at the time of payment, withhold tax
from the amount so paid. The withholding tax payable in
respect of salary paid to an employee is the full amount of tax
then due. Usually, the withholding of tax at source in respect of
an employees income is made on a monthly basis, which is the
time-frame within which most employees are paid their salary.

Dividends

The rate of withholding tax on dividends is 25%, save for
dividends deriving from foreign securities received by Israeli
residents or vice versa (i.e., the distribution of dividends by an
Israeli resident company to foreign resident individuals), the
rate of withholding tax for which may differ (35% or 25%),
according to the date of distribution.

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In the case of dividends paid by an Approved Enterprise, the
rate of withholding tax may be reduced to 15%.

However, in the case of a dividend distributed by a foreign
resident company to Israeli resident individuals, the rate of
withholding tax will be determined according to the provisions of
the relevant tax treaty in force (if applicable).

Royalties

Unless the provisions of the relevant tax treaty specify a
different rate, the maximum rate of withholding tax on royalties
payable by an individual is 25%.

Interest

Various withholding tax rates have been fixed in respect of
payments of interest income, which are dependent upon the
residency status and type of person receiving such interest
income payments. For example, interest income payments to
foreign resident individuals are usually taxed at source at the
rate of 25% unless the foreign resident individual has been
exempted from tax (e.g., with respect to interest income on
foreign currency deposits in specified conditions). In certain
circumstances, the rate of withholding tax on interest income is
10% or 15% (for example, interest income deriving from
deposits, saving plans, debentures and provident funds). In
respect of interest on foreign securities received by Israeli
residents, the withholding tax rate may differ (35% or 15%),
according to the date of payment of such interest income.

13.17.2. What is the treatment of residents as compared to non-residents?

Foreign residents may be entitled to enjoy certain tax reliefs and
exemptions over and above the tax treatment applicable to Israeli
residents (see section 3.3National Tax Incentives for Foreign
Investors above).

1 14 4. . T TA AX X O ON N O OT TH HE ER R L LE EG GA AL L B BO OD DI IE ES S

G Ge en ne er ra al l

Under Israeli taxation laws and regulations different tax treatments apply to
specific legal bodies which are not regarded as body corporates in the ordinary
sense. Amongst those legal bodies, reference is made in this Chapter 14 to the
following:

Partnerships;

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Joint Ventures;

Controlled Foreign Corporations (CFCs);

House Property Companies and Real Estate Associations;

Real Estate Investment Trusts (REITs);

Family Companies and Transparent Companies;

Trusts;

Foreign Occupational Companies;

Non-Profit Organisations; and

Unlimited Companies.

P Pa ar rt tn ne er rs sh hi ip ps s

(a) Partnerships (whether registered or unregistered) are entitled to special
treatment for taxation purposes. In order to benefit from such special tax
treatment, the assessee must be able to prove to the Israeli tax authorities
that a business or vocation is carried on by two or more persons jointly
( persons include individuals, companies, partnerships and other bodies
of persons). Such special tax treatment will also be granted to partnerships
if they have received, apart from their business income, passive income in
the form of rental, income in the form of interest payments, or dividends,
etc.

(b) The tax treatment to which partnerships are subject is transparent for
taxation purposes. In other words, the share of the partnerships income, to
which each partner is entitled in the relevant tax year, will be regarded as
the partners income and ought to be included in the return of income to be
submitted by him in addition to his other income. Therefore, the individual
partners (and not the partnership) will be regarded as the assessees for
taxation purposes.

(c) It is necessary to emphasise that the income of the partnership is
calculated at the partnership level (i.e., the aggregate income and
expenditure of the partnership, with each type of income being dealt with in
accordance with its source) and the overall calculation ascribed to each of
the partners, pro rata to his share in the partnership. Thereafter, each
partner is entitled to deduct personal deductions and credits from his
income and/or to set-off same against other losses from certain other
activities (under certain conditions). Finally, each of the partners are
obliged to pay tax on his or its (if the partner is a body of persons)
chargeable income.

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(d) With regard to the reporting requirements, the senior partner (the Israel
resident partner whose name is listed first in the partnership agreement or,
in the event that all of the partners are foreign residents, an Israeli resident
attorney, agent, etc.) shall prepare and file a return of the partnerships
income every tax year. Likewise, each of the partners in the partnership
are obliged to include their attributed income from the partnership together
with all other income earned by them in the return of income submitted for
the relevant tax year.

(e) In general, the aforementioned tax treatment may equally apply to limited
partnerships or to partnerships that include limited partners (a limited
partnership is a partnership in which most of the partners are limited
partners and there is one general partner; a limited partner is a partner
who, according to the partnership agreement, is liable for the partnerships
obligations in an amount not exceeding a specified sum, constituting such
limited partners capital investment in the partnership; a general partner is
a partner whose responsibility for the partnerships obligations is unlimited).

(f) The Israeli tax authorities have also issued a ruling regarding a beneficent
tax treatment applicable to foreign residents investing in certain venture
capitals (for this purpose, a venture capital means a limited partnership in
which one or more of the limited partners is a foreign limited partnership
and the other partners are Israeli limited partnerships). According to this
ruling, the foreign resident investors may apply to the tax authorities for a
pre-ruling that the tax rate payable by them on income earned by the
venture capital will be 20% or even 0% (i.e., exempt from tax) for certain
types of investors such as foreign resident Non-Profit Organisations (for
example, pension funds) located in a country which is not only party to a
double taxation treaty with Israel but is also customarily exempt from the
payment of tax in its country of residency. The entitlement to a reduction in
tax, as aforesaid, is subject to certain conditions (such as: the partners in
the foreign partnership are not Israeli residents; the funds in the venture
capital comprise US $20,000,000 or more; the capital will be invested in
research and development intensive companies; 90% or more of the capital
(or such lesser rate if the venture capital has funds in excess of
US $75,000,000) will be invested in Israeli companies).

J Jo oi in nt t V Ve en nt tu ur re es s

The tax treatment applicable to joint ventures is generally similar to that
applicable with respect to partnerships, as detailed in this Chapter 14 above.

C Co on nt tr ro ol ll le ed d F Fo or re ei ig gn n C Co om mp pa an ni ie es s ( (C CF FC Cs s) )

(a) Simultaneously with the conversion of the Israeli tax regime into a personal
(rather than a territorial) taxation regime, which became effective as of
January 1, 2003, new rulings were made, and the Israeli taxation legislation
accordingly amended, in an attempt to frustrate the tax-planning efforts of

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Israeli residents wishing to earn passive income abroad through foreign
entities, usually located in tax havens or countries offering convenient tax
rates. One such amendment relates to CFCs.

(b) In general, the legislation applicable to a CFC provides that if a CFC has
unpaid profits, then the controlling member thereof shall be treated as if he
had received his proportional share of unpaid profits by way of a Deemed
Dividend (as such term is defined in section 13.12Taxes on Dividends
above).

(c) The controlling member of a CFC is obliged to submit to the tax authorities
a report setting out a calculation of his tax obligations.

(d) In general, a CFC is a foreign resident company, which meets the following
criteria:

its shares are not listed for trade on a stock exchange or its shares
are so listed on an exchange, but less than 30% of the rights therein
have been offered to the public;

the majority of its income in the tax year comprises passive income or
the majority of its profits derive from passive income;

the tax rate applicable to its passive income in the foreign country
does not exceed 20%; and

more than 50% of one or more of its means of control are directly or
indirectly held by Israeli residents or more than 40% of one or more of
its means of control are held by Israeli residents who, together with a
relative of one or more of them, holds more than 50% of one or more
of its means of control or in the case where an Israeli resident has the
right to prevent the adoption of substantive management decisions,
including decisions with regard to the distribution of dividends or
winding-up.

