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Income Tax Ordinance

Disclaimer : The Following is an unofficial translation, and not necessarily an updated one.
The binding version is the official Hebrew text. Re aders are consequently advised to consult
qualified professional counsel before making any de cision in connection with the enactment,
which is here presented in translation for their ge neral information only.

INCOME TAX ORDINANCE [NEW VERSION] 5721-1961

PART ONE – INTERPRETATION

Definitions
1. In this Ordinance –
“person” – includes a company and a body of persons, as def ined in this
section;
“house property”, in an urban area – within its meaning in the Urban Property
Ordinance 1940;
“Exchange” – a securities exchange, to which a license was gi ven under
section 45 of the Securities Law, or a securities e xchange abroad, which was
approved by whoever is entitled to approve it under the statutes of the State
where it functions, and also an organized market – in Israel or abroad – except
when there is an explicitly different provision;
“spouse” – a married person who lives and manages a joint h ousehold with
the person to whom he is married; ” registered spouse” – a spouse designated or selected under section 64 B;
” industrial building “, in an area that is not urban – within its meanin g in the
Rural Property Tax Ordinance 1942;
“retirement age” – the retirement age, within its meaning in the Re tirement
Age Law 5764-2004;
“income” – a person’s total income from the sources specifi ed in sections 2
and together with amounts in respect of which any statute provides that they
be treated as income for purposes of this Ordinance ;
“chargeable income” – income, after the deductions, set-offs and exemp tions
from it, which are allowed under any statute;
“linkage differentials” – any amount added to a debt or to a claimed amoun t
in consequence of linkage to the currency exchange rate, the consumer price
index or to some other index, including exchange ra te differentials; however,
for purposes of tax exemption, any amount added to a debt or to the amount of
a claim in consequence of linkage to the currency e xchange rate or to the
Consumer Price Index – including exchange rate diff erentials – shall be
deemed linkage differentials;
“linkage differentials and interest” – within their meaning in section 159A(a);
“exchange rate differentials” – any amount added – in consequence of a
change in the currency exchange rate – to the princ ipal of a loan, which is a
foreign currency deposit or a loan repayable in for eign currency;
“work income” – income under section 2(2);
“real estate association right” – within its meaning in the Real Estate
Taxation Law;
“real estate right” – as defined in the Real Estate Taxation Law;
“body of persons” – any public body, incorporated or amalgamated, an d any
company, fraternity, fellowship or society, whether incorporated or not;
“company” – a company incorporated or registered under any L aw in effect in
Israel or elsewhere, including a cooperative societ y;
“month” – includes a part thereof;
“Taxation under Inflationary Conditions Law” – the Income Tax Law
(Taxation under Inflationary Conditions) 5742-1982;
“Inflationary Adjustments Law” – the Income Tax Law (Inflationary
Adjustments) 5745-1985;
“Investment Encouragement Law” – the Encouragement of Capital
Investments Law 5719-1959;
“Real Estate Taxation Law” – the Real Estate Taxation (Appreciation, Sale

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and Acquisition) Law 5723-1963;
“VAT Law” – the Value Added Tax Law 5736-1975;
“Companies Ordinance” – the Companies Ordinance [New Version] 5743-
1983;
“Companies Law” – the Companies Law 5759-1999;
“Savings Encouragement Law” – the Encouragement of Savings (Income
Tax Reductions and Guaranty of Loans) Law 5716-1956 ;
“Securities Law” – the Securities Law 5728-1968;
“Amutot Law” – the Amutot (Nonprofit Societies) Law 5740-1980;
“Industry Encouragement Law” – the Encouragement of Industry (Taxes)
Law 5729-1969;
“Control of Benefit Funds Law” – the Control of Financial Services (Benefit
Funds) Law 5765-2005;
“Joint Investment Trusts Law” – the Joint Investment Trusts Law 5754-
1994;
“adjusted amount” – any amount, plus that amount multiplied by the i ndex
increase;
“Israel resident” or “resident” –
(a) in respect individuals – a person, the center o f whose life is in Israel, and
the following provisions shall apply to this matter :
(1) in order to determine the place that is the cen ter of a person’s life,
the totality of his family, economic and social tie s shall be taken
into account, including inter alia:
(a) the place of his permanent home;
(b) his and his family’s place of residence;
(c) his regular or permanent place of business or t he place of
his permanent employment;
(d) the place of his active and substantive economi c interests;
(e) the place of his activity in organizations, soc ieties and
various institutions;
(2) it is a assumed that the center of an individua l’s life during a tax
year is in Israel –
(a) if during the tax year he spent 183 or more day s in Israel;
(b) if during the tax year he spent 30 or more days in Israel and
the total period of his stay in Israel in the tax y ear and in the
two years before it was 425 days or more;
for purposes of this paragraph, ” day” includes part of a day;
(3) the assumption in paragraph (2) may be refuted both by the
individual and by the Assessing Officer;
(4) the Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe conditions under which an indi vidual who is
not an Israel resident under paragraphs (1) and (2) shall be
deemed an Israel resident, on condition that one of the following
holds true for him:
(a) he is an Israel State employee;
(b) he is an employee of a local authority in Israe l;
(c) he is an employee of the Jewish Agency for Isra el;
(d) he is an employee of the Jewish National Fund, Keren
Hayessod – United Israel Appeal;
(e) he is an employee of a Government corporation;
(f) he is an employee of a Government Authority or of a body
corporate set up under a Law;
and he may also prescribe as aforesaid that categor ies of
individuals deemed Israel residents under paragraph s (1) and (2)

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shall not be so deemed, all on conditions that he shall prescribe;
(b) in respect of a body of persons – a body of per sons for which one of the
following holds true:
(1) it incorporated in Israel;
(2) its business and management are activated from Israel, except for
a body of persons, the business of which is control led and
managed in Israel by an individual who became an Is rael resident
for the first time or is a veteran returning reside nt, as said in
section 14(a) and ten years have not yet passed sin ce he became
an Israel resident as aforesaid, or by any person o n his behalf, on
condition that that body of persons would not be an Israel resident
if the control and management of its business were not by a said
individual or by a person on his behalf, unless the body of persons
requested otherwise.
“foreign resident” – a person who is not an Israel resident, and also an
individual for whom all the following hold true:
(a) he stay abroad for at least 183 days in each ye ar, in the tax year and in
the following tax year;
(b) the center of his life was not in Israel, as sa id in paragraph (a)(1) of the
definition of “Israel resident” or “resident”, duri ng two tax years after the
tax years said in subparagraph (a);
“income from personal exertion” includes –
(1) a pension paid by a former employer;
(2) a pension paid by a benefit pension fund in re spect of employment or by
virtue of membership in it during not less than fiv e years, to a person
most of whose chargeable income – in the five years before payment of
the pension began – was from personal exertion;
(3) a pension paid to the survivor of a person to whom paragraphs (1) or (2)
apply, by virtue of his entitlement to a pension as said there;
(3a) a loss of working capacity pension paid by a p ension benefit fund or by a
savings benefit fund, or paid under loss of working capacity insurance;
for this purpose, “loss of working capacity” – an i mpairment of working
capacity due to disease, invalidity or accident, wh ich caused the loss of
wage income or profits under section 2(1) or (2);
(4) a taxable pension paid by the National Insuran ce Institute;
(5) a grant received in consequence of retirement or death;
(6) an amount received in consequence of the capit alization of one of the
pensions said in paragraphs (1) to (4);
(7) an amount received by a person as rent for rent ing out an asset, which
served that person during at least ten years before its rental for the
production of income from personal exertion from bu siness or vocation;
for this purpose, “person” includes whoever was his spouse immediately
before his death;
“index” – the consumer price index published by the Centra l Bureau of
Statistics;
“rate of index increase”, in a certain period – the difference between the
index last published before the end of the period a nd the index last published
before the beginning of the period, divided by the index last published before
the beginning of the period;
“preferred loans” – loan or deposits under savings schemes, on which
interest is wholly or partly exempt of tax under an y statute, unless otherwise
provided in that statute, and also participation ce rtificates therein;
“income tax” or “tax” – either income tax or companies tax imposed under
this Ordinance;

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“foreign taxes” – as defined in section 199;
“reciprocating state” – within its meaning in section 196;
“vocation” – a profession and any other vocation, other than a business;
“security” – as defined in section 88;
“assessee” – a person who had income during the tax year;
“Director” – the Director appointed under section 229, includ ing the Deputy
Director;
“business” – including commerce, handicraft, agriculture or i ndustry;
“output” – as defined in the Computers Law 5755-1995;
“acceptable books” – account books that the Assessing Officer did not
refuse to accept and did not reject, or that he ref used to accept or rejected, but
a committee under section 146 or the Court set asid e his decision, but books
shall not be deemed acceptable if the assessee admi tted that they are not
acceptable, and if he certified in writing that the legal consequences of his
admission were explained to him;
“legal incompetents” – a minor , a mentally defective or insane person, and
any person not competent for a legal act;
“Assessing Officer” – an officer authorized by the Minister of Finance to
make assessments under this Ordinance, including a Deputy Assessing
Officer, an Assistant Assessing Officer or a Chief Collector, whom the Director
authorized in writing to exercise a certain power o f Assessing Officers under
this Ordinance or to carry out certain of their fun ctions; appointments of
Assessing Officers, of Deputy Assessing Officers, o f Assistant Assessing
Officers or Chief Collectors authorized as aforesai d shall be published in
Reshumot;
“deposit” – an amount deposited with a banking corporation o r with a banking
institution abroad, which operates under the Law of the country in which it
operates;
“benefit fund”, ” savings benefit fund”, ” severanc e pay benefit fund”,
“pension benefit fund”, “training fund” and ‘insurance fund” – as defined
in the Control of Benefit Funds Law;
“land” , in an urban area – within its meaning in the Urba n Property Tax
Ordinance 1940; in an area that is not urban – with in its meaning in the Rural
Property Tax Ordinance 1942;
“debenture interest” – interest which an incorporated body must pay
according to or by virtue of a debenture or of a de benture trust deed, whether
in the form of a mortgage or in the form of a docum ent or certificate of some
other kind, which includes acknowledgment of the ob ligation;
“local authority” – a municipality, local council, or other similar authority
established under a Law that is in effect at the ti me, which provides for the
creation of local Government authorities, including a cooperative society or any
other body which at the time performs the functions of a local authority;
“organized market” – a system whereby trading in securities is conduc ted
according to rules prescribed by whoever is entitle d to prescribe them under
the statutes of the State in which it is conducted;
“urban area” – an area in which urban property tax is payable u nder the
Urban Property Tax Ordinance 1940;
“tax year” – a period of twelve consecutive months that begin s on January 1,
and if a special assessment period was determined, then the assessment
period determined as aforesaid;
“banking corporation” – within its meaning in the Banking (Licensing) La w
5741-1981;
“savings program” – in a banking corporation, including a savings pl an
approved under the Savings Encouragement Law and al so the savings

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component of a life insurance policy or a savings plan attached to a said policy
and approved by the Controller of Insurance, within the meaning of the term in
the Insurance Business (Control) Law 5741-1961.

PART TWO: IMPOSITION OF TAX

CHAPTER ONE: SOURCE

Sources of income
2. Subject to the provisions of this Ordinance, inc ome tax shall be payable for
each tax year, at the rates specified below, on the income of a person resident
in Israel, which was produced or which accrued in I srael or abroad and on the
income of a foreign resident which was produced or which accrued in Israel
from the following sources:

Business and vocation
(1) wages or profits from any business or vocation exercised for any length
of time, or from any incidental transaction or deal of a commercial
character;
Employment
(2) (a) wages or profits from employment; any benef it or allowance given
to an employee by his employer; payments made to em ployees to
cover their expenses, including payments for mainta ining a vehicle
or telephone, travel abroad or the acquisition of p rofessional
literature or of clothing, but exclusive of aforesa id payments which
for the employee are deductible as expenses; the va lue of the use
of a vehicle or of a mobile radio-telephone placed at an
employee’s disposal; all whether paid in cash or in kind, whether
given to the employee directly or indirectly or giv en to another for
his benefit;
(b) the Minister of Finance shall, with approval by the Knesset
Finance Committee, determine the value of the use o f a vehicle or
of a mobile radio-telephone placed at the employee’ s disposal as
aforesaid;

(3) Repealed

Dividends, interest and linkage differentials
(4) dividends, including dividends paid out of a c ompany’s capital gains, and
interest, linkage differentials or discounts;
Benefits
(5) pension, usufruct or annuity;

House property and land
(6) rents, royalties, keymoney, premiums and other profits derived from
house property, land or industrial buildings; if a person built a house
property and let it and received keymoney or a prem ium for the letting,
and if after he let it he sold that house property directly or indirectly to
another, under an agreement made when or before the property was let,

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then the purchaser shall be deemed to have received keymoney or a
premium of the same amount on the date of the purch ase; if the
purchase is made within one year after the letting, that shall be prima
facie evidence that there was an aforesaid agreemen t;

Other assets
(7) gains or profits derived from any asset other than house property, land or
industrial buildings;

Agriculture
(8) gains or profits derived from agriculture, land cultivation, afforestation or
crops, including the value of any produce received in consideration of
the use of capital, assets, seed or domesticated an imals, for purpose of
the sources of income said in this paragraph, and i ncluding a share of
profits received in respect of the aforesaid use;

Patent and copyright
(9) consideration received for the sale of a paten t or design by the inventor,
or for the sale of a copyright by the author, if th e invention was made or
the work produced not within the scope of the inven tor’s or author’s
ordinary occupation;

Other sources
(10) gains and profits from any other source not in cluded in paragraphs (1) to
(9), but not explicitly excluded from them and no e xemption having been
granted on them in this Ordinance or in any other s tatute.

Gains or profit from gambling, lotteries or prizes
2A. (a) Gains or profits of an Israel resident pers on, produced or accrued in
Israel or abroad, as well as gains or profits of a foreign resident person,
produced or accrued in Israel, the source of which is gambling, lotteries
or prize winning activity, shall be taken into acco unt in determining his
profits or income and for the purposes of this Ordi nance they shall be
deemed income, except in respect of the set-off of losses.
(b) The provisions of subsection (a) shall not appl y to each of the following:
(1) gains or profit, which under this Ordinance con stitute income from
some other source;
(2) gains or profits from prizes given within a per sonal framework;
(3) gains or profits from lotteries or prizes desig nated by the Minister
of Finance with approval by the Knesset Finance Com mittee.

Other income
3. (a) An amount received by a person under insura nce against loss of profits
or under insurance against the loss of working capa city shall be taken
into account in determining his profits or income; for this purpose:
” insurance against loss of working capacity ” – insurance against
injury to the working capacity, against a loss of e arnings or against a loss
of profits due to disease, invalidity or accident, all irrespective of whether
the money under the insurance was paid all at once or in periodic
payments, whether it was paid by a benefit fund or by somebody else.
(b) (1) If a debt or part of a debt was waived for a person in a certain tax
year, and if that debt arose out of an expenditure deductible in

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determining his chargeable income, then the debt shall be deemed
part of his income in that year.
(2) If a person received a loan and, had he been p aid a grant instead,
the grant would have been income, and if the lender gave him a
grant before the loan is repaid or within one year after the day of
its repayment, then the grant shall, up to the amou nt of the loan,
be deemed part of the recipient’s income in the tax year in which it
was given; for this purpose, the remission of a loa n shall be
treated like giving a grant.
(3) (a) If a person’s debt or a part of his debt was remitted or written
off in a certain tax year, and if that debt stems f rom sums he
received for the production of his income from any business
or vocation, or if he was given a grant for the pro duction of
his income as aforesaid, and if that person is not liable to tax
on it under section 2 or under paragraphs (1) or (2 ) of this
subsection and if the provisions of sections 20A an d 21(b)
also do not apply to it, then the debt shall be dee med
income in the year in which it was remitted or writ ten off, and
the grant as income in the year in which it was giv en, and on
them that person shall be liable to tax at a rate o f not more
than 50%.
(b) On application by a person who had income said in
subparagraph (a), that income shall – for purposes of
section 28(b) – be deemed business income.
(c) Tax under subparagraph (a) shall, for purposes of section
92(a), be deemed tax on a capital gain.
(4) The provisions of paragraphs (2) and (3) shall not apply to a
waived or written off grant or loan, which was give n by the State,
the Keren Kayemet le-Israel, the Keren Hayessod – U nited Israel
Appeal, the Jewish Agency for Israel, the W orld Zio nist
Organization or the Rural and Suburban Settlement C ompany Ltd.
(RASSCO) to a cooperative society classified by the Registrar of
Cooperative Societies as an agricultural society or to a member of
a said society; however, if the society or the memb er suffered a
loss as said in section 28, then the amount of that loss shall be
reduced by the amount of the grant or of the loan t hat was waived
or written off.
(5) For purposes of this subsection, a person whose debt has been
waived includes a person who treats a debt owed by him as if it
had been waived or written off.
(c) (1) If a person received amounts from the rede mption of redeemable
shares issued by a company free of charge, or if a person received
from the redemption of redeemable shares amounts in excess of
the amount he paid for them to the company (in this section: the
amount of income) – except for the redemption of sh ares in a
cooperative society upon the resignation or death o f a member or
upon the winding up of the society and except for t he amounts
from the redemption of shares that were allocated t o an employee
or to a service provider within their meaning in se ction 3(i) – then
he shall be liable to tax at the rate of 35% on the part of the
amount up to the determining date, even if he is ex empt of tax or if
the tax rate to which he is liable is less than 35% , and on the
balance of the amount of income – at the rate of 20 %, but if the
individual is a substantive shareholder, as defined in section 88 –

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at the rate of 25%, even if he is exempt of tax or if the tax rate to
which he is liable is less than the said rate; for the purposes of this
section –
” the part of the amount of income up to the determin ing date”
– the part of the amount of income, the ratio of wh ich to the total
amount of income is as is the ratio of the period f rom the date of
issue of the share until the determining date, to t he period from the
date of issue of the share until the day of its red emption;
“balance of the amount of income ” – the amount obtained by
subtracting the part of the amount of income until the determining
date from the amount of income;
“determining date” – as defined in section 88;
(2) the paying company shall deduct the tax when it pays the amounts
said in paragraph (1) and pay it to the Assessing O fficer within one
week after the day of payment, accompanied by a rep ort;
(3) the amounts said in paragraph (1), which were p aid by the
company, shall not be deductible under sections 17, 127 and 128;
(4) liability under paragraph (1) or (2) shall not apply to amounts a
foreign resident received in addition to the amount s paid by him to
the company for shares, in consequence of a change in the official
exchange rate.
(d) (1) Amounts paid to an employer by a benefit f und, within its meaning
in section 47, including interest, linkage differen tials and other
profits that stem from the employer’s payments to t he fund, shall
be taken into account in the determination of his i ncome; for this
purpose: ” amounts paid to an employer ” include amounts which
the employer treated as if they had been received f rom the benefit
fund and were redeposited in it, and he claimed the ir deduction
under section 17(5);
(2) the Minister of Finance may, with approval by t he Knesset Finance
Committee, make rules on exemption from tax of amou nts
transferred from one benefit fund to another, or of amounts the
designation of which was changed within the same be nefit fund.
(e) Amounts paid by an employer for his employee to training funds within
limits prescribed in a collective agreement, within its meaning in the
Collective Agreements Law 5717-1957 (hereafter: col lective agreement),
and in respect of an employee to whom no collective agreement applies
– within limits set in a collective agreement appli cable to employees
whose profession, seniority and working conditions are similar, but no
more than 8.4% of the determining salary in respect of a teaching
employee, and no more than 7.5% of the determining salary in respect of
any other employee, shall be deemed the employee’s work income when
he receives them, but amounts paid by an employer a bove the aforesaid
limits shall be deemed the employee’s work income w hen they are paid
to the fund; for this purpose:
“determining salary” – work income, exclusive of payments to the
employee to cover his expenses, overtime pay and pa yments for special
efforts or for a certain event – but not more than double the amount that
is the ceiling for the payment of the cost-of-livin g bonus, as determined
from time to time by agreement between the Coordina ting Office of the
Economic Organizations and the General Federation o f Labor in Israel;
(in tax years 1999 to 2004 the said double amount w as NS 15,400; from
March 2004: NS 15,712 – Tr.)
“teaching employee” – a member of one of the following training funds:

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(a) Keren Hishtalmut Lemorim Vegananot Ltd.;
(b) Keren Hishtalmut Lemorim Alyessodiim, Morei Seminarim
Umefakchim Ltd.
(c) Keren Hishtalmut Lemorim Alyessodiim Ltd.
(e1) Repealed**
(e2) Amounts received by an individual from a train ing fund for the
selfemployed, as defined in section 17(5a), includi ng interest, linkage
differentials and other profits, and exclusive of a mounts which he
deposited and which were not deductible under secti on 17(5a), shall be
deemed that individual’s income or profit from busi ness or occupation
when he received them; however, the amounts of inte rest, linkage
differentials and other profits received from the t raining fund on the dates
designated in section 9(16b) shall be deemed income from interest, as
said in section 2(4).
(e3) (1) Amounts which all employers of an employee paid for him to
savings benefit funds and to pension benefit funds on account of
the employer’s benefit component and which exceed t he rate for
deposit, multiplied by the employee’s salary or by the ceiling
amount, whichever is less, shall be deemed work inc ome of the
employee when they were paid to the benefit funds; amounts paid
as aforesaid to benefit funds, which do not exceed the rate for
deposit, multiplied as aforesaid, shall be deemed t he employee’s
work income when he receives them;
(2) in this subsection –
“average wage in the economy” – the average wage calculated
for the purpose of benefits and insurance contribut ions under
section 2(b) of the National Insurance Law [Consoli dated Version] 5755-1995, as the National Insurance Institute publ ishes them;
“the rate for deposit” – the rate set under section 22 of the
Control of Benefit Funds Law for deposit on account of the
employer’s benefit component, or the percentage of the
employee’s salary which the employer deposited in a benefit fund
on account of the employer’s benefit component, whi chever is
less;
“employer’s benefit component” – within its meaning in section
21 of the Control of Benefit Funds Law;
“salary” – within its meaning under section 22 of the Contr ol of
Benefit Funds Law, in respect of which the employer paid to a
benefit fund;
“ceiling amount” – one of the following, as the case may be:
(1) if amounts for the employee were paid only to p ension
benefit funds – an amount equal to four times the a verage
wage in the economy per month;
(2) if amounts for the employee were paid only to s avings
benefit funds – one twelfth of the ceiling of entit ling income;
(3) if amounts for the employee were paid to pensio n benefit
funds and also to savings benefit funds –
(a) in respect of the amounts paid to pension benef it
funds – the amount said in paragraph (1);
(b) in respect of the amounts paid to savings benef it
funds – the amount said in paragraph (1), less the
salary in respect of which the amounts were paid to
pension benefit funds, on condition that it does no t
exceed the amount said in paragraph (2);