For the purposes of the aforegoing:

a controlling member is an Israeli resident who, directly or indirectly,
alone or together with another, holds at least 10% of one of the
means of control in the CFC at the end of the tax year or on any day
during the tax year and on any day in the subsequent tax year;

means of control includes: (i) the right to participate in the profits of
the foreign resident company; (ii) the right to appoint a director to the
foreign resident company; (iii) voting rights; (iv) the right to receive a
portion of the balance of assets of the foreign resident company upon
winding-up; and (v) the right to direct a person vested with one of the
rights referred to in (i)(iv) above as to how such right may be
exercised;

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passive income includes each of the following types of income, if
not deemed to be income derived from any business or occupation:
(1) interest; (2) dividends, other than dividends received from a
foreign resident for which it has been shown that such dividend
derived from income on which tax was paid at a rate exceeding 20%;
(3) royalties; (4) rental income; and (5) capital gains not deriving from
an asset used by the company in any business or occupation.
Income deriving from the types of income described above, even if
emanating from a business or an occupation, shall be regarded as
passive income. For example, management fees earned by a
business company in the form of passive income (e.g., dividends
distributed by its subsidiary) will also be regarded as passive income;
and

unpaid profits constitute profits of a CFC earned in the form of
passive income in a tax year and which, during the course of such tax
year, were not paid or distributed to persons entitled to receive same.
The controlling members proportional part of unpaid profits
constituting a Deemed Dividend shall be calculated according to such
controlling members direct and/or indirect right to profits in the CFC
on the last day of the tax year (any indirect rights so held by a
controlling member in the CFC shall be calculated by multiplying the
rights of such CFC held by such controlling member in each body
corporate within the group of companies with the profits earned by
each such body corporate).

(e) The general provisions applicable to a CFC are the following:

the controlling member of a CFC shall be deemed to receive his
proportional share of the unpaid profits of the CFC as a Deemed
Dividend;

if an obligation to pay taxes applies to the CFC in its country of
residence, inter alia, by deduction at source in respect of a dividend
distribution, then a tax credit shall be allowed in the amount of tax
that would have been paid had the unpaid profits been distributed as
a dividend;

if a dividend is actually paid to a shareholder out of the CFCs profits
on which he or his designate paid tax as a Deemed Dividend, then
such dividend shall be exempt from tax up to the proportional part of
the unpaid profits in respect of which tax was paid;

if a controlling member sells all or a portion of the means of control
held by such controlling member in the CFC, then such controlling
member shall be exempt from the tax applicable to such sale in the
amount of tax paid by the controlling member during the preceding
tax years on unpaid profits as a Deemed Dividend in respect of the

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means of control being sold and which were not distributed as a
dividend on the date of sale.

H Ho ou us se e P Pr ro op pe er rt ty y C Co om mp pa an ni ie es s & & R Re ea al l E Es st ta at te e A As ss so oc ci ia at ti io on ns s

House Property Companies and Real Estate Associations constitute two types of
legal entities that are classified under Israeli tax laws whose principal objects
include the acquisition and possession of real estate assets. A company may be
designated a House Property Company for income tax purposes and also a Real
Estate Association for the purposes of land appreciation tax and other land taxes.

A House Property Company usually comprises a small company (a company
whose controlling members do not exceed five in number and which is neither a
subsidiary nor a company in which the public is substantially interested), all the
assets and business of which concern the holding of buildings. A company may
be regarded as a Real Estate Association but, even more so, a House Property
Company. However, generally, every House Property Company may, in effect,
also be considered a Real Estate Association.

Usually, the income of a House Property Company shall be deemed the income
of its members. Therefore, in practice, the distribution of the income earned by a
House Property Company will not be subject to additional tax on dividends.

In practice, utilisation of a House Property Company is quite rare. For this and
other reasons, it is anticipated that House Property Companies, like Family
Companies (see our discussion on Family Companies below) will be converted
into Transparent Companies once certain prescribed regulations with respect to
Transparent Companies have been enacted into Israeli taxation legislation (in
other words, Transparent Companies will replace House Property Companies).

A Real Estate Association may be a company (including a foreign company), a
registered partnership or any other entity ( an association ), all the assets of
which, constitute, whether directly or indirectly, real estate rights (for this
purpose, the following shall not be deemed assets of the association: cash,
shares, bonds, other securities and moveables not used by the association in the
production of its income, or used in the production of its income, but are
insignificant for the associations main objectives, which are pursued regularly
and not intermittently).

In general, the sale of rights (i.e., shares) in a Real Estate Association or, in
certain circumstances, the allocation of rights by the Real Estate Association ( a
Real Estate Association Act ), is subject to the following taxes: land
appreciation tax, acquisition tax and, under certain conditions, sale tax. The
method for calculating land appreciation tax payable by a Real Estate
Association is similar to that for calculating capital gains tax (for the rates
imposed in respect of the different land taxes, see section 13.7Real
Estate/Habitation Tax above).

R Re ea al l E Es st ta at te e I In nv ve es st tm me en nt t T Tr ru us st ts s ( (R RE EI IT T) )

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At present, no Real Estate Investment Trusts ( REITs ) have been established in
Israel. Nonetheless, a special committee was recently appointed by both the
Israeli tax authorities and the Israeli Securities Authority for the purpose of
making recommendations as to the proposed amendments to be implemented
into the relevant legislation so as to facilitate and encourage the activity of REITs
in Israel. The committee has since published its report of recommendations and
it is anticipated that the relevant legislation will be amended shortly.

In general, a REIT is a public company which owns and operates income-
producing real estate, such as apartments for rent, offices, commercial centres,
hotels and the like. The shares of REITs are usually listed for trade on a
recognised stock exchange. Accordingly, a REIT enables "small" investors, who
are unable to acquire real estate by themselves, to invest small amounts in the
real estate market through a REIT.

Largely, the committee's recommendations are divided into three parts, each one
dealing with a particular issue relevant to REITs, as follows:

the first partthe definition of a REIT and the conditions to be met in order
for an entity to be considered a REIT;

the second partthe reporting and disclosure requirements to be complied
with by REITs, including the type and scope of information to be furnished
by REITs to potential investors, the relevant securities regulations to be
observed for trading the units of a REIT on the TASE and the accounting
presentation to be submitted by a REIT containing a description of its
assets; and

the third partthe tax implications affecting both the activities of a REIT
and persons investing therein.

According to the committee's recommendations, the following conditions must be
complied with in order for an entity to be considered a REIT:

the entity is registered as a new Israeli company;

the entitys shares are traded on the TASE;

75% or more of the entity's assets comprise of income-producing real
estate assets in Israel (for this purpose, "income-producing real estate
assets" include investments in parking lots, commercial or shopping
centres, hotels, retirement homes, etc., as well as furniture and equipment
located in the real estate assets, shares held in other REITs, etc., save for
empty plots of land (including all assets relating thereto) still under
construction);

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95% or more of the entity's assets comprise of both income-producing real
estate assets (as defined above) and financial investments (such as bonds,
securities, deposits, etc.);

the value of the entitys income-producing real estate assets is at least
NIS 200 million;

the leverage rate of the entity does not exceed 60% of its income-producing
real estate assets. The maximum leverage rate in respect of other assets
owned by the entity is 20%;

75% or more of the entity's income is generated from the income-producing
real estate assets, being income deriving either from operating or selling
real estate assets of the REIT, or from investments in other REITs;

95% or more of the entity's income deriving from income-producing real
estate assets (as defined above) is generated either from interest accruing
on mortgages, or from financial investments (such as dividends and capital
gains earned on securities);

five investors or less do not hold, whether directly or indirectly, including by
means of voting agreements, 50% or more of the capital or voting rights in
the entity (for this purpose, provident and trust funds will be counted
according to the number of units held by their respective owners); and

90% or more of the entitys accumulated accounting profits (being profits
not deriving from the sale of real estate assets) will have been distributed
as dividends until the end of April in the subsequent tax year. The entity
will be entitled to distribute as dividends the depreciation component (even
if the amount of the dividend exceeds the accounting profits). In addition,
all profits earned by the entity in the form of capital gains/appreciation
(being profits deriving from the sale of real estate assets) will have been
distributed until April in the subsequent tax year, unless the entity
purchased alternative real estate asset within a year from the date of sale
of such real estate assets. The sums distributed as a dividend from
depreciation as aforesaid will be subtracted from the distributable capital
gains profits.