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“ceiling of entitling income” – the amount stated in paragraph
(1) of the definition of “entitling income” in sect ion 47, as the case
may be.
(e4) (1) Profits an individual received from a bene fit fund, which he was
entitled to receive under the provisions of section 23 of the Control
of Benefit Funds Law, and also interest and other p rofits which he
received from a training fund at the times designat ed in section
9(16a) or (16b), as the case may be, shall be deeme d interest
income; however, profits he received as aforesaid a s an amount of
linkage differentials calculated on payments paid t o the benefit
fund or to the training fund shall be deemed income from linkage
differentials.
(2) repealed
(e5) Profits received by an individual from the sav ings program in a life
insurance policy shall be deemed income from intere st; but aforesaid
profits received as an amount of linkage differenti als calculated on the
payments paid to the savings program shall be deeme d income from
linkage differentials.
(e6) Income from partial linkage differentials shal l be deemed interest
income; in this subsection, ” partial linkage differentials ” – as defined in
section 9(13)(1), but for this purpose the index sh all be the Consumer
Price Index, a foreign currency exchange rate, incl uding exchange rate
differentials, or any other index ;
(f) If the occupation of a person ceased in a parti cular tax year and his
income is determined by assessment on a cash basis, then all the
amounts which, due to the determination of income o n a cash basis,
were not charged with tax in the hands of that pers on before the
cessation, shall be deemed income of the person ent itled to them at the
time of their receipt; for this purpose: “cessation of occupation” includes
a change of occupation or death; however, aforesaid amounts which are
included in the estate of that person shall, for pu rposes of estate duty
under the Estate Duty Law 5709-1949, be reduced by the amount of tax
due on them under section 125A.
(g) If, during the tax year, a body of persons was a public institution, within
its meaning in section 9(2), or if it did not opera te for profit or all its
income was exempt of tax, or if in its respect legi slation determined that
– for the purpose of tax payment – it be treated li ke the State, then it
shall be liable to tax at the rate of 90% on the am ounts specified below,
without any right to exemption, deduction or set of f whatsoever:
(1) amounts expended for purposes specified in regu lations under
section 31, which under those regulations are not d eductible, or
which exceed the deductible amounts;
(2) amounts it expended, which are not deductible under section
32(11);
(3) amounts it paid to a severance pay benefit fund in excess of the
amounts that would have been deductible, had it not been exempt
of tax.
(h) If a person received amounts as interest on de bentures, and in the case
of debentures that do not relate to a preferred loa n, if he received
interest – including linkage differentials – in res pect of a period when the
debenture was owned by another (hereafter: accrued interest), then the
following provisions shall apply:
(1) if for its recipient the accrued interest does not constitute income
under section 2(1), then the accrued interest shall be deemed

11
income in respect of which there is no right to any exemption –
other than the exemption granted on the interest it self – credit,
deduction or set off; this provision shall not appl y to that part of
accrued interest received by a certain benefit fund that accrued in
other benefit funds, as long as continuity is maint ained by sale
from one benefit fund to another; for this purpose: “benefit fund” –
a benefit fund exempt of tax under section 9(2);
(2) if the accrued interest constitutes income for its recipient under
section 2(1), and in respect of a linked debenture – if the following
two conditions hold:
(a) the interest accrued in respect of a period of more than one
year;
(b) the debenture was acquired within a year and a half before
its redemption or before the date of the interest p ayment;
and in respect of an unlinked debenture – if the fo llowing two
conditions hold:
(a) the interest accrued in respect of a period of more than three
months;
(b) the debenture was acquired within three years b efore its
redemption or before the date of the interest payme nt,
then, for purposes of calculating the profit or los s of the recipient of
the interest from the sale or redemption of the deb enture, no
account shall be taken of that part of the amount h e expended on
the debenture’s acquisition which equals the accrue d interest, less
the tax due thereon.
The provisions of this subsection on interest shall apply, mutatis
mutandis as the case may be, also to discounts as d efined in section
9(13b), which are not tax exempt under the said sec tion.
(h1) The Minister of Finance may, with approval by the Knesset Finance
Committee, determine that the provisions of subsect ion (h) shall not
apply to certain categories of investments or to ce rtain categories of
assessees, all on conditions and with adjustments t hat he shall
prescribe.
(i) (1) If a person realized a right received in th e past to acquire an asset
or service, and if at the time of the realization t here was a
difference between the price normally payable for t hat asset or
service and the price that person paid, or if a per son received a
loan, whether given directly or indirectly to him o r to another for his
benefit, and if that loan was free of interest or b ore a lower rate of
interest than the Minister of Finance set for this purpose with
approval by the Knesset Finance Committee – either in general or
for particular categories of loans or for loans for specific purposes
– then the difference shall be deemed –
(a) if the right or loan was given in connection wi th an employee
/ employer relationship – work income;
(b) if the right or loan was received from someone to whom its
recipient provides services – income within the mea ning of
section 2(1), unless he proves that it was not give n in
connection with the services he provides;
(c) if a right or loan to which subparagraphs (a) o r (b) do not
apply was received by a controlling member or by hi s
relative from a company under his control – income under
section 2(4);
for this purpose:

12
“relative” – as defined in section 76(d)(1);
“controlling member” – a person who holds or is entitled to
acquire, directly or indirectly, alone or together with his relative,
one of these:
(1) at least 5% of the issued share capital;
(2) at least 5% of the voting power in the company ;

(3) the right to receive at least 5% of the company ‘s profits or of
its assets upon winding up;
(4) the right to appoint a director.
For purposes of this subsection – “loan” includes any debt; “interest”
includes linkage differentials.
(2) The tax on the differential in realizing an afo resaid right shall, on
the assessee’s application, be calculated as if tha t differential were
income received in a number of equal annual install ments, as is
the number of years from the day when the right was conferred
until it was realized, but not more than six years that end with the
year of the realization.
(3) The Minister of Finance may prescribe the way of calculating the
differential said in paragraphs (1) and (2), and th e way of
calculating every datum necessary for that purpose.
(4) repealed
(j) (1) If a person extended a loan which is entere d in account books
kept in respect of income for which books must be k ept by the
double entry method, or if a body of persons gave a loan and that
loan carries no interest or interest at a rate lowe r than the rate set
for this purpose by the Minister of Finance with ap proval by the
Knesset Finance Committee, then the interest differ ential shall be
deemed interest under section 2(4) fir whoever gave the loan;
for purposes of this subsection –
“interest” includes linkage differentials;
“loan” includes any debt that is not one of the following :
(1) a debt of customers or of suppliers in respect of goods or
services;
(2) a tax debt;
(3) a loan to a certain person or to a certain cate gory of persons
or for a certain purpose, extended directly or indi rectly
against made by the State or by the Jewish Agency f or Israel
and in accordance with the depositor’s instructions .
(4) a loan to which subsection (i) applies;
(5) a fixed term deposit or the balance of a curren t account with
a banking corporation that is a bank or a foreign b ank
licensed under the Banking (Licensing) Law 5741-198 1;
(6) a deposit deposited with the State, a local aut hority, a
Government company or a Government subsidiary and a
loan extended to them;
(7) a loan extended by a financial institution in t he ordinary
course of business, except for a loan extended to a
company under its control or to a sister company; f or this
purpose – ” financial institution ” –
(a) within its meaning in the Value Added Tax Law;
(b) an institution for which interest income is inc ome
under section 2(1) and said income is its main inco me;

13
“sister company ” – a company that is controlled by some
third company, which also controls the financial in stitution
that extends the loan;
(8) a loan extended by a public institution, as def ined in section
9(2) of the Ordinance, for a public purpose;
(9) a loan that is an international transaction, wi thin its meaning
in section 85A;
(10) a loan that is not linked to any index and doe s not bear any
interest or any yield, extended by a body of person s under
its control against a capital note that was issued for a period
of at least five years, provided the loan cannot be repaid
before the end of the said period, is of lower rank then other
obligations and precedes only the distribution of s urplus
property at liquidation;
(11) capital notes and debentures issued by another body of
persons, on conditions prescribed in paragraph (5) of the
definition of “fixed assets” in Schedule Two of the
Inflationary Adjustments Law, which on December 31, 2007,
were a fixed asset for whoever extended the loan;
” control ” – at least 25% of the voting power or of the righ t to
profits, whether direct or indirect, on at least on e day during the tax
year.
(2) The Minister of Finance may prescribe the mann er in which the
interest differential is to be calculated, as well as the manner of
calculating every datum necessary for that purpose.

Income from an area
3A. (a) For purposes of this section –
“Israel citizen” – each of the following:
(1) an Israel citizen, within its meaning in the C itizenship Law 5712-
1952;
(2) an Israel resident;
(3) a person entitled to enter Israel under the Law of Return 5710-
1950, who is a resident of an area;
(4) a body of persons, in which an Israel citizen, within its meaning in
paragraphs (1) to (3), is a controlling member; for this matter –
“controlling member” – as defined in section 32(9);
“area” – each of these: Judea and Samaria and the Gaza Di strict,
including the areas included within the territorial jurisdiction of the
Palestinian Authority in accordance with the Agreem ent about the Gaza
District and the Jericho Area between Israel and th e Palestine Liberation
Organization, which was signed in Cairo on May 4, 1 994;
“resident of an area” – like the definition of “Israel resident” or
“resident” in section 1, except that, instead of “i n Israel”, everywhere
there read “in an area”; ” profits ” – within their meaning for purposes of tax in the tax law
applicable in the area.
(b) The income of an Israel citizen, which accrued or was generated in an
area, shall be treated like income that accrued or was generated in
Israel.
(b1) The income of an Israel citizen resident of an area, which accrued or
was generated outside Israel and outside an area, s hall be treated like
the income of an Israel resident that accrued or wa s generated outside
Israel.

14
(c) (1) If an Israel citizen belongs to a body of persons resident in an
area, then part of that body’s profits, proportiona l to that citizen’s
share in the rights to the body’s profits, is deeme d his income;
(2) for the purposes of paragraph (1), if the incom e of a body of
persons was produced in Israel or in an area, then the income of
the Israel citizen shall be treated as if it had be en produced in
Israel; if the income of the body was produced outs ide Israel and
outside an area, then the income of the Israel citi zen shall be
treated as if it were the income of an Israel resid ent that was
produced outside Israel;
(3) dividends received by an Israel citizen out of profits on which he
paid tax under this subsection are exempt of tax.
(d) Repealed
(e) If an Israel citizen paid tax to area authoriti es on income said in
subsection (b) or in subsection (b1), then he shall receive an Israel tax
credit in the amount of the tax he paid in the area ; in respect of income
said in subsection (c), an Israel citizen shall rec eive credit for part of the
tax paid by the body of persons on its profits, pro portional to his share in
the rights to the body’s profits; tax paid as said in this section shall not be
considered foreign taxes, as defined in section 199 .
(f) The provisions of this Ordinance shall apply – mutatis mutandis as the
case may be and subject to the provisions of this s ection – to an Israel
citizen who resides or works in an area, as if he w ere an Israel resident.

CHAPTER TWO: LOCATION

Location of income from sale abroad
4. If a person carries on an agricultural, manufact uring or any other productive
enterprise in Israel, then the following provisions shall apply to him:
(1) if that person wholesaled any product of his en terprise abroad or for
delivery abroad, whether the contract was concluded in Israel or abroad,
then all the profit derived from that sale shall be deemed that person’s
income accrued or derived in Israel, except that, i f it is proven to the
Assessing Officer’s satisfaction that the profit wa s increased by anything
done to that product abroad – other than handling, grading, fattening,
sorting, packaging or converting – then that enhanc ement of profit shall
not be deemed income accrued or derived in Israel;
(2) if a person otherwise converted, used or dealt abroad with any product
of his enterprise, then the profit he might have ob tained if he had
wholesaled the product abroad under optimal conditi ons shall be
deemed his income accrued or derived in Israel.