The last section of the committee's recommendations deals with the taxation of
REITs and the basic principles according to which tax will be imposed both on
REITs and investors therein, as described in general below:

the REIT will be regarded as a "real estate association" (see above), save
for VAT purposes (i.e., the sale of the shares in a REIT will not be subject
to VAT);

individuals or companies, for which the provisions of the Inflationary
Adjustments Law do not apply and which will invest in REITs, will be
subject to income tax at the rate of 15% on any distribution of profits by the

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REIT. The "real capital gain" (see sections 12.3Capital Gains
(Corporations) and 13.3Capital Gains (Individuals) above) deriving from
the sale of shares of a REIT will also be subject to tax at the rate of 15%
(however, if the seller will want to deduct his interest expenses, the tax rate
in respect of such sale will be 25%). The tax will be withheld by the REIT
itself or by a financial institution. Investors will be able to set-off any
business losses against the profits to be earned by them from the REIT
(whether from distributed dividends or from the sale of the REITs shares).
Similarly, in any tax year, investors will be able to set-off any losses
sustained from the sale of shares in a REIT against their annual profits from
distributed dividends received by them in respect of such REIT during that
tax year. A loss sustained from the sale of shares in a REIT may be set-off
against profits earned from the sale of other traded securities;

companies, for which the provisions of the Inflationary Adjustments Law
apply, will be subject to tax at the rate of 15% on the profits distributed to
them by the REIT. Likewise, the real capital gain deriving from the sale of
shares in the REIT will be subject to tax at the rate of 36%, according to the
relevant provisions of the Inflationary Adjustments Law. If the REIT is
established by a company ( the founder company ), the profits
distributed to the founder company by the REIT, will be taxed in the same
manner as other profits distributed by one Israeli company to another
(usually, exempt of tax), save for profits deriving from the sale of real estate
assets by the REIT (for which tax at the rate of 15% will be imposed). The
real capital gain deriving from the sale of shares of the REIT by the founder
company will be subject to tax at the rate of 25%; and

current profits deriving from real estate assets to be generated by the REIT
(e.g., in the form of rent, refunds of loans or certain sales of real estate
assets held by the REIT for a period not exceeding four years), will be
subject to tax at the rate of 36%. Profits of the REIT deriving from traded
securities or from interest on debentures and deposits will also be subject
to tax at the rate of 36%, save for profits stemming from dividends. Capital
gain profits earned from the sale of real estate assets and dividend profits
generated by the REIT, will be subject to tax at the rate of 12%. Profits
generated by the REIT from the distribution of profits or from the sale of
shares in other REITs will be exempt from tax. Likewise, "prohibited
income" generated by the REIT (being other types of profits, such as
income produced from any other business, income from the sale of a real
estate asset that is considered inventory, etc.) will be subject to tax at the
rate of 60%.

F Fa am mi il ly y C Co om mp pa an ni ie es s & & T Tr ra an ns sp pa ar re en nt t C Co om mp pa an ni ie es s

Another type of legal entity incorporated for taxation purposes is a Family
Company. As shall be explained below, it is anticipated that in the near future
Family Companies and all references to Family Companies will be deleted from
Israeli taxation legislation.

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A Family Company is a company, all of whose shareholders are relatives (the
term relative includes a spouse, brother, sister, parent, grandparent, etc.) and
which, during a specific tax year, has requested that it be considered a Family
Company.

In general, the chargeable income (i.e., the income remaining after deductions,
set-offs or exemptions) or losses of a Family Company will be considered the
income, or loss, as the case may be, of one of the shareholders ( the
Representative Assessee ), being the shareholder entitled to receive the
largest portion of the companys profits and will be added to the balance of the
income or losses of such shareholder. The Representative Assessee is
obligated to pay tax in respect of such chargeable income (after first deducting
personal deductions, set-offs or exemptions) attributable to him on an annual
basis, even if the profits were not actually distributed as dividends (similar to a
Transparent Company, at the tax rate imposed on individuals) during the relevant
tax year. The classification of the income (the source from which the income was
generated) produced by the Family Company will be identical for the
Representative Assessee. Any distribution of dividends by a Family Company
will not be subject to withholding tax or any other taxes.

Since the structure of a Family Company has been utilised by Israeli assessees
for various tax planning schemes, it is the intention of the Israeli legislature to
abolish all legislation enacted pertaining to this legal body. To this end, the
Israeli tax laws were recently amended and it is anticipated that, upon the
enactment of certain regulations applicable to Transparent Companies, those
provisions relating to Family Companies will be abolished so that Family
Companies will be replaced by Transparent Companies or regular companies.

Principally, the difference between a Family Company and a Transparent
Company is that, on the one hand, the Family Company may determine that one
shareholder will be taxed on his income, thereby allowing for the implementation
of various tax planning schemes, or that a person in a convenient tax situation be
appointed the Representative Assessee (i.e., a disabled person who by law is
exempt from tax, or a person with personal losses) while, on the other hand, a
Transparent Company is transparent, to the extent that its income is attributed
to every shareholder pro rata to such shareholders right to receive profits in the
Company.

In general, a Transparent Company is an Israel resident company, for which all
the following hold true:

the company is not a public company and its Articles of Association do not
expressly provide for its conversion into a public company;

the number of shareholders does not exceed 50 (or greater, subject to the
approval of the tax authorities) and, for this purpose, a shareholders
spouse and children (being the legal heirs of such shareholder) or the
purchasers of such shareholders rights by means of an involuntary sale,
shall be deemed a single shareholder;

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all shareholders are individual residents of Israel (this condition prevents
utilisation of a Transparent Company by foreign residents);

the companys shares comprise of one class, save for shares to which
voting rights are attached and the shareholders cannot alter the rights by
virtue of their shareholdings, save for an alteration to the voting rights;

a right to the companys profits is determined only by virtue of the shares;

a shareholders right to profits will be determined according to his
entitlement to the companys assets upon its liquidation;

the company is not a financial institution (i.e., a bank or insurance
company); and

the company has, by written notice duly signed by all of its shareholders
and delivered to the tax authorities within sixty days after its incorporation,
specifically requested that it be classified as a Transparent Company.

In general, the chargeable income (the income after deductions, set-offs or
exemptions) of a Transparent Company, including income deriving from
dividends and its losses, shall be deemed the income or losses of its
shareholders pro rata to their right to receive profits in the company. Profits
distributed out of the companys chargeable income shall not be deemed income.
Likewise, rules have been determined regarding the set-off of losses by a
Transparent Companys shareholders, the classification of income, credits due
on account of foreign taxes and the tax treatment applicable to the sale of shares
of a Transparent Company.

T Tr ru us st ts s

At present, the Israeli taxation laws do not provide specific tax treatment with
respect to Trusts, especially Foreign Trusts. Indeed, very few provisions have
been enacted in the Income Tax Ordinance providing for the manner in which
certain dispositions or assignments of income and assets may be effected that,
somehow, also relate to trust arrangements, as shall generally be described
below.

In spite of the aforegoing, a special committee was recently appointed by the
Israeli Minister of Finance for the purpose of making recommendations as to
what amendments will need to be implemented into the Israeli taxation legislation
with respect to the taxation of Trusts. The aforesaid committee has since
published its conclusions and recommendations with respect to the taxation of
Trusts and it is expected that most of such recommendations will be adopted by
the legislator and thereafter incorporated into the relevant provisions of the
Income Tax Ordinance.

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Israeli tax laws provide that upon a revocable disposition being made, the income
therefrom shall be considered the income of the disposer for that tax year and
not, for the removal of doubt, as the income of any other person. The tax laws
further provide that a disposition shall be deemed to be revocable if it includes
any provision warranting the direct or indirect transfer or return of income or of
the asset from which the income is derived, to the disposer or to his spouse or, if
the disposer or his spouse are empowered, whether directly or indirectly and in
whatsoever manner, to receive or to recover direct or indirect control over such
income or over such asset.

In view of the above, in cases where the Trust is revocable, the settlor of the
Trust (i.e., the person who transferred the asset or income to the Trust) is
exposed to a claim that the income derived from the Trust constitutes the settlors
personal income and, accordingly, may be liable to pay tax thereon.

Another section under Israeli taxation laws deals with the tax consequences of
dispositions in favour of juveniles. Under this section, if income is paid to a
person or to his beneficiary by virtue, or in consequence, of a disposition made
during the disposers lifetime and such person has neither reached the age of
twenty years as at the commencement of the tax year in question, nor married,
then such income shall be treated as if it were the income of the disposer and not
that of any other person, even if the disposition were to be irrevocable. It is
irrelevant, for this purpose, whether the income is paid directly or indirectly,
whether paid to that person or to his beneficiary, whether at present or in the
future, whether it is payable upon the fulfilment of a condition or after any event,
the occurrence of which is uncertain, or whether it is payable as a result of the
exercise of power or discretion conferred on any person, or in any other manner.

In light of the above, it would appear that the said section sought to deal with
irrevocable Trusts for juveniles. However, the said section deals with the transfer
(disposition) of income from a person for the benefit of a juvenile as aforesaid
and does not directly deal with the actual income of the Trust which is distributed
by a Foreign Irrevocable Discretionary Trust ( FID ) to the beneficiaries
thereunder and other major issues regarding irrevocable Trusts.