Place where income is produced
4A. (a) The place where income or profit accrued or was produced from any of
the sources specified below shall be –
(1) in respect of business income – the place where the income
yielding business activity takes place;
(2) in respect of income from business or from inci dental business of
a commercial character – the place where the transa ction or the
business takes place;
(3) in respect of income from an occupation – wher e the service is
performed;

15
(4) in respect of work income – where the work is performed;
(5) in respect of interest, discount and linkage di fferentials – the
payer’s place of residence;
(6) in respect of rent or fees for the use of an as set – where the asset
is used;
(7) in respect of gain or profit, including royalti es, that stem from an
intangible asset – the payer’s place of residence;
(8) in respect of a pension, usufruct or annuity – the payer’s place of
residence;
(9) in respect of income from agriculture – the pla ce of the asset that
yields the income;
(10) in respect of dividends – the seat of the body of persons that pays
the dividend.
(11) in respect of gains or profit from gambling, l otteries or prize
winning activity, as said in section 2A – the place of residence of
the person who pays the said gains or profits.
(b) (1) Notwithstanding the provisions of paragraph s (4) and (8) of
subsection (a), Israel will be deemed the place whe re income
under the said paragraphs was produced, if the empl oyer is one of
the bodies specified in paragraph (a)(4) of the def inition of “Israel
resident” or “resident” in section 1, on condition that the work
relationship with the said employer began when the employee was
an Israel resident.
(2) Notwithstanding the provisions of paragraphs (5 ), (7) and (8) of
subsection (a), the following will be deemed the pl ace where the
income was produced:
(a) in Israel, also when the payer is a foreign res ident – if the
payment constitutes an expense of the foreign resid ent’s
permanent enterprise in Israel;
(b) abroad, also when the payer is an Israel reside nt – if the
payment constitutes an expense of the Israel reside nt’s
permanent enterprise abroad.
(c) The Minister of Finance may prescribe, with app roval by the Knesset
Finance Committee –
(1) in respect of income produced in more than one place and for
which there is no other provision – rules to relate production of the
income to different places;
(2) the place where income was produced in certain instances, for
which no other provision has been prescribed.

Special provisions on the location of income
5. Notwithstanding the provisions of any statute on the location of income, the
following shall be deemed income produced in Israel :
(1) repealed
(2) repealed
(3) repealed
(4) (a) repealed (b) the Minister of Finance may, with approval by t he Knesset Finance
Committee and on conditions to be prescribed by him , exempt of
the tax, in whole or in part, rent paid for charter ing an aircraft or
vessel that operates on international routes, as we ll as interest and
linkage differentials on loans for the acquisition thereof; this
exemption may be general or for particular categori es of charters
or loans;

16
(5) (a) income produced by a foreign occupational company, which stems
from activity in a special occupation – in the amou nt of the income
of the Israel resident shareholders;
(b) in respect of income under this paragraph and d ividends
distributed out of it to shareholders said in subpa ragraph (a), the
foreign occupational company shall be treated as if its business
were controlled and managed in Israel;
(c) the income, chargeable income and profits of a foreign
occupational company said in subparagraph (a) shall be
calculated according to the applicable tax laws; fo r this purpose:
” applicable tax laws ” – one of the following, as the case
may be:
(1) in respect of a foreign occupational company re sident in a
reciprocating state within its meaning in section 1 96 (in this
section: reciprocating state), which files a return of its
income or is assessed in the said state – the tax l aws in that
state;
(2) in respect of a foreign occupational company to which the
provisions of subparagraph (1) do not apply – bookk eeping
principles accepted in Israel, other than bookkeepi ng
principles on equity gains or equity losses, and on changes
in the value of securities;
(d) notwithstanding the provisions of Part Ten, Cha pter Three, Article
Two on credit for foreign taxes, the taxes paid by a foreign
occupational company to tax authorities of a countr y abroad on its
income said in subparagraph (a) in respect of incom e which under
section 4A was produced abroad shall be treated lik e foreign
taxes, as defined in section 199, and the said inco me shall be
treated like foreign income, as defined in the same section;
(e) for the purposes of this paragraph –
“foreign occupational company ” – a foreign resident body of
persons, for which all the following hold true:
(1) if it is a company, then it is a small company, within its
meaning in section 76(a);
(2) 75% or more of one or more of the means of cont rol in it are
directly or indirectly held by individual Israel re sidents or by
Israel citizen residents of an area, as defined in section 3A;
for this purpose, the proportion of indirectly held means of
control shall be calculated in accordance with the provisions
of section 75B(a)(1)(d)(2); and for this purpose th e direct or
indirect rights of individuals who became Israel re sidents for
the first time or of veteran returning residents, a s said in
section 14(a), shall not be taken into account befo re ten
years have passed since they became Israel resident s as
aforesaid;
(3) the controlling members or their relatives, who jointly or
severally, directly or indirectly hold 50% or more of one or
more of the means of control, work for the company in a
special occupation, either directly or through a co mpany in
which they directly or indirectly hold means of con trol to the
extent of at least 50%;
(4) most of the income or of the profits of the com pany during
the tax year, other than equity profits and losses and
changes in the value of securities, stem from the s pecial

17
occupation;
” special occupation ” – an occupation or profession designated
by the Minister of Finance with approval by the Kne sset Finance
Committee; ” income of the Israel resident shareholders ” – the chargeable
income of a foreign occupational company derived fr om
activity in a special occupation, multiplied by the proportion
of the direct or indirect entitlement of shareholde rs who are
Israel residents or Israel citizen residents of an area, as
defined in section 3A, to the company’s profits; an d for this
purpose the share in the direct or indirect rights of
individuals who became Israel residents for the fir st time or
of veteran returning residents, as said in section 14(a), shall
not be taken into account before ten years have pas sed
since they became Israel residents as aforesaid;
” means of control “, “controlling member ” and “relative ” – as
defined in section 75B.
CHAPTER THREE: ASSESSMENT PERIOD

Tax Year
6. Tax for each tax year shall be charged on a per son’s chargeable income in
that year.

Special assessment period
7. (a) Notwithstanding the provision of section 6, the Director may – on
application by the assessees specified below – pres cribe that the tax for
each tax year be imposed on their income during a p eriod of twelve
consecutive months that begins on a date other than January 1
(hereafter: special assessment period):
(1) a joint investment trust, within its meaning in the Joint Investment
Trusts Law 5721-1961;
(2) a Government company, within its meaning in th e Government
Companies Law 5735-1975;
(3) a company, the shares of which are listed for trading on a Stock
Exchange recognized for purposes of the Joint Inves tment Trusts
Law 5721-1961;
(4) a company, at least 51% of whose share capital and voting power
are held by a foreign resident company, the shares of which are
traded on a Stock Exchange abroad, or by a company in which the
rights to at least 51% of the profits are held by a n aforesaid foreign
resident company.
(b) In addition to the provisions of subsection (a ), the Director may set a
special assessment period also for an assessee who has a special
relationship, direct or indirect, with a company fo r which a special
assessment period was set under subsection (a)(2) t o (4), but he shall
do so only if the assessee agreed.
(c) W hen the Director has set a special assessment period for an assessee
under subsections (a) or (b), then tax shall be imp osed for each said
period subject to all the adjustments that the Dire ctor deems just and
reasonable.
(d) The Director may make the setting of a special assessment period under

18
this section conditional, and he may refrain from setting a special
assessment period for a company said in subsection (a)(2) to (4), if no
special assessment period was set under subsection (b) for the
assessee with whom it has, directly or indirectly, a special relationship.
(e) W hen the Director has set a special assessment period, he may cancel
his decision, whether or not on the assessee’s appl ication, if he finds
reasonable cause for doing so, and – for purposes o f that cancellation –
he may prescribe any adjustment he deems just and r easonable; such a
cancellation, made not on the assessee’s applicatio n, shall go into effect
at the end of the special assessment period during which it was made.

Apportionment of income over more than one year
8. (a) The Director may permit keymoney or a premiu m under section 2(6),
which is a participation in the cost of constructio n, or a similar payment
to be apportioned as income over the entire period of the rental contract
or over any other period which the Director may des ignate.
(b) The Director may permit income from the sale o f a patent or design by
the inventor, or from the sale of a copyright by th e author, to be
apportioned as income over a period to be prescribe d by the Director;
this provision shall not apply to income under sect ion 2(9).
(c) On application by an assessee or his heirs, th e following types of income
shall be deemed, for purposes of tax computation, t o have been
received as said here:
(1) wage differentials – in the years to which they refer, but not during
more than six tax years up to the year in which the y were received;
(2) pay in lieu of vacation received by an employee – in equal annual
installments over a period of not more than six tax years that ends
in the year in which they were received, but not mo re than the
number of years of his employment;
(3) income from personal exertion, as said in parag raphs (5) or (6) of
the definition of that term in section 1 – in equal annual
installments in the work years for which the grant is paid or in the
period in which the right to the pension was create d, as the case
may be, but over no more than six tax years up to t he tax year in
which the grant was received or the pension capital ized; however,
the Director may, if requested, permit such apporti onment over a
different period, including years to come, under co nditions which
he may determine, including the payment of an advan ce.
(d) If the Director permitted income to be apportio ned under this section or
under section 9A(d) and the assessee dies, or the a ssessed company
begins to be wound up before the end of the period set by the Director,
then any income which under the apportionment belon gs to years
subsequent to that tax year shall be added to the a ssessee’s income in
the tax year in which he died, or to the income of the company in the tax
year in which it began to be wound up; however, on application by the
assessee’s heirs, the administrator of his estate o r the executor of his
will, the whole income shall be reapportioned over a period of years
ending with the tax year in which the assessee died , or, on application by
the assessee’s heirs, all the income which under th e apportionment
relates to years subsequent to that tax year, shall be deemed the heirs’
income in those years, in proportion to their respe ctive shares in the
assessee’s estate, and that after they have provide d collateral to the
Director’s satisfaction for payment of the tax whic h will be due from them
under this calculation; but if the assessee paid th e advance under

19
subsection (c)(3) or section 9A(d), or if tax was withheld at the source
under section 164 – then the said advance paid or t he said tax withheld
at the source in respect of years after the death s hall be deemed the
amount of tax due.

Division of income from work, the performance of wh ich takes longer
than one year
8A. (a) In this section –
“extended work ” – work, the performance of which takes longer tha n
one year, including construction work on a building by a person who
performs the work at the order of another, and excl usive of the
construction of a building by its owner; ” income from extended work ” – income from extended work which is
income under section 2(1), either from performance or from sale.
(b) If an assessee engages in extended work, he sha ll report his income
from it in the following manner:
(1) in the tax year in which he completed at least 25% of the monetary
volume of the work, as calculated for that year, or of the
quantitative volume of the work, whichever he choos es, he shall
report on the estimated income earned by him from t he part of the
work he has performed, and in every tax year therea fter he shall
report on the estimated income earned by him in acc ordance with
the part of the work he performed in that year, cal culated on the
basis which he chose when he first calculated the v olume of work
completed; in the tax year in which he completed th e work he shall
report on the business results in their entirety, d educting income
which he reported in previous years;
(2) a loss from extended work shall be taken into a ccount for
purposes of determining chargeable income during th e tax years
before the tax year in which the work was completed , only after the
assessee completed at least 50% of the monetary vol ume of the
work, as calculated for the year in which he claime d the set-off of
the loss, or at least 50% of the quantitative volum e of the work;
(3) if subparagraphs (1) or (2) apply to an assesse e, then he shall
append to his return under section 131 a return, ce rtified by an
auditor, as defined in the Auditors’ Law 5715-1955, specifying the
manner of determining the income or the loss, as th e case may be,
and the manner in which the volume of accomplished work was
calculated.
(c) (1) In this subsection –
“building ” – a building built by its owner, the construction of which
takes longer than one year; ” building fit for use ” – a building or part thereof, which has been
connected to the electricity grid, or a building in respect of which
the conditions for the receipt of a building comple tion certificate
under the Planning and Building Law 5725-1965 (here after:
Planning Law) have been met; ” income from a building ” – income from the sale of the building,
which is income under section 2(1).
(2) The following provisions shall apply to an ass essee who has
income from a building:
(a) In the first tax year in which the building wa s fit for use the
assessee shall report all the income he had from th e
building until that tax year and in that tax year, and in every

20
tax year thereafter he shall report all the income he had from
the building in that tax year;
(b) for the purpose of determining the assessee’s chargeable
income from the sale of part of a building that is fit for use,
the proportional part of the total cost of the buil ding shall be
taken into account, as is the proportion of the are a sold in
that tax year to the area of the entire building, a s specified in
the building license issued under the Planning Law, but for
this purpose sold parking spaces shall not be inclu ded in the
sold area;
(c) the loss from a building shall not be taken in to account for
the determination of chargeable income in the tax y ears that
preceded the tax year in which the building became fit for
use.

Income under Section 2(6) or (7)
8B. Income under section 2(6) or (7) shall be inclu ded in the assessee’s
chargeable income in the year in which he actually received it, even if it
constitutes deferred income, and expenses incurred in subsequent tax years in
the production of the income under the said provisi ons shall be deductible from
any source in the year in which they were incurred, but if they cannot be
deducted in the year in which they were incurred, p rovided that – if the
expenses cannot be deducted in the tax year in whic h they were incurred –
they may be deducted in the year in which the incom e was received, and the
assessment for the said year shall be deemed to hav e been amended
accordingly; however, in consideration thereof ther e shall be no obligation to
pay interest and linkage differentials under sectio n 159A.

Date on which income from exchange rate differentia ls is charged
8C. A person’s income from exchange rate different ials shall be deemed income in
the year in which it accrued, even when returns are filed on a cash basis.

PART THREE: CALCULATION OF INCOME
FOR TAX PURPOSES

CHAPTER ONE: EXEMPTIONS

Article One: Statutory Exemptions

Exempt income
9. The following are exempt of tax:
The President
(1) Payments, services and benefits paid or given by the State Treasury to
the President or to a former President or to his su rvivors, in respect of
his performance of the functions of President, exce pt for salary and
pension;

Local authority, benefit fund and public institutio n
(2) (a) the income of a local authority, of Mif’al Hapayis and of a public

21
institution, to the extent that it was not derived from a business
carried on by it or from dividend, interest or link age differentials
paid by a body of persons under its control that en gages in
business, as well as the income of a benefit fund, if it was not
obtained from any business in which the benefit fun d engages or
from any income paid by a body of persons that enga ges in a
business and which is under the control of the bene fit fund or in
which the benefit fund has a substantive holding; h owever, the
Minister of Finance may, by Order for a period and on conditions
which he shall set, exempt of tax the income obtain ed from the
said sources by a local authority, by Mif’al Hapayi s or by a public
institution that is a free loan fund, if he is sati sfied that doing so is
in the public interest;
(b) in this paragraph –
“benefit fund ” – other than an insurance fund;
” income “, in respect of a retirement age benefit fund – in cluding
appreciation from the sale of a real estate right o r of a real estate
association right; ” tax “, in respect of a retirement age benefit fund – in cluding tax
under sections 6 or 7 of the Real Estate Taxation L aw;
” retirement age benefit fund ” – a pension benefit fund, a savings
benefit fund of a severance pay benefit fund; ” public institution ” – a body of at least seven persons most of
whom are not related to each other, or an endowment , most of the
trustees of which are not related to each other, wh ich exists and
functions for a public purpose, its property and in come being only
used for the public purpose, and which submits annu al reports on
its assets, income and expenses to the Assessing Of ficer’s
satisfaction according to regulations made for this purpose by the
Minister of Finance; for this purpose – ” relative ” – within its meaning in section 76(d);
” public purpose ” – a purpose concerned with religion, culture,
education, science, health, social welfare or sport and any other
purpose approved by the Minister of Finance as a pu blic purpose;
” means of control ” in a body of persons – any of the following:
(1) the right to appoint a Director;
(2) the right to vote;
(3) the right to profits;
(4) the right to the balance of the body’s assets u pon liquidation,
after its debts have been paid;
” control ” – the ability to direct the activity of a body of persons,
alone or together with others, directly or indirect ly; without
derogating from the generality of the aforesaid, th e ability to
prevent the adoption of business decisions by a bod y of persons
shall be deemed control thereof, except for the abi lity to prevent
adoption of substantive business decisions by the b ody of
persons; for this purpose: ” substantive business decisions ” –
decisions about the issue of means of control in th e body of
persons, or the sale, liquidation or substantive ch ange of most of
the business of that body of persons; without derog ating from the
generality of the aforesaid, it will be deemed that such ability exists
in a local authority, in Mifal Hapayis, in a benefi t fund or in a public
institution when one of the following holds true:
(1) the local authority, Mifal Hapayis or the publi c institution has

22
the power to appoint – directly or indirectly – a Director of
that body or has a right – direct or indirect – to at least 25%
of the voting power in it or to the balance of its assets upon
its liquidation after its debts have been paid, or to most of its
profits;
(2) repealed
(3) several bodies from among the following – a loc al authority,
Mifal Hapayis, a public institution or a benefit fu nd – hold or
have the right to hold, jointly or severally, direc tly or
indirectly, more than 50% of the means of control i n a body
of persons;
” substantive holding ” –
(1) in a single benefit fund – holding or having th e right to hold,
directly or indirectly, more than 10% of one or mor e of the
means of control in a body of persons;
(2) in several benefit funds, which are directly or indirectly
managed or held by one person – holding or having t he right
to hold, directly or indirectly, jointly or several ly, more than
20% of one or more of the means of control in the b ody of
persons; and if they are managed or held as aforesa id by a
bank – more than 10%; for this purpose several bene fit
funds shall be deemed to be managed by one person a lso if
their investments are directly or indirectly manage d by him,
and several benefit funds shall be deemed to be hel d by one
person, if he is able to direct the activity of the benefit funds;
without derogating from the provisions of this para graph, a
said ability is deemed to exist also if that person directly or
indirectly has at least 50% of one or more of the m eans of
control of each of the benefit funds;
” bank ” – within its meaning in the Banking (Licensing) L aw 5741-
1981, and several banks shall be deemed to be one b ank if one
has the ability to direct the activity of the other directly or indirectly,
or if one person has the ability to direct their ac tivity as aforesaid,
all if they do not have separate systems for the ma nagement of
benefit funds, as prescribed under section 26 of th e Control of
Benefit Funds Law
(c) (1) The Minister of Finance may, with approval by the Knesset
Finance Committee, prescribe provisions on the calc ulation
of the amount of indirect control and of indirect s ubstantive
holdings of benefit funds in a body of persons.
(2) The Minister of Finance may prescribe that hold ing one or
more means of control in a body of persons by sever al
aforesaid bodies, in amounts that bring them to con trol that
body of persons or to have a substantive holding in it shall
not constitute control or substantive holding, as t he case
may be, if it was for a period which in the aggrega te did not
exceed three months during the tax year or a shorte r period
prescribed by the Minister, at the end of which the amount of
the holding dropped to an amount that does not cons titute
control or a substantive holding, as the case may b e, all in
accordance with the rules made by him.

Professional Organization
(2a) (a) The income of a professional organization, including income from

23
membership dues, on condition that it was not obtained from any
business in which it engages or from any income of a body of
persons under its control, which engages in busines s, including
dividend, interest or linkage differentials;
(b) (1) notwithstanding the provisions of subsectio n (a), the balance
of income of a professional organization that excee ds 50%
of its expenses shall not be exempt of tax;
(2) an amount of expenditure in excess of the amoun t of income
in a certain tax year shall be treated like an amou nt of
expenditure incurred in the following tax year, it having been
adjusted at the rate of index increase during the s aid
following tax year;
(3) for this purpose:
“balance of income ” – income exempt under subparagraph
(a), after the expenses incurred in generating that income
were deducted from it; ” expenses ” – deductible expenses other than depreciation,
and expenses for acquisition of a depreciable asset used for
the organization’s purposes or to create a said ass et;
” depreciable asset ” – as defined in section 88, including a
real estate right, within its meaning in the Land A ppreciation
Tax Law;
(c) in this paragraph, ” professional organization ” – a body of
persons approved by the Director, for which all the following hold
true:
(1) it has at least 70 members, or its members incl ude the State
and at least ten members; if the number of members in the
body of persons includes a professional organizatio n, then
the number of that professional organization’s memb ers
shall be taken into account;
(2) its entire purpose is the advancement of joint professional
interests, professional training or the public repr esentation of
members of a certain occupation or of persons engag ed in a
certain branch or sector of the economy, all its as sets and
income serving the advancement of those purposes;
(3) its activity is not aimed at the enhancement of the income of
certain of its members;
(4) it submits an annual report on its assets, inco me and
expenditure to the Assessing Officer’s satisfaction ,
according to regulations made by the Minister of Fi nance;

Cooperative society
(3) the income of a cooperative society, which does business only with its
members, or whose business with non-members is inco nsiderable in
extent or of an incidental nature, if it was proven to the Assessing
Officer’s satisfaction that the society’s business is the supply of goods,
equipment and services for domestic or private use only, and not for the
purposes of the business or vocation of that member or person;

Diplomats and consuls
(4) sums payable to diplomatic representatives and consular officers in the
regular service of a foreign state for their office s or for services rendered
by them in their official capacities, to the extent that that foreign state
reciprocates with such exemptions for the State of Israel;

24
Blindness and 100% disability
(5) (a) the income from the personal exertion of a blind person or of an
invalid, whose invalidity has been established at 1 00%, or at no
less than 90% due to invalidity in different parts of the body, the
said percentage being the result of a special compu tation of
disability in different parts of the body, without which invalidity
would have been established at no less than 100%; a s specified
below:
(1) if the said invalidity was determined for a per iod of 365 days
or longer – income up to the amount of NS 522,000 (in
2008; in 2007: NS 507,600; in 2006: NS 510,000; in 2005:
NS 496,800 – Tr.);
(2) if the said invalidity was determined for a per iod of between
185 and 364 days – income up to the amount of NS 62 ,640
(in 2008;(in 2007: NS 60,960; in 2006: NS 61,080; i n 2005:
NS 59,520 – Tr.);
for this purpose: (a) if the invalid’s degree of invalidity was deter mined
under one of the following Laws, then the said
determination shall apply:
(1) the Invalids (Benefits and Rehabilitation) Law [Consolidated Version] 5719-1959;
(2) the Invalids of the W ar Against the Nazis Law 5714-1954;
(3) the Invalids from Nazi Persecutions Law 5717- 1957;
(4) the Benefits for Victims of Hostile Actions Law
5730-1970;
(5) repealed
(6) Part Three, Chapter Six “B” and Chapter Nine “B” of the National Insurance Law [Consolidated
Version] 5728-1968;
(7) the Compensation for Ringworm Sufferers Law 5754-1994;
the Minister of Finance may, with approval by the
Knesset Finance Committee, add to the said Laws;
(b) if the invalid’s percentage of invalidity was n ot
determined as aforesaid, then it shall be determine d
under regulations, which the Minister of Finance sh all
make with approval by the Knesset Finance
Committee;
(b) if the income from personal exertion of an afo resaid invalid or blind
person was lower than NS 62,640 (in 2008; in 2007: NS 60,960; in
2006: NS 61,080; in 2005: NS 59,520 – Tr.) (or if he had no said
income, then his income other than from personal ex ertion shall
also be exempt of tax, up to a total sum of NS 62,6 40; however, if
he had income from interest paid on money deposited in a deposit,
a savings program or a benefit fund, which stemmed from
compensation or insurance payments received by the individual
because of bodily injury – up to a total amount of NS 223,200 (in
2008; in 2007: 217,080; in 2006: 217,680; in 2005: NS 118,680 –
Tr.) or a greater amount prescribed by the Minister of F inance with
approval by the Knesset Finance Committee.