The common legal understanding, therefore, is that the current Israeli taxation
legislation does not directly deal with irrevocable Trusts in which the settlor
thereof does not have any influence or control with respect to the assets of the
Trust.

The general view held by tax experts from the private market is that, under the
current legal situation (i.e., prior to the adoption of the recommendations of the
committee on the taxation of trusts as referred to above), if appropriate measures
are taken into account (as detailed below), there is a good chance that income
accruing in a FID, will not be subject to tax in Israel nor will the beneficiaries
thereunder be subject to tax at the stage of receipt, upon distribution, of assets
and capital from the FID. The aforesaid approach is not certain due to a lack of
case law and formal interpretation of the issue and also based on the fact that it
is anticipated that the Israeli tax laws dealing with the tax implications of Trusts

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will soon be amended, thus also making it difficult for practitioners and experts to
predict the tax consequences that will eventually apply to Trusts.

As far as the committees recommendations are concerned, they are principally
based upon certain standard principles of Israeli law, examples of which include
the following:

the Trust is not a legal entity and, therefore, cannot be considered an
assessee for taxation purposes; only the beneficiary and/or the settlor
thereunder may be considered the assessee;

the rules relating to the taxation of Trusts will apply to irrevocable trusts
only, where the beneficiaries thereunder are not juveniles. If the Trust is
controlled, whether directly or indirectly, by the settlor thereof, then the
Trust will be considered transparent for taxation purposes and the tax
payable in respect of all income accruing in such Trust will be borne by the
settlor;

the tax liability will be determined according to the tax status of the
beneficiaries and/or the settlor of the Trust. The residency of the trustee is
of no significance;

in certain cases, the tax payable on all income accruing in the Trust shall
be paid even prior to distribution of the assets of the Trust to the relevant
beneficiaries thereunder;

tax reliefs should be granted for trusts established by foreign residents for
the benefit of Israeli residents as well as for Trusts created by new
immigrants prior to their arrival in Israel; and

the necessity to specify certain anti-tax planning rules for the prevention of
inappropriate abuse of a trust arrangement.

The committee recommended that a distinction be made between various types
of Trusts for taxation purposes, examples of which include the following:

an Israeli Residents Trustin general, an irrevocable Trust in which both
the settlor thereof and the beneficiary thereunder are Israeli resident
individuals; and

a Mixed Trustcomprising of four different types of Trusts in which a
foreign resident is involved, as follows:

a Foreign Beneficiary Trusta Trust in which the settlor thereof is
an Israeli resident and all the beneficiaries thereunder are foreign
residents;

a Foreign Settlor Trusta Trust for the benefit of Israeli residents, in
which the settlors thereof are foreign resident individuals who at no

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time were Israeli residents (or, at least, had not been Israeli residents
for fifteen years or more);

a Limited Foreign Settlor Trusta Trust for the benefit of Israeli
residents, in which all the settlors thereof are foreign residents
(including foreign incorporated bodies) or individuals who were
previously Israeli residents in any one or more of the past fifteen
years; and

a Foreign Settlor and Beneficiary Trusta Trust in which all the
settlors thereof and all the beneficiaries thereunder are foreign
residents.

With respect to each type of Trust, the committee has recommended that a
different tax treatment apply at the various stages of the establishment and
management of such Trust, namely: (a) the tax payable upon establishment of
the Trust and transfer of the assets from the settlor to the Trust; (b) the tax
payable on all income accruing in the Trust and the reporting duties with respect
to such income; (c) the tax payable at the time of distribution of the income
and/or assets from the Trust to the beneficiaries thereunder; and (d) the tax
consequences upon liquidation of the Trust.

F Fo or re ei ig gn n O Oc cc cu up pa at ti io on na al l C Co om mp pa an ni ie es s

Another type of legal body is a Foreign Occupational Company (FOC). The
purpose for implementing tax rules applicable to FOCs is to hinder certain
potential tax plannings by Israeli resident individuals where it is intended to evade
the CFC rules and Israeli tax liability arising therefrom. One type of potential tax
planning is where an Israeli resident establishes a foreign company (to be
controlled and managed abroad) though which professional services are
rendered so as to avoid Israeli tax liabilities on the income earned by such
foreign company; however in this case the CFC rules will not apply, due to the
fact that the CFC rules only apply to passive income earned by a foreign
company and not to income earned by a foreign company from the rendering of
professional services.

A FOC is defined under the pertinent Israeli taxation legislation as a foreign
resident body corporate for which all the following hold true:

it is a small company (a small company is defined to mean a company
under the control of not more than five persons and which is not a
subsidiary of a company or a company in which the public has a substantial
interest);

75% or more of one or more of its means of control are, directly or
indirectly, held by individual Israeli residents ( means of control to bear
the same meaning as that ascribed to such term in respect of CFCs);

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most of the controlling members or their relatives who are employed by the
company hold, directly or indirectly, 50% or more in one or more of the
means of control; and

most of the income or the profits of the company during the tax year, other
than equity profits and losses and changes in the value of securities, derive
from a special occupation.

Special occupation includes almost every occupation for which a person
renders professional services (i.e., a certified public accountant, a lawyer, an
auditor, etc.).

In general, income produced by a FOC deriving from the controlling members
activity in a special occupationin the amount of the income of the Israeli
resident shareholders ( income of Israeli resident shareholders is calculated
as the income of a FOC multiplied by the rate of entitlement of Israeli resident
shareholders to the companys profits)shall be deemed to be income produced
in Israel and thus subject to Israeli tax.

In respect of income accruing in a FOC and dividends distributed therefrom to
shareholders as referred to above, the FOC shall be treated as if the control and
management of its business were carried out in Israel.

N No on n- -P Pr ro of fi it t O Or rg ga an ni is sa at ti io on ns s

Under Israeli taxation legislation, Non-Profit Organisations (public institutions) are
afforded special tax treatment. In addition, different tax treatments apply under
the relevant income tax and real estate taxation laws.

A Non-Profit Organisation may be a company whose goals are not-for-profit; an
Amuta (special instance society) which performs public acts for non-profit goals;
pension funds, etc.

Under Israeli income tax legislation, a public institution is defined as a legal
body comprising at least seven persons (or a trust) most of whom are not related
to one other, which exists and functions for a public purpose (e.g., a purpose
connected with religion, culture, education, science, etc.) and the property and
income of which are used only for public purposes and who submit annual
reports on their assets, income and expenses to the tax authorities.

The income of a public institutionto the extent that it does not derive from any
business conducted by it or from dividends, interest or linkage differentials paid
by a body of persons under its control engaging in any businessis exempt from
income tax (or companies tax). According to the common approach adopted by
law interpreters, such legal body will also be exempt from capital gains tax.

Under Israeli real estate tax laws, public institutions include religious, cultural,
educational, scientific, health, welfare or sports institutions, or institutions
established for promoting other public purposes other than for the production of

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profits, which have been recognised as such by the Minister of Finance with the
approval of the Knesset Finance Committee, as well as all legal bodies
considered to be public institutions for the purposes of Israeli income tax laws.

Special exemptions and tax benefits are granted to public institutions under
Israeli real estate tax laws. For example, the sale of a real estate right for no
consideration (i.e., by way of gift) to public institutions is exempt from tax.
Likewise, the sale of a real estate right by a public institution is exempt from land
appreciation tax under certain specified conditions: (a) such real estate right, the
subject of the sale, was in the institutions possession for at least one year; and
(b) such real estate right was used directly by the institution for at least 80% of
the time during which it was in the possession of the institution, or the institution
may be entitled to a partial exemption from tax if such real estate right was in the
institutions possession for more than one year, even if it was not used by the
institution. A further exemption granted to public institutions concerns the sale of
a residential apartment received by way of inheritance, under certain conditions.
A public institution enjoys a reduced acquisition tax rate of 0.5% (instead of 5%)
on any real estate purchased by it for the use for public purposes.

In general, Non-Profit Organisations are not subject to VAT and may not receive
a refund with respect to input tax (i.e., VAT paid by it). Non-Profit Organisations
are subject to wage tax at the rate of 8.5% on wages paid to their respective
employees (see in this regard sections 12.7Sales Tax or Other Turnover Tax
and 13.8Sales Tax above) and are also subject to employers tax at the rate of
4% on salary payments made to their respective employees.

U Un nl li im mi it te ed d C Co om mp pa an ni ie es s

Unlimited companies are generally treated for tax purposes in the same manner
as companies (see Chapter 12Tax on Corporations above). Unlimited
companies are mainly incorporated by professionals, such as, lawyers,
accountants and other professionals who, by law, are prohibited from operating
through limited companies.


What are the major allowances (e.g., capital cost depreciation)?
What are the major deductible items?
What are the major expenses that are excluded from deductibility?

The policy for deducting allowances with respect to the above legal
bodies is, in certain respects, almost identical to that applicable for
companies (see section 12.1Allowances (Corporations) above).
With respect to partnerships, transparent companies and other legal
bodies that are transparent for tax purposes, allowances are
deductible at the partnership/company level as referred to in this
Chapter 14 above and, accordingly, the partnership or corporation
shall deduct its allowances in respect of producing the relevant

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income and the outcome will be attributed to the partners or
shareholders of the relevant legal entity.



The manner for determining the taxable base with respect to each
type of legal body described above is similar to that applicable for
regular companies (see section 12.2Calculation of Taxes
(Corporations) above, save for CFCs and FOCs, with respect to
which see this Chapter 14 above).


What are the federal or national tax rates on capital gains?
What are the regional or state taxes on capital gains?
What are the municipal or local taxes on capital gains?

See section 12.3Capital Gains (Corporations) above.


14.4.1. When must the entity file a tax return, if any?

In general, an assessees return shall be delivered to the tax
authorities by not later than April 30 after the end of the tax year. In
the event that a legal entitys return is based on a complete set of
double entry accounts then the return shall be delivered by not later
than May 31 after the end of the tax year. The following directives
are included in the Israeli tax laws with respect to a particular legal
entitys liability to submit a return:

Partnershipseach of the partners is obliged to include his
attributed income from the partnership amongst the other
income earned by him in his annual return. Likewise, the senior
partner (the Israeli resident partner whose name appears first in
the partnership agreement or, in the event that all partners are
foreign residents, an Israeli attorney, agent, etc.) shall complete
and deliver a return of the partnerships income every tax year.

CFCsevery controlling member (as defined in this Chapter 14
above) of a CFC is obliged to submit an annual return.

House Property Companies and Transparent Companies
every body of persons earning income during a tax year shall
submit a return. Likewise, a person (which includes a
corporation and other bodies of persons) who performed a Real
Estate Association Act (as defined in this Chapter 14 above) or
who transferred real estate rights during such tax year, shall

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also submit a return (see also section 13.7Real
Estate/Habitation Tax (Individuals)) above.

Family Companies and Transparent Companiesin general,
the chargeable income of the Family Company (or its losses)
shall be included in the annual return to be submitted by the
Representative Assessee (as defined in this Chapter 14 above)
together with his other income. Likewise, the Family Company
is itself obliged to submit a return every tax year declaring the
income earned by it during such tax year, as confirmed by an
accountant.

Regulations regarding the filing and payment requirements in
respect of Transparent Companies have not yet been
published.

Trustssince 2002 and thereafter, every Israeli resident who
created a Trust during a tax year or who received an amount
exceeding NIS 100,000 (approximately, US $23,000) from
monies held in a Trust, as well as every person who, directly or
indirectly, is a beneficiary of a Trust, or is entitled to the funds
held therein, shall submit a tax return, even if such person is not
liable for tax in Israel in respect of the income accruing in the
Trust. The aforesaid return shall include details regarding the
income, the identity of the trustee, the beneficiary and the
payee and if any of the aforegoing persons is a foreign
residentalso the country in which such person resides.

It should be noted that, at present (prior to the adoption into the
Income Tax Ordinance of the recommendations of the
committee with respect to the taxation of Trusts, as referred to
in this Chapter 14 above), there is no reporting obligation with
respect to Trusts not created by Israeli residents or which were
created by Israeli residents prior to 2002, if the aforesaid sum
(or more) was not distributed to the beneficiaries of the Trust in
2002 or thereafter.

Foreign Occupational Companies (FOCs)every controlling
member (as defined in this Chapter 14 above) of a FOC is
obliged to submit an annual return.

Non-Profit OrganisationsNon-Profit Organisations (public
institutions) are obliged to submit an annual return to the tax
authorities, which shall include therein a balance sheet as of the
last day of the tax year, an income and expenditure report for
such tax year, an adjustment account reflecting any excess
income or expenditure based on such income and expenditure
report as well as other specified reports.

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14.4.2. When must the entity pay its taxes?


14.4.3. Are taxes paid in instalments or annually?

In general, taxes are paid annually, but assessees are required, in
certain circumstances, to pay advance payments during a tax year
(see section 12.4Filing and Payment Requirements above).

1 14 4. .5 5. . M Mi is sc ce el ll la an ne eo ou us s T Ta ax xe es s

Are other taxes due?
What are the filing and payment requirements?

See section 12.5Miscellaneous Taxes Due (Corporations) above.

1 14 4. .6 6. . R Re eg gi is st tr ra at ti io on n D Du ut ti ie es s

Are there registration duties or fees due upon the setting up of the
legal body?
Are there registration duties or fees due upon a change in the capital
of the legal body?
Are there registration duties due upon the transfer of capital?
Are there registration duties due upon a transfer of assets?
Are there any other registration duties due?

See section 12.6Registration Duties (Corporations) above.

1 14 4. .7 7. . S Sa al le es s T Ta ax x o or r O Ot th he er r T Tu ur rn no ov ve er r T Ta ax x

Is the legal body subject to sales tax or any other turnover tax (e.g.,
VAT, cumulative?)
Is input tax creditable against output tax?
What are the tax rates?
What are the filing and payment requirements?

See section 12.7Sales Tax or Other Turnover Tax (Corporations)
above.


Are social security contributions due?
Are retirement or pension contributions due?
Are unemployment insurance contributions due?
What are the filing and payment requirements for any such
contribution?

See section 12.8Social Security and Welfare System Contributions
(Corporations) above.

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1 14 4. .9 9. . S Sp pe ec ci ia al l T Ta ax x T Th he em me es s

Are there particular tax consequences of doing business in the country
under the form of the particular legal body?

The tax consequences for doing business in Israel would depend
upon the particular legal status and structure of legal body and,
therefore, tax advice should be obtained prior to commencing any
business activities in Israel. With respect to the tax consequences of
operating through certain legal bodies (such as partnerships, trusts,
etc.)see, in general, the comments set out in the introductory
paragraphs to this Chapter 14 above with respect to the relevant legal
body.

1 14 4. .1 10 0. . T Ta ax x o on n P Pr ro of fi it ts s

What are the federal or national income tax rates on profits?
What are the regional or state tax rates on profits?
What are the municipal or local tax rates on profits?

See section 12.10Tax on Profits (Corporations) above.


Are there any applicable tax treaties?
Are there any rules against treaty-shopping?

See section 12.11Tax Treaties (Corporations) above.


Where is the legal body subject to tax?
Is the legal body subject to tax on its worldwide income?

See section 12.12Territoriality Rules (Corporations) above.

1 14 4. .1 13 3. . T Tr re ea at tm me en nt t o of f T Ta ax x L Lo os ss se es s

How are tax losses treated?

See, in general, section 12.13Treatment of Tax Losses
(Corporations) above. For specific tax losses with respect to a
particular legal body, see also the comments included in the
introductory paragraphs to this Chapter 14.


Is there any applicable wealth tax?

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There is no wealth tax in Israel.


What are the rates of withholding tax on the legal bodys activities?

See section 12.15Withholding Taxes (Corporations) above.

1 15 5. . G GE EN NE ER RA AL L T TA AX X C CO ON NS SI ID DE ER RA AT TI IO ON NS S

1 15 5. .1 1. . T Ta ax xe es s G Ge en ne er ra al ll ly y

15.1.1. Is there a generally accepted way of structuring the company or other entity
so as to ensure the desired tax consequences?

Structuring the proposed mode of operation of a foreign investor in
Israel is dependent upon: (a) the nature of the operation; (b) whether
the investment will be made through an Approved Enterprise (see
Chapter 3Investment Incentives above); (c) the country of
residence of the investor; (d) the existence of a double taxation treaty
between Israel and the country of residence of the investor; and
(e) other legal and taxation considerations which will need to be taken
into account having regard to the circumstances of the proposed
investment/operation of activities in Israel. There is no single
generally accepted way of structuring an investment for convenient
tax purposes and it is advisable that specific advice be sought and
obtained beforehand from an Israeli tax expert in order to structure
the company or other entity in the most efficient manner.