25
(c) (1) in respect of a blind person or an invalid, for whom invalidity
was determined as said in subparagraph (a)(1) in re spect of
part of the tax year, the provisions of this subpar agraph shall
apply to part of his income in the tax year, the pr oportion of
which to all his income in the tax year is as is th e proportion
of the number of days in the tax year, for which hi s invalidity
was determined, to 365 (in this subparagraph: the i nvalidity
period ratio), and the amounts stated in subparagra phs
(a)(1) and (b) shall be read as amounts, the ratio of which to
the stated amounts is as is the invalidity period r atio;
(2) in respect of a blind person or an invalid, for whom invalidity
was determined as said in subparagraph (a)(2), the
provisions of this subparagraph shall apply to part of his
income during the tax year, the proportion of which to all his
income in the tax year is as is the invalidity peri od ratio, but if
the invalidity period determined for him is in two tax years,
the total amount of exemption in the two tax years shall not
exceed the amount stated in subparagraph (a)(2).

Pensions for war invalids
(6) pensions payable in respect of war injuries, b order injuries or enemy
inflicted injuries, and pensions paid by the State Treasury to dependents
of soldiers who died in consequence of belligerent acts; for this purpose:
” war injuries ” – illness, aggravation of illness or injury which occurred to
an individual during the period of his service in c onsequence of military
service, within its meaning in the Invalids (Pensio ns and Rehabilitation)
Law [Consolidated Version] 5719-1959, or in consequ ence of war
service within its meaning in the Invalids (W ar Aga inst the Nazis) Law
5714-1954, or under circumstances that entitle him to a benefit under the
Invalids (Nazi Persecution) Law 5717-1957; ” enemy inflicted injury ” – within its meaning in the Victims of Hostile
Action (Pensions) Law 5730-1970;

Vehicle maintenance for leg invalids
(6a) amounts that a person with leg invalidity lawf ully receives for the
maintenance of his vehicle;

Pensions for Palestine Government employees
(6b) pensions paid by the State, in respect of empl oyment by the Palestine
Government;

National Insurance invalidity and old age pensions
(6c) invalidity pensions paid under Article Five of Chapter Three, Chapter Six
“B” and Chapter Nine “B” of the National Insurance Law, old age and
survivors’ pensions paid under Chapter Two, and dep endents’ pensions
paid under Chapter Three of the said Law;

Benefits for prisoners of Zion
(6d) social benefits or compensation paid to Prison ers of Zion or to relatives
of prisoners of Zion and Jewish martyrs, by virtue of Law;

Invalidity pensions from foreign states
(6e) invalidity pensions paid by a foreign state by virtue of its Laws;

26
Survivors’ pensions
(6f) survivors’ pensions paid under Law or collecti ve agreement, to which
paragraphs (6) and (6c) do not apply, in an amount that does not exceed
the entitling pension within its meaning in section 9A, but if exemption is
also due under sections 9A or 9B, then the larger o f the two exemptions
shall apply;

Righteous gentiles
(6g) benefits paid under the Benefits for Righteous Gentiles Law 5755-1995;

Orphan’s compensation
(6h) benefits for an orphan, payable under the Bene fits (Child Orphaned in
Consequence of Violence in the Family) Law 5755-199 5;

Consolidated compensation
(7) any capital sum received as inclusive compensa tion for death or injury;

Grant in consequence of retirement or death
(7a) (a) (1) a capital grant received in consequen ce of retirement, up to
an amount equal to one month’s salary for each year of
employment, according to the last salary; if the am ount of
the grant exceeds the aforesaid amount, then the Di rector
may exempt all or part of the excess, taking into
consideration the period of service, the amount of salary, the
terms of employment and the circumstances of the
retirement;
(2) in no case shall the amount exempt under this subparagraph
exceed NS 10,500 (in 2008; in 2007: NS 10,220; in 2006:
NS10,250; in 2005: NS 9,980 – Tr.) for each year of
employment and a proportional part of that amount f or a
fraction of a year’s employment;
(3) for purposes of this subparagraph, ” retirement” includes the
change in the status of an employee of a cooperativ e society
from hired employee to member;
(4) (a) if, when he retires from employment by his employer,
an employee has to his credit in a compensation fun d
an amount intended for a retirement grant, or if he
received a retirement grant, and if he notified the
Director at the time of his retirement that he opts for
the application of the provisions of this item, the n the
sums he left in the compensation benefit fund or
deposited in that fund immediately upon his retirem ent
shall not be deemed to have been received by him if ,
within one year of his retirement, he begins work w ith
another employer, who makes retirement
compensation payments on his behalf to that same
fund;
(b) if the conditions of subitem (a) have been met and the
employee subsequently retires from employment by
the other employer (hereafter: the last employer)
without having met the conditions of subitem (a), t hen
the provisions of items (1) through (3) shall apply to
him, subject to the following provisions:
(1) the periods of employment with the different

27
employers that involved consecutive
retirements, as said in subitem (a), shall be
combined, and he shall be deemed to have
worked for the last employer for all the said
years of employment;
(2) the amounts to his credit with the compensation
benefit fund at the time of his retirement from
the last employer, derived from retirement
grants said in subitem (a), including linkage,
interest differentials and other profits on them
(hereafter in this item: profits on the grant), sha ll
be deemed part of the retirement grant from the
last employer;
(b1) if the provisions of subitem (a) were met and the
employee died, then the provisions of subparagraph
(b) shall apply, subject to the provisions (1) and (2) of
subitem (b) and mutatis mutandis as the case may be ;
(c) if an employee received, at the time of retirem ent said
in subitem (a), part of the retirement grant accrue d to
his credit, then he shall be liable to tax on the a mount
received;
(d) if an employee opted for the application of the
provisions of this item, then he may retract that
decision within two years, and if he does so, the p rofits
on the grant shall be deemed part of the grant; as for
the exemption – his last salary shall be the salary paid
to him when he retired, increased in proportion to the
increase of the consumer price index in the period
between his retirement and the retraction of his
decision, and the ceiling of the exemption shall be as it
was when he retracted the decision, but the period of
employment after retirement from his last employer
shall not be taken into consideration; subject to t hat,
any amount which he withdrew from a compensation
benefit fund before his retirement from employment
with his last employer, and which derived from the
retirement grant said in subitem (a), and the profi ts
thereon, shall be liable to tax;
(5) notwithstanding the provisions of section 164, if a person
pays a retirement grant which is exempt under item (4), then
he shall be exempt of the obligation to withhold ta x at the
source, on condition that he received approval ther efor from
the Director or from a person authorized by him;
(b) (1) a capital grant received in consequence of death, up to an
amount equal to the salary of two months’ employmen t for
each year of employment, according to the last sala ry; if the
amount of the grant exceeds the said amount, then t he
Director may exempt all or part of the excess, taki ng into
consideration the period of service, the amount of salary, the
terms of employment and the circumstances of the de ath;
(2) the amount exempt under this paragraph shall in no case
exceed NS 21,010 (in 2008; in 2007: 20,440; in 2006: NS
20,500; in 2005: NS 19,970 – Tr.) for each year of
employment and a proportional part of this amount f or a

28
fraction of a year’s employment;
(c) if the Director concludes that the salary was i ncreased
unreasonably shortly before the date of retirement in order to
increase the amount of exempt grant, then he may se t the amount
of exempt grant without taking the increase into ac count;
(d) if the last salary was for part time employment , then, in respect of
the years in which the employee was employed full t ime, the last
salary which would have been paid for full time emp loyment shall
be taken into account;
(e) a decision by the Director under subparagraphs (a) to (c) may be
appealed in accordance with sections 153 to 158;
(f) if an employer paid a grant in consequence of r etirement or death,
he shall add prescribed particulars about the grant to the return,
which he submits under section 166 for the month in which the
grant was paid;
(g) subject to the provisions of subparagraph (a)(4 )(a), a capital grant
in consequence of retirement, as well as a capital grant in
consequence of death, shall be deemed to have been received,
even if it remains deposited in a benefit fund; thi s provision shall
not apply to sums in a pension benefit fund to the credit of a retired
employee if, when he retired, he notified the Direc tor that he
wishes to leave them there for purposes of the paym ent of a
pension; if he so notified, he may subsequently rev oke the
notification by notice to the Director; if he so re voked, the whole
amount, including interest, linkage differentials a nd other profits on
it shall, subject to paragraph (17), be deemed a re tirement grant
and the following provisions shall apply to it:
(1) if he did not receive a grant when he retired, he shall be
entitled to exemption under subparagraph (a), and t he
ceiling of the exemption shall be as it was when he revoked
his decision;
(2) if he received a grant when he retired, the cei ling of the
exemption shall be reduced at a rate equal to the a mount of
grant for each year of employment, divided by the e xemption
ceiling, as it was when he retired;

Foreign ship owner
(8) the profits of a ship owner who is not an Israe l resident, subject to the
provisions of section 70;
Concessionaire
(9) income derived by a person from a concession gr anted him by the State,
to the extent that it was tax exempt under the term s of the concession;
however, nothing in this section shall be construed to exempt of tax any
dividends, interest, linkage differentials, bonuses , salaries or wages
received by any person, wholly or in part, out of i ncome exempted as
aforesaid;

Interest to a foreign state
(10) interest payable to a foreign state, or to a p erson recognized by the
Minister of Finance, with approval by the Knesset F inance Committee,
as acting in the name or on behalf of that state;
(11) and (12) – repealed

29
Linkage differentials on bank deposits or savings p rograms
(13) linkage differentials received by an individua l in respect of an asset, on
condition that all the following apply:
(1) the linkage differentials are not partial linka ge differentials; for this
purpose: ” partial linkage differentials ” – as prescribed by the
Minister of Finance with approval by the Knesset Fi nance
Committee;
(2) the individual did not claim the deduction of interest or linkage
differentials in respect of the asset;
(3) the linkage differentials are not income under section 2(1) and are
not and do not have to be entered in his account bo oks;
the provisions of this paragraph shall not apply to an asset that is an
account in a benefit fund;
Linkage in respect of expropriation
(13a) linkage differentials paid in respect of the expropriation of an asset that
is not stock in trade, as defined in section 85;
(13b), (14) and (14a) – repealed

Exchange rate differentials in a company controlled by foreign
residents
(14b) exchange rate differentials on a company’s fo reign currency deposit,
derived from payments by foreign residents on accou nt of the acquisition
of shares in that company, in so far as the money i n that deposit has not
yet been used, on condition that most of the share capital of the
company, a majority of the voting rights and most o f the rights to profits
are in the hands of foreign residents;

Exchange rate differentials on loans
(15) exchange rate differentials on a loan made by a foreign resident, except
for a loan he gave from his permanent enterprise in Israel;

Insurance against change in exchange rate
(15a) amounts received by a foreign resident under a policy to insure a loan
against changes in the shekel exchange rate in rela tion to the principal
of a loan he made in a lawfully held foreign curren cy or in shekalim
derived from the lawful conversion of foreign curre ncy, and which under
its conditions is repayable in shekalim without lin kage differentials, but
the exempt amount shall not exceed the amount of th e differential
resulting from the exchange rate change;

Exemption for a foreign resident who gets no doubl e taxation relief
(15b) (a) in this paragraph –
“security ” – a share or debenture issued by a company for a
period of at least twelve years and traded on an Ex change, within
its meaning in section 88; ” foreign currency ” – including Israel currency obtained by the
lawful conversion of foreign currency and Israel cu rrency obtained
by the redemption of State of Israel bonds that wer e floated
abroad;
(b) (1) income from dividend or interest received b y a foreign
resident on a security which he acquired with forei gn

30
currency and on which he gets no double taxation relief in
his country of residence, or on which, under an agr eement
for the prevention of double taxation on income, he is
deemed to have paid – in his country of residence – the tax
which he would pay, if not for the provisions of th is
paragraph;
(2) the exemption shall be granted from the day on which the
security is first included in the list of securitie s traded on an
Exchange;
(c) a foreign resident who with foreign currency a cquired participation
units in a non-restricted fund under the Joint Inve stment Trusts
Law 5721-1961, shall be entitled to the exemption u nder
subparagraph (b) in respect of that part of his inc ome from his
fund units, as bears to the total of that income th e same proportion
as the securities acquired by the fund, which would entitle a
foreign resident to exemption as aforesaid if he ac quired them,
bear to the aggregate of securities within the mean ing of the said
Law on the day on which the accounts of the fund ar e drawn up
under section 20 of the said Law;
(d) notwithstanding the provisions of this paragra ph, the Minister of
Finance may prescribe, with approval by the Knesset Finance
Committee by notice published in Reshumot, either g enerally or in
respect of a particular category of companies, that aforesaid
exemption from tax on income shall not be granted, if the
proportion between the company’s paid up share capi tal and the
aggregate of loans received by it is not to his sat isfaction;

Interest on debenture acquired by foreign resident
(15c) interest on a debenture issued by virtue of a Law that exempts its owner
from interest, if he is a foreign resident and if i t is paid to a person who
was a foreign resident when he acquired the debentu re;

Interest, discount and linkage differentials on de bentures traded on the
Exchange by foreign residents (15d) Interest, discount and linkage differentials paid to a foreign resident on
debentures traded on the Exchange in Israel, which were issued by an
Israel resident body corporate (in this paragraph: issuer body corporate),
provided the income is not in the foreign resident’ s permanent enterprise
in Israel; in this paragraph, “foreign resident” – a person who is a foreign
resident on the day the interest, discount and link age differentials, as the
case may be, is received, unless he is one of the f ollowing:
(1) a substantive shareholder, as defined in sectio n 88, in the issuer
body corporate;
(2) a relative, as defined in paragraph (3) of the definition of “relative”
in section 88, of the issuer body of persons;
(3) a person who is employed in the issuer body of persons, provides
services to it, sells products to it, or has other special relations with
it, unless he proved to the Assessing Officer’s sat isfaction that the
interest or the discount, as the case may be, was s et in good faith
without being affected by the existence of the said relations
between the foreign resident and the issuer body of persons;
(16) repealed

31
Withdrawal of employer’s payments from training fund
(16a) (a) amounts withdrawn by an employee from his account in a training
fund, including linkage differentials as well as in terest and other
profits that stem from a benefited deposit – if six years have
passed since the first payment to that account, and for an
employee who has reached the retirement age – if th ree years
have passed since the first payment to that account ; and in
respect of amounts used by the employee for his tra ining – if three
years have passed since the time of the first payme nt to that
account; if the employee died, then the persons ent itled to receive
the said amounts may withdraw them from the trainin g fund
exempt of tax;
(b) the exemption under this paragraph is conditio nal on the account
being closed to additional payments, once the emplo yee withdraws
any amount from his account; when an account has be en closed
in this manner, the provisions of subparagraph (a) shall apply to
the withdrawal of the balance in the account; howev er, if an
amount no larger than one third of the amount at th e account
holder’s disposal at the time of the withdrawal was withdrawn for
training in Israel, and no other withdrawal was mad e within the 12
months preceding the said withdrawal, then it shall not be deemed
a withdrawal for the present purpose;
(c) for purposes of this paragraph,
” date of the first payment ” – the earlier of these:
(1) the end of the month in which the first paymen t was paid;
(2) the end of the month in respect of which the fi rst payment
was paid, but no earlier than the beginning of the tax year in
which it was paid;
” benefited deposit ” – each of the following:
(1) an amount that the employer paid, up to the amo unt or up
the rate which under section 3(e) was not considere d work
income when it was paid to the fund;
(2) an amount paid by the employee that is one of t he following:
(a) an amount that is not more than one third of th e
amount paid by the employer at the rate prescribed in
section 3(e) in respect of the employee’s determini ng
pay, as defined in the said section;
(b) an amount that does not exceed 2.5% of the employee’s determining pay;
(c) a payment in a different amount, prescribed for the
employee’s payments in accordance with a collective
agreement approved under the Collective Agreements
Law 5717-1957 before June 12, 2002;
(3) an amount paid to a training fund for kibbutz m embers, as
defined in section 58A, up to the amount of NS 15,7 20 per
year (in 2008; in 2007: 15,240; in 2006: NS 15,360; in 2 005:
NS 14,880 – Tr.)
(d) the Minister of Finance may, in regulations, ma ke rules about
closing accounts to additional payments and about c onditions
under which an employee’s different accounts in one or more
training funds shall be deemed a single account for purposes of
this paragraph;
(e) repealed

32
Withdrawal from a training fund for the selfemployed
(16b)(a) amounts withdrawn by an individual from hi s account in a training
fund for the selfemployed, as defined in section 17 (5a), including
linkage differentials as well as interest and other profits that stem
from a benefited deposit – if six years have passed since the first
payment to that account, and for an individual who has reached
the retirement age – if three years have passed sin ce the first
payment to that account; and in respect of amounts used by the
individual for his training – if three years have p assed since the
first payment to that account; if the individual di ed, then the
persons entitled to receive the said amounts may wi thdraw them
from the training fund exempt of tax; the Director may prescribe
rules on the entitlement to withdraw amounts exempt of tax for
training purposes; for this matter, ” benefited deposit” – NS
15,720 per year (in 2008; in 2007: NS 15,240; in 2006: NS 15,360;
in 2005: NS 14,880 – Tr.) ;
(b) the provisions of paragraphs (16a)(b) to (d) sh all apply to
withdrawals of amounts under this paragraph, mutati s mutandis.

Employee’s money from a benefit fund
(17) money received by an employee – other than mon ey he received under
insurance against loss of working capacity, as defi ned in section 3(a) –
up to the amount of the employer’s payments to a sa vings benefit fund
and not chargeable with tax under section 87, but i n respect of payments
made in and after tax year 1964, only money up to t he amount of the
employer’s payments is exempt within the limits of amounts based on
rates prescribed under section 22 of the Control of Benefit Funds Law,
as well as amounts taxed under section 3(e3);

Linkage differentials from a savings benefit fund
(18) linkage differentials not chargeable with tax under sections 3(d) or
section 87, received by an individual from a saving s benefit fund, which
stem from payments the individual and his employer deposited in the
benefit fund;

Interest and profits at age of entitlement
(18a) (a) interest and profits that stem from the ceiling of the benefited
deposit, which are not liable to tax under sections 3(d) or section
87 and were received by an individual from a saving s benefit fund
when he reached the age of entitlement, if the savi ngs period in
the benefit fund was not less than 15 years since t he date of the
first payment to the benefit fund, and if the first payment date after
he had reached the age of entitlement was five year s after that
date, or upon his death;
in this paragraph – ” date of the first payment ” – as defined in paragraph (16a)(c);
” ceiling of benefited deposit ” – a deposit to a savings benefit
fund that does not exceed the amount of NS 19,200 i n the tax year
(in 2006 and 2007; in 2005: NS `19,440 – Tr.)
(a1) for the purposes of this paragraph, the age o f entitlement of an
individual shall be the age of entitlement prescrib ed for him
according to the month of his birth, as specified b elow:

for men for women

33

month of birth age of entitlement month of birth age of entitlement

until December 1944 60 yrs until December 1944 60 yrs
Jan. – April 1945 60 yrs 8 mos. Jan. – April 1945 60 yrs 8 mos.
May – Dec. 1945 61 yrs May – Dec. 1945 61 yrs
Jan. – Aug. 1946 61 yrs 4 mos. Jan. – Aug. 1946 61 yrs 4 mos.
Sept. 1946 – April 1947 61 yrs 8 mos. Sept. 1946 – April 1947 61 yrs 8 mos.
May – Dec. 1947 62 yrs May 1947 – Dec. 1949 62 y rs
Jan. – Aug. 1948 62 yrs 4 mos. Jan. – Aug. 1950 62 yrs 4 mos.
Sept. 1948 – April 1949 62 yrs 8 mos. Sept. 1950 – April 1951 62 yrs 8 mos.
May – Dec. 1949 63 yrs May – Dec. 1951 63 yrs
Jan. – Aug. 1950 63 yrs 4 mos. Jan. – Aug. 1952 63 yrs 4 mos.
Sept. 1950 – April 1951 63 yrs 8 mos. Sept. 1952 – April 1953 63 yrs 8 mos.
May – Dec. 1951 64 yrs May 1953 and after 64 yrs
Jan. – Aug. 1952 64 yrs 4 mos.
Sept. 1952 – April 1953 64 yrs 8 mos.
May – Dec. 1953 65 yrs
Jan. – Aug. 1954 65 yrs 4 mos.
Sept. 1954 – April 1955 65 yrs 8 mos.
May – Dec. 1955 66 yrs
Jan. – Aug. 1956 66 yrs 4 mos.
Sept. 1956 – April 1957 66 yrs 8 mos.
May 1957 and after 67 yrs (a2) Notwithstanding the provisions of subparagrap h (a1), if – under the
provisions of Chapter 4 of the Retirement Age Law 5 764-2004 –
the Minister changed Part Two of the Schedule of th e said Law in
respect of women born in January 1950 and thereafte r, then the
retirement age set for a woman in Part Two of that Schedule shall
be her age of entitlement for the purposes of this paragraph.
(b) The Minister of Finance may prescribe, with app roval by the
Knesset Finance Committee and on conditions he shal l set, a
savings period shorter than that specified in subpa ragraph (a);

Life insurance
(19) an amount received under a life insurance poli cy, except –
(1) an amount received by a person from insurance of the life of
another who is not his relative, within its meaning in section 88, if
the premium for his insurance was not recognized as an expense
of the insurer;
(2) an amount not exempt under paragraph (7a) or ( 17) or on which
tax must be paid under sections 3(d) or 87;
in this paragraph, ” amount received under a life insurance policy ” –
an amount received upon the death of the insured on ly on the death risk
element included in the life insurance policy, excl usive of the amount
received or derived from the savings component;

Employers rebates and gifts to their employees and the value of
organized transport
(20) the value of an employee’s travel from his hom e to the place of
employment and back by collective transport, organi zed and financed by
the employer, if the Director or a person empowered by him finds that
the collective transport of employees to the place of employment is

34
necessary, because of the working conditions and the location of the
work place, and that the said transport is in accor dance with conditions
prescribed by him;

Wage delay compensation
(21) (a) an amount received by an employee as wage delay compensation
under the W age Protection Law 5718-1958, within the limits of
linkage differentials and interest on the amount of delayed wage;
(b) notwithstanding the provisions of subparagraph (a), if a person’s
chargeable income in any one of the 24 months that preceded
receipt of the compensation exceeded the ceiling fo r that month,
then the tax element in the exempt compensation sha ll be paid as
tax;
(c) in this paragraph –
“tax element ” – the compensation paid for that part of the wage
which would have been paid as tax, had the wage bee n paid on
time; ” ceiling ” – the amount of NS 6,960 (in 2008; NS 6,720 in 2006
and 2007; in 2005: NS 6,600 – Tr.), adjusted as if it were an
income ceiling, as defined in section 120A;
Alimony
(22) alimony received by an individual from the per son to whom he was
married or from the person to whom he is married bu t from whom he is
separated, and a maintenance allowance received by an individual for
his children from the other parent, or a payment re ceived by an individual
for himself or for his children from the National I nsurance Institute under
the Maintenance (Assurance of Payment) Law 5732-197 2;

Amounts under living legacy agreements
(23) (a) part of a pension received by a person und er an agreement for the
bequest of a living legacy to the Keren Kayemet le- Israel, the
Keren Hayessod – United Israel Appeal, or any other institution
designated by the Minister of Finance, as follows:
(1) if the person who bequeathed the living legacy had not
reached age 50 at the time of the bequest – 50%;
(2) if the donor had reached age 50, but had not r eached age
60 at the time of the bequest – 60%;