15.1.2. Is there an advance tax ruling that can be used to validate or invalidate the
chosen form of doing business?

The concept of applying for, and obtaining, an advance tax ruling (or,
as is commonly termed, pre-ruling") has not yet been formally
recognised in Israel. However, informal consultations between Israeli
tax experts and the Israel tax authorities are common and sometimes
useful in planning the proposed mode of operation. Further, with
respect to certain transactions (particularly, complex transactions),
the tax authorities may issue a pre-ruling with respect to the relevant
tax implications arising thereunder.

15.1.3. Is there a general anti-tax avoidance system?

YesIsraeli tax laws include, inter alia, specific anti-tax avoidance
provisions (e.g., rules applicable to CFCs (see in this regard
Chapter 14Tax on Other Legal Bodies above)) and a general anti-
tax avoidance rule, according to which the tax authorities may
disregard certain transactions or dispositions for tax purposes. Under
the relevant Israeli taxation laws (e.g., the Income Tax Ordinance,

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VAT laws, etc.), if the tax authorities believe that a certain
transaction, which reduces, or is likely to reduce, the amount of tax
payable by any person (including corporations and other bodies of
persons) is artificial or fictitious, or that a certain disposition is not in
fact carried out, or that one of the principal objectives of a particular
transaction is an improper avoidance or reduction of tax, then the tax
authorities may disregard such disposition or transaction and assess
the tax obligation in a different manner.

The Israeli courts have developed certain parameters for determining
whether a certain disposition or transaction shall be deemed artificial
or fictitious for taxation purposes. The main test for reaching such
determination is "the business objective" of the transaction, i.e.: if the
assessee has a business objective for consummating the transaction
in the manner elected by him, then the assessee will have a strong
basis for arguing that the transaction shall not be deemed artificial or
fictitious.

15.1.4. Can the chosen form of business be treated as a deferent form for tax
purposes?

Yes. As may be evident from Israeli case law, the tax authorities
have the authority to reclassify certain transactions even if a
transaction is not deemed artificial or fictitious. For example, a
dividend distribution could be reclassified, in certain circumstances,
as payment of salary to a shareholder of a company who is also an
employee of such company. Likewise, the VAT authorities have the
authority to reclassify the status of an assessee as a business dealer
(i.e., a company or individual operating a business) or a non-profit
organisation or a financial institution, each of which have different tax
ramifications.

1 16 6. . I IM MM MI IG GR RA AT TI IO ON N R RE EQ QU UI IR RE EM ME EN NT TS S

1 16 6. .1 1. . I Im mm mi ig gr ra at ti io on n C Co on nt tr ro ol ls s
2 25 5

16.1.1. Are there immigration quotas?

Israel has no immigration quotas, per se. As far as persons having
Jewish origins are concerned, the Law of Return entitles every Jew to
immigrate to Israel.

Since the early 1990s, an increasing number of foreign workers have
entered Israel, which gave rise to various internal conflicts, inter alia,
with respect to the employment market and affected industry sectors.
As a result, quotas limiting the number of foreign workers permitted to

25 Some of the information contained in this Chapter 16 was obtained from the internet site of the Ministry of
Tourism (www.tourism.gov.il).

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enter and work in Israel are set annually by the Israeli government
with respect to the different sectors of employment where the need
for such foreign workers has been recognised (such as: construction,
agriculture, industry, etc.).

16.1.2. Are medical certificates or vaccinations required?

In principle, the Entry into Israel Law and the Entry into Israel
Regulations do not require that a person wishing to enter Israel
furnish a medical certificate. However, the Minister of Interior (in this
Chapter 16, the Minister ) is authorised to enact regulations
regarding medical inspection of persons entering Israel, medical
treatments provided to them and any sanitary disinfection of their
belongings. The Minister is also empowered to take measures
rejecting or reducing contact between travellers who have arrived in
Israel and any individual already located in Israel, if the Minister is of
the opinion that such measures are necessary, inter alia, in the
interests of public health. For example, during the outbreak of SARS
in 2003, the Minister ordered that all passengers arriving from
infected countries be medically examined upon their arrival to Israel.

Regarding foreign workers in Israel, the Entry into Israel Law
expressly provides that a permit will not be granted to a foreign
worker, unless a medical certificate has been obtained. Such
medical certificate must be issued by a medical institution recognised
by the Israeli Minister of Health and which is located in the foreigners
country of origin. The medical certificate should certify that:
(a) according to the medical institution, the foreign worker underwent
medical tests in the three months preceding his entry into Israel; and
(b) the results of the medical tests reveal that the foreign worker does
not have any of the diseases prescribed in the Foreign Workers Law.

The Minister may exempt a foreign worker from the obligation to
furnish the aforesaid medical certificate. Such exemption may be
applied personally or collectively.

Finally, vaccinations are not specifically required for persons wishing
to enter Israel.

16.1.3. Are entry permits required? Must you apply for an entry permit before
entering the country?

Every visitor to Israel must be in possession of a passport valid for at
least six months. Persons having no citizenship whatsoever must be
in possession of a valid transit certificate, with a return visa to the
country that issued it.

The Entry into Israel Law provides that any person wishing to enter
Israel who does not possess Israeli citizenship or is not a new
immigrant (oleh) must be issued with an entry permit (i.e., a visa).

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Visitors are permitted to remain in Israel for a period of three months
from the date of their arrival, in accordance with the terms of the visa
issued to them. Visitors wishing to work in Israel must file the
relevant application with the Minister for receipt of a special work visa
(B/1).

Citizens of the following countries are not required to obtain a tourist
visa prior to their arrival in Israel and will be issued with such visa,
without charge, at every port of entry into Israel:

Europe:

Albania, Andorra, Austria, Belgium, Bulgaria, Croatia, Cyprus,
Czech Republic, Estonia, Finland, France, Germany (persons
born after January 1, 1928), Greece, Denmark, Holland,
Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania,
Luxembourg, Macedonia, Malta, Monaco, Montenegro, Norway,
Poland, Portugal, Romania, Russia, San Marino, Serbia,
Slovakia, Slovenia, Spain, Sweden, Switzerland, Ukraine and
the United Kingdom.

Asia and Oceania:

Australia, Fiji, Hong Kong, Japan, Macau, Micronesia,
Mongolia, New Zealand, The Philippines, Singapore, South
Korea, Taiwan and Vanuatu

Africa:

Central African Republic, Lesotho, Malawi, Mauritius, South
Africa and Swaziland.

America:

Argentina, Bahamas, Barbados, Bolivia, Brazil, Canada, Chile,
Colombia, Costa Rica, Dominica, Dominican Republic,
Ecuador, El Salvador, Grenada, Guatemala, Haiti, Jamaica,
Mexico, Panama, Paraguay, Peru, St. Kites, St. Lucia, St.
Vincent, Surinam, Trinidad & Tobago, Uruguay and USA.

Citizens of other countries should contact the local Israeli consulate
before the contemplated entry into Israel in order to obtain a visa. It
is advisable to apply for a visa at least one month prior to the planned
visit.

Visas may be extended (for a nominal fee) at the offices of the
Ministry of the Interior located in Jerusalem, Tel-Aviv, Haifa, Eilat,
Ben Gurion Airport and Tiberias.

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Visitors wishing to make a stopover in Israel en route to other
destinations, may request a transit visa for five days, which period
may be extended by an additional ten days. Travellers on board
cruise ships visiting Israel will be issued with a landing pass, enabling
them to stay in Israel for so long as the cruise ship is anchored at
port. No application for a visa is required in such cases.

16.1.4. Are exit and/or re-entry permits required?

An exit permit is not required. However, when departing Israel, a
person will be required to present a valid passport as well as the form
duly completed by him upon entering Israel to the relevant border
control official.

In general, citizens of the countries listed in section 16.1.3 above are
automatically issued a visa upon entry or re-entry into Israel. Citizens
of other countries may re-enter Israel for the duration of the visa
issued to them, subject to the terms thereof.

1 16 6. .2 2. . I Im mm mi ig gr ra at ti io on n R Re eq qu ui ir re em me en nt ts s/ /F Fo or rm ma al li it ti ie es s

16.2.1. Is a residence permit required? If so, does the investor have to apply for
one before entering the country?

Pursuant to the Entry into Israel Law, residence in Israel by a person,
other than an Israeli citizen (or an oleh (i.e., new immigrant) under the
Law of Return), requires a residency permit. Residency permits are
granted by the Minister for various periods of time, according to the
purpose for which the permit of residence is sought. The available
permits and duration of stay allotted to each type of permit, are as
follows:

A transitory residence permitgranted for an initial period not
exceeding five days, which permit may be extended for a
further ten days.

A visitor residence permitgranted for an initial period not
exceeding three months, which permit may be extended for a
period not exceeding two years.

A visitor residence permit may be issued to a person wishing to
enter and work (whether with or without consideration) in Israel
on a temporarily basis only.

A permit of temporary residencegranted for a period not
exceeding three years. However, the Minister may extend the
permit, provided that each extended period does not exceed
two years.

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A permit of temporary residence may be issued to the following
individuals:

(a) an individual who, ordinarily would be entitled to receive a
visa according to the status of an oleh (new immigrant),
wishes to reside in Israel for a period of up to three years
solely for the purpose of exploring the possibility of
subsequently settling in Israel as an oleh;

(b) a person wishing to reside in Israel for study purposes;

(c) a religious scholar wishing to reside in Israel for the
purpose of maintaining a religious function within his
religious community in Israel who has been invited to
come to Israel at the request of the relevant religious
institutions;

(d) a person wishing to reside in Israel who is a relative of a
person (spouse or a minor child) who has been issued
with a permit of temporary residence of the type falling
within (b) or (c) above; or

(e) any person wishing to temporarily reside in Israel for any
reason.

16.2.2. What information must be supplied to the immigration authorities?

The information and documents to be provided by an applicant and
which need to be attached to the application for a residency permit
are as follows:

the applicants valid foreign passport;
a certified copy of the applicants birth certificate;
a photograph of the applicant;
the personal details of the applicant;
details of the applicants spouse and/or children;
the applicants permanent place of residence outside of Israel;
and
the purpose for entering Israel.

In specific cases, additional documents may need to be furnished.
For example, if the applicant wishes to obtain a residency permit in
order to study in Israel, the applicant should also provide:

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written confirmation from the relevant Israeli educational
institution to which he has been admitted as a student;

proof that the applicant has adequate financial resources; and

a certificate confirming payment of tuition fees.

If the purpose of the applicant for applying for a residency permit is to
perform a religious function, in addition to providing the
aforementioned, the applicant should also provide a reference from
the Ministry of Religion as well as a certificate from the religious
institution where he intends to serve.

Furthermore, the Minister has the discretionary power to demand that
an applicant provide further details relating to the proposed entry
and/or stay in Israel, as well as evidence corroborating such details.

16.2.3. How long does it take to receive authorisation?

There is no definite time frame within which the Ministry of Interior is
required to issue the relevant authorisation. The duration depends
upon the circumstances of each individual case and the country of
origin. Under normal circumstances, such authorisation is issued
within two to three weeks, after the Minister has had an opportunity to
make the necessary internal inquiries and has examined the
documents attached to the relevant application, including their
accuracy.

1 16 6. .3 3. . V Vi is sa as s

16.3.1. Is a visa required for travel or stay in the country? If so, for how long is the
visa valid?

See 16.1.3 above.

16.3.2. How does the investor apply for a visa?

See 16.1.3 above.

16.3.3. What documents are required?

The main document which will need to be attached to an application
for a visa is the applicants passport or any other travel document.
Citizens of the countries listed in section 16.1.3 above do not require
any additional documents. Citizens of other countries should consult
with the local Israeli consulate in their country of origin.

16.3.4. How long does it take to receive a visa?

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Citizens of the countries listed in section 16.1.3 above obtain visas at
the point of entry. Citizens of other countries should apply to the local
Israeli consulate in their country of origin for the relevant visa at least
one month prior to their planned departure.

16.3.5. What fees are involved?

With regard to citizens of the countries listed in section 16.1.3 above,
no fees are involved. With regard to citizens of other countries, fees
are payable, the amount of which may vary from country to country.

1 17 7. . E EX XP PA AT TR RI IA AT TE E E EM MP PL LO OY YE EE ES S

1 17 7. .1 1. . C Co os st t o of f L Li iv vi in ng g a an nd d I Im mm mi ig gr ra at ti io on n

How does the cost of living compare to that in the investors home
country?
What is the rate of inflation?

The cost of living in Israel, when compared to the investors home
country, depends on the country of comparison. Of course, the cost
of living takes into consideration not only prices, but income as well.
The Mercer's Cost of Living survey taken in March 2011, ranked Tel
Aviv the 24th most expensive city out of the 214 cities around the
world that the survey covered. The survey measures the comparative
cost of over 200 goods and services in each location, including
housing, transport, food, clothing, household items and
entertainment. New York is used as the base city and all other cities
are compared against New York. Two main factors determine a citys
ranking in Mercers surveythe relative strength of the relevant
currency against the US dollar over the prior 12 months and price
movements over the prior 12 months as compared to those of New
York City. Israel is more expensive than most European and US
cities (for example: Paris (ranked 27th), , Rome (ranked 34th),
Stockholm (ranked 39th) and Los Angeles (ranked 77
th
)). It is less
expensive than Zurich (ranked 7th)and London (ranked 18th).

Over the past five years, the annual average inflation rate in Israel
was approximately 2.6%. The annual average inflation rates for each
year during the five-year period were as follows:

2010 2.7%

2009 3.3%

2008 4.6%

2007 0.5%

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2006 2.1%

1 17 7. .2 2. . D Dr ri iv ve er rs s L Li ic ce en nc ce es s

Must the investor obtain a drivers licence for that country?
How does the investor obtain a drivers licence?

An investor visiting Israel as a tourist is permitted to drive in Israel
during his stay, provided that he has applied for and obtained a valid
international drivers licence and holds same together with a valid
drivers licence applied for and obtained in his country of residence.
In such event, the investors drivers licence will be valid for one year,
commencing on the date of the investors entry into Israel.

After the expiration of this one-year period, the investor must apply to
the Israeli licensing authorities to obtain a drivers licence valid in
Israel. To obtain an Israeli drivers licence, the investor will be
required to first pass a practical driving test (including undergoing an
eyesight test and physical examination).

The fee involved in obtaining a drivers licence, valid for one year, is
approximately US $20.

1 17 7. .3 3. . E Ed du uc ca at ti io on n

17.3.1. What types of schools are available for the investors family?
What is required for enrolment?

There are several types of private schools in Israel which may suit the
investors family and which provide instruction in languages other
than Hebrew. One well-known school is the American International
School located in Kfar Shmaryahu (a residential area located just
north of Tel-Aviv) which is attended largely by the children of
diplomats. A fully-functional branch of the American International
School was recently opened in Jerusalem to serve the needs of the
children of diplomats or other dignitaries located in and around the
Jerusalem area. The fees charged by the American International
School are relatively high and are not tax deductible. In addition,
several other private schools have been established in Israel which
are funded by certain religious sectors, such as the schools located in
Jaffa and in East Jerusalem which are funded and run by churches of
the Christian faith. These schools charge lower fees and the
language of instruction is English, French or Arabic.

The investor may also send his/her children to public schools located
in the area in which the investor resides, where instruction is given in

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the Hebrew language. No tuition fees are payable but parents are
required to pay at the beginning of each school year a set amount to
cover certain extra additional items and/or activities offered by the
relevant school, including sums to cover cultural and recreational
activities as well as school outings. In addition, parents are obliged to
provide exercise and text books and pay for standard school attire
and other additional costs required by the relevant public school
during the course of the school year. In order to enrol with a public
school, the investor will need to present his/her passport and visa to
the Education Department of the applicable local authority
(municipality or local council) where the investor resides in Israel, as
well as passports (or birth certificates) of his/her child/children.
However, should the investors child/children not be proficient in
Hebrew, they will be required to first attend a school catering solely to
teaching the Hebrew language (Ulpan).

17.3.2. Can the investor or company receive a tax benefit?

There are no regulations entitling the investor or the company to
receive a tax benefit for the education of the investors family
members.

1 17 7. .4 4. . H Ho ou us si in ng g

17.4.1. What type of housing is available for the investor?
Can the investor own property?
Must the investor have housing before he enters the country?

The investor may rent or purchase housing in Israel. Usually, when
first coming to Israel, it is advisable for the investor to rent rather than
purchase property and only purchase property after the deciding to
make a long-term commitment to Israel.

Fully furnished apartments or villas with air-conditioning (a must in
the hot humid summers) are available for rent in Jerusalem, Tel-Aviv,
Haifa and the suburbs. There is no requirement that the investor own
housing before entering the country. No tax benefits are available for
housing purchased and/or rented in Israel.

17.4.2. Can the investor subsidise housing and receive a tax benefit?

Under Israeli tax legislation, work income includes any of the
following: salary, wages or profits from employment, any benefit or
allowance, reimbursement or any payments made to cover an
employee's expenses (unless such expenses are deductible under
Israeli tax laws and regulations).

Nevertheless, professional Israeli guidelines, as published by the
Israeli tax authorities, provide that board and lodging expenses paid

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by an employer on behalf of a foreign employees stay in Israel, will
not be subject to income tax, subject to certain limitations with
respect to the amount and type of expenses involved.

Certain other tax benefits in the form of a deduction of expenses
(including housing expenses) are available to foreign employees
temporarily residing in Israel. An example of one such benefit applies
to a foreign expert (as defined below). A non-resident, who qualifies
as a foreign expert, will be entitled, during his/her first 12 months in
Israel, to deduct documented rental expenditure and a daily living
allowance from remuneration for services performed in Israel (subject
to double taxation treaty provisions)..

For the above purpose, a foreign expert is defined as a foreign
resident for whom all of the following holds true:

he was invited by an Israel resident, who does not engage in
the hiring or recruiting of personnel in the ordinary course of
business (i.e., an employment agency), to travel to Israel for the
purpose of rendering a service in his field of expertise;

his stay in Israel is lawful;

throughout the duration of his stay in Israel, he engages solely
in his field of expertise; and

the consideration he receives for engaging in his field of
expertise, is at least NIS 12,300 (in 2010) (approximately
US $3,500) or more, multiplied by the number of months of his
stay in Israel and tax was lawfully withheld in respect of such
consideration.

In general, similar tax benefits are available to foreign journalists
and foreign sportsmen visiting Israel for engaging in their respective
professions.

1 17 7. .5 5. . I Im mp po or rt ti in ng g P Pe er rs so on na al l P Po os ss se es ss si io on ns s

17.5.1. How can the investor import his personal belongings?

Personal belongings may be shipped to Israel by an international
moving company. In general, goods imported into Israel are subject
to customs duties. However, it may be possible to obtain an
exemption from customs if the goods are intended for personal use
during a short-term stay in Israel and an undertaking is giving to the
customs authorities to repatriate the goods at the end of the stay.
Clearance of belongings through customs is usually performed by
customs agents and most international movers retain the services of
a customs agent.

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17.5.2. Are import duties payable?

In general, customs and import duties are levied on import of most
types of assets (including personal belongings) into Israel. However,
the relevant Israeli legislation dealing with the taxation of imports
(e.g., the Customs Ordinance) contains many exemptions regarding
the import of personal belongings and/or domestic articles and/or
work tools and other specific articles brought into Israel by
immigrants (new residents), returning residents, tourists and foreign
residents under certain circumstances.

For the above purpose, personal belongings include, generally,
articles of clothing and shoes, wine (up to one litre for every adult)
and other articles expressly designated for personal use and whose
total value does not exceed US $200. Similarly, domestic articles
include, in general, items ordinarily used in a residential apartment.

17.5.3. Are there requirements for clearing the belongings through customs?

In general, any person seeking to obtain an exemption from customs
and import duties must submit to the Customs Authorities all relevant
documents regarding his status (i.e., whether he is a tourist or
immigrant). The Customs Authorities may also require such person
to provide certain guarantees, in order to ensure that the articles will
leave Israel on the date such person departs or that the customs and
import duties will be paid, if the articles will, by consent, remain in
Israel. For example, if an employee holds a B/1 Visa, he/she or
his/her employer can leave a deposit or bank guarantee for the
amount of import duties due. This deposit will be returned once the
Customs Authorities have been shown proof that the goods have
been exported.

1 17 7. .6 6. . M Me ed di ic ca al l C Ca ar re e

What level of medical care is available?
Is there national health?

The level of medical care in Israel is high, by any objective standard.
All Israeli residents are entitled to medical care pursuant to the
National Health Insurance Law. Foreign citizens visiting or staying in
Israel on a short-term basis are not considered Israeli residents and,
therefore, should obtain health insurance from a commercial
insurance company. These services are generally provided by the
recognised sick funds, private doctors and/or hospitals.

1 17 7. .7 7. . M Mo ov vi in ng g C Co os st ts s

17.7.1. What costs are involved in moving?

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No special moving costs are involved, save for the regular costs
involved in shipping personal belongings to Israel.

17.7.2. Can the investor receive any tax allowances?

No special tax allowances are granted for the costs associated with
moving to Israel.

1 17 7. .8 8. . T Ta ax x L Li ia ab bi il li it ty y

17.8.1. What is the expatriates tax liability?

In general, every foreign resident may be liable to pay income tax in
Israel on income generated or accruing in Israel. Therefore,
assuming that the expatriate employees are not Israeli residents for
tax purposes, the work income earned by them in Israel will be
subject to Israeli income tax. However, such tax liability will be
examined in accordance with the provisions of the relevant tax treaty
in force (if any).

In addition, such income could be subject to social security
contributions (i.e., national insurance contributions and health tax
see in this regard sections 12.8.1 and 13.9.1 above). It should be
noted that Israel has entered into several Social Security Conventions
with other states, pursuant to which the contracting states are
responsible for resolving certain problems arising (e.g., double-
insurance; maintaining the pension entitlement in the country of
residence, etc.) when employees, who are resident of one state, are
employed for a certain period in another state.

According to the Capital Investments Law, the rate of tax for income
earned by an approved expert (as defined below) which was
generated while engaging in his field of expertise, shall not exceed
25%. Such tax benefit is granted to the approved expert for a limited
period. For the above purpose, an approved expert means a
foreign resident who has not previously received Israeli residency
status and who, with the consent of the Manager of the Investment
Centre, was expressly invited by an Israeli enterprise to be employed
by such enterprise in the capacity as an expert.

See also, in this regard, Chapter 13Tax on Individuals and, in
particular, section 13.15Territoriality Rules above.

17.8.2. What are the allowances?

Israeli tax laws and regulations enable an employee to deduct from
his work income a certain portion of the board and lodging
expenses paid by the employee for the duration of his stay in Israel.
Such expenses are limited to approximately US $90 per day for
lodging and approximately US $45 per day for vehicle rental.

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As a general rule, in accordance with most of the tax treaties to which
Israel is a party, Israel, being the source country, may also collect tax
on income earned by the foreign resident employee for work
performed by such foreign resident employee in Israel. However, this
rule is not usually enforced and only the country of residency has the
right to collect tax on such work income, provided that the following
three conditions have been met: (a) the employees stay in Israel is
for a period or periods not exceeding 183 days, in the aggregate, in
the relevant fiscal year; (b) the employee's wage/salary is paid by or
on behalf of an employer who is a resident of the country of
residency; and (c) the wage/salary is not paid by a permanent
establishment established in Israel by the employer. See also, in this
regard, section 12.11.1 above.

1 17 7. .9 9. . W Wo or rk k C Co on nt tr ra ac ct ts s

Does the investor need a work contract to work in the country?
If so, does the contract have to be for a certain duration, for the
performance of a specific job or for a specific position?
Does the contract have to be with a national or resident of the country
or related state?

There is no legal requirement for the investor to have a written
employment contract to enable him to work in Israel, unless the
employee is neither a citizen nor resident of Israel. Nevertheless, a
notice setting down specific employment terms must be submitted by
the employer to the employee. Contracts for foreign employees
should be made in writing, in a language understood by them.
Special entry visa and work permits (see section 17.10Work
Permits below) are also required for such foreign employees. The
relevant application for a work permit must be made by the
prospective employer. The employee should be employed in the
occupation described in the application. The contract need not be for
a prescribed duration.

1 17 7. .1 10 0. . W Wo or rk k P Pe er rm mi it ts s

17.10.1. Does the investor need a work permit to work in the country?
How and where does the investor apply for the permit?
What documents are required?
How long does it take to receive the permit?

The applicable requirements appearing in section 11.5Labour
Permits above would apply, mutatis mutandis, to a foreign investor
wishing to be employed in Israel.

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17.10.2. For how long is the permit valid?

Work permits are usually issued for a period not exceeding one year
but such period may be extended upon the employers specific
request.

L/44193/0/1780440/1

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