(3) if the donor had reached age 60, but had not r eached age
70 at the time of the bequest – 75%;
(4) if the donor had reached age 70, but had not r eached age
80 at the time of the bequest – 80%;
(5) if the donor had reached age 80 at the time of the bequest –
90%;
(b) the exemption under sub-paragraph (a) is in lie u of an exemption
under section 9B, and the person who bequeathed the living
legacy shall not be entitled to credit or deduction under any statute
for that living legacy;

Linkage differentials and interest on excess tax pa yments
(24) interest and linkage differentials received by an assessee in
consideration of excess tax payments, interest and linkage differentials
received by a dealer under section 105 of the Value Added Tax Law

35
5736-1975, and interest and linkage differentials received by an
assessee by virtue of section 103A of the Land Appr eciation Tax Law;
this provision shall not apply to an assessee, for whom interest and
linkage differentials constitute income under secti on 2(1);

Rental income received by elderly person
(25) rental income received by an elderly person wh o lives in an old age
home, for the dwelling unit in which he lived befor e he entered the old
age home – up to half of the annual amount paid dur ing the tax year for
his stay in the old age home;
for this purpose: ” old age home” – a permanent place of residence for
at least 30 individuals aged more than 65, which wa s given a license
under the Homes (Supervision) Law 5725-1965;

Contribution to a candidate in primary elections
(26) a contribution to a candidate in primary elect ions, which is permitted
under Chapter Two of the Political Parties Law 5752 -1992.
Discharged Soldiers Law
(27) money received by a fund or by a discharged so ldier under the
Absorption of Discharged Soldiers Law 5754-1994;

Gambling, lotteries or prizes
(28) gains or profit, as said in section 2A, the va lue of which is less than the
amount set by the Minister of Finance with approval by the Knesset
Finance Committee, all on the conditions and with t he adjustments
prescribed by him.

Exemption on pension payable by employer or benefit fund and on pension
payable under insurance against loss of working cap acity
9A. (a) For the purposes of this section –
“pension ” – a pension payable by an employer or payable by a benefit
fund, and also a pension payable under insurance ag ainst loss of
working capacity, as defined in paragraph (3a) of t he definition of
“income from personal exertion” in section 1;
“recognized pension” – part of a pension paid by a pension benefit
fund that is managed by an insurance company, or pa id by another
pension benefit fund that was set up after January 1, 1995, and which
stems from exempt payments; for this purpose, “exem pt payments” –
(1) amounts charged with tax as said in section 3(e 3);
(2) amounts that the recipient of the pension depos ited and on which
he was not entitled to a deduction said in section 47;
” entitling pension ” – that part of a pension or of the total of all p ensions
received by a person which does not exceed NS 7,200 (in 2008; in 2007:
NS 7,000; in 2006: NS 7,020; in 2005: NS 6,840 – Tr .); if part of a
pension was capitalized, then that pension shall be taken into account
for the present purpose, which would have been paid if not for the
capitalization; ” retirement age ” – as defined in section 1, but for the purposes o f this
section a person is also deemed to have reached ret irement age if –
(1) repealed
(2) he retired early because of a stable invalidit y of a degree of 75% or
more, determined under one of the Laws specified in section
9(5)(a) or under regulations made by virtue of sect ion 9(5)(b);

36
“exempt grant ” – that part of a retirement grant or half of that part of a
death grant in respect of which tax exemption was g ranted under section
9(7a) and which was received after March 31, 1973, exclusive of a grant
in addition to a pension paid –
(1) under section 18 of the Israel Defense Forces (Permanent
Service) (Benefits) Law 5714-1954;
(2) to a police man or prisons service member unde r section 22 of the
State Service (Benefits) Law [Consolidated Version] 5730-1970,
subject to section 77 of the said Law;
(3) to a security services employee, as the Prime Minister shall
prescribe;
(b) the recognized pension or 35% of the entitling pension, whichever is
larger, received by any of the following shall be e xempt of tax:
(1) a person who reached retirement age;
(2) repealed
(3) survivors;
however, if the pension is paid by an employer, oth erwise than under a
Law or collective agreement, then the exempt amount shall not exceed
NS 101 per month in 2008 (in 2006 and 2007: NS 98; in 2005: NS 96 –
Tr.) in respect of each year of employment.
(b1) the recognized pension, received by an individ ual who has reached age
60 and who is not entitled to a benefit under subse ction (b), is exempt of
tax.
(c) (1) If, after payment of the pension began or within fifteen years
before payment of the pension began, a person also received
grants for the years in respect of which the pensio n is paid, and if
the total of exempt grants, divided by the number o f years of
employment in respect of which they were received, together with
the amount of the monthly entitling pension (hereaf ter: the total
amount) exceeds NS 7,200 per month (in 2008; in 2007: NS
7,000; in 2006: NS 7,020; in 2005: NS 6,840 – Tr. ) (hereafter: the
total amount), then the monthly exempt amount of th e pension
shall be reduced by an amount equal to the entitlin g pension
multiplied by the difference between the total amou nt and NS
7,000 (hereafter: the difference), divided by the t otal amount; this
provision shall not apply if the recipient of the p ension elected to
pay tax on that part of the exempt grants which is equal to the
difference multiplied by the number of years of emp loyment in
respect of which the grants were paid.
(2) The following shall be taken into account for purposes of
computing the total amount:
(a) if the grant was received after payment of the pension began
or within five years before it began – the whole am ount;
(b) if the grant was received between the sixth an d the fifteenth
year before receipt of the pension began – the amou nt said
in subparagraph (a), less 10% for each year from th e said
sixth year to the year when the grant was received, up to the
fifteenth year.
(d) If an assessee elects to pay tax on part of th e grant, as provided in
subsection (c), then that part shall be apportioned equally over a period
of up to six tax years, ending with the year in whi ch the grant was
received, but the Director may, on the assessee’s a pplication, permit
apportionment over a different period on conditions he may prescribe,
which may include an advance payment.

37
(e) (1) An amount received by way of capitalization of an exempt pension
is exempt of tax, on condition that this amount is not greater than
the amount that would have been received from capit alization of
35% of the entitling pension;
(2) if tax exemption under paragraph (1) was grante d for part of a
capitalized pension, then from the monthly pension exempt under
subsection (b) shall be subtracted – in the tax yea rs in respect of
which that part of the pension was capitalized – an amount equal
to the capitalized exempt monthly pension, multipli ed by the ratio
between the amount stated in the definition of “ent itling pension” in
the tax year in which the pension is being paid and the amount
that was stated in that definition in the tax year in which the
capitalization was carried out.

Exemption of other pensions
9B. 35% of the income under section 2(5), received by a person upon reaching
retirement age within its meaning in section 9A(a), or received by survivors,
and which is not a pension within its meaning in se ction 9A(a), is exempt of
tax; an amount received in consequence of the capit alization of a pension
exempt under this section is exempt of tax.

Allowance for pension of an oleh
a first time Israel resident and for a veteran
returning resident
9C. Notwithstanding the provisions of sections 9A, 9B and 121, as the case may
be, and subject to the provisions of section 14(a) the amount of tax on a
pension from abroad for his work abroad, received b y an individual who
became an Israel resident for the first time or by a veteran returning resident,
as said in section 14(a), shall not exceed the amou nt of tax which he would
have paid on that pension in the state in which the pension is being paid, had
he remained a resident of that state.

Exemption of certain rental income
9D. (a) 35% of the benefited rental income received by an entitled individual is
exempt of tax, if all the following apply:
(1) the individual or his spouse have no pension in come to which the
provisions of sections 9A or 9B apply, or interest income to which
the provisions of sections 125D or 125E apply;
(2) the rent is not paid by a relative, as defined in section 105K, and
not by a body of persons of which the individual is a controlling
member.
(b) An exemption under subsection (a) shall be gran ted only to one of the
spouses.
(c) In this section –
“controlling member ” – as defined in section 32(9);
” benefited rental income ” – income from rent chargeable under section
2(6) or (7), received by an individual for the rent al of a property that had
been his own, was used by him directly in the produ ction of income from
personal exertion from a business or occupation in Israel, up to the
income ceiling multiplied by the rate of entitlemen t;
” entitled individual ” – any one of the following:
(1) an individual who has reached the retirement ag e;
(2) an individual, if he or his spouse has reached the retirement age;
all if he is an Israel resident and had reached age 55 by the determining

38
date, as defined in section 88; “rate of entitlement ” – a rate of 2% for each tax year in which the
property was used by the individual directly for th e production of income
from personal exertion from a business or occupatio n in Israel, but not
more than 70%; ” income ceiling ” – the amount stated in the definition of “entitli ng
pension” in section 9A, multiplied by twelve.

Article Two: Authority to Exempt

Tax reduction on productivity bonus and shift work pay
10. (a) In this section –
“tax benefit ” – tax credit, deduction from income or tax rates lower than
those prescribed in section 121; ” productivity bonus ” – a bonus, benefit or premium, which is work
income paid under a work contract approved for the purposes of this
section as prescribed by regulations, which is in a dditionl to the
customary salary or wage prescribed by the work con tract, for
productivity in excess of ordinary productivity as determined by
measured norms approved by the Israel Institute of Productivity or by
some other body designated by the Minister of Finan ce on the Institute’s
recommendation; ” second and third shift ” – as defined by the Minister of Finance in
regulations, after consultation with the Minister o f Labor and Social
W elfare.
(b) The Minister of Finance may, with approval by the Knesset Finance
Committee, prescribe by regulations tax benefits in respect of income
from second and third shift work or from grants pai d for productivity in
industrial enterprises most of whose activity in th e tax year is productive
activity, within its meaning in the Encouragement o f Industry (Taxes)
Law 5729-1969, which the Minister of Finance specif ied after
consultation with the Minister of Industry and Trad e, and for this purpose
he may specify certain enterprises or branches of i ndustry.
(c) A person entitled to a total income of more th an NS 109,200 (in 2008; in
2007: NS 106,320 – Tr.) (hereafter: ceiling) from the employer who pays
him income as said in subsection (b), is not entitl ed to the benefit under
this section in respect of the part of the income t hat exceeds the ceiling,
and for this purpose the income to which subsection (b) applies shall be
deemed the highest of his income brackets; the ceil ing amount shall be
adjusted, as if it were an income ceiling, as defin ed in section 120A.
(d) The regulations said in subsection (b) may pres cribe –
(1) that the tax benefit apply to all the income as said in them or to
part of it;
(2) tax benefits at different rates or in different amounts for different
branches of industry, for different professions or for different
categories of assessees;
(3) rules and regulations for application of the ta x benefits;
(4) categories of employees to whose income the tax benefits shall
not apply.

Tax benefits in settlements
11. (a) In this section –

39
“soldier ” – a soldier who serves under an undertaking for p ermanent
service in the Israel Defense Forces, a policeman, including a policeman
in the Border Guard in the Israel Police, a prison guard and also an
employee of the General Security Service or of the Institute for
Intelligence and Special Assignments, on condition that they serve in
combat units; ” special pay ” – the total salary that includes the level A acti vity bonus,
paid during at least three consecutive months; ” level A activity bonus ” – a salary supplement paid to soldiers because
of activity in a combat unit in a development area, which under the
statute that applies to the soldier is defined as a level A activity bonus
and was approved by the Director for this purpose; ” development area ” – each of the following:
(1) the area of Judea, Samaria and the Gaza Strip;
(2) any place north of latitude line 270;
(3) any place south of latitude line 070, including the Dead Sea area;
” resident ” of a certain settlement – an individual, the cent er of whose life
is in that settlement;
(b) (1) if a person was a resident of one of the se ttlements specified in
Part One of Schedule One during the entire tax year , then in that
tax year he is entitled to a tax credit at the rate of 13% of his
chargeable income from personal exertion, up to the amount of NS
205,800 (in 2008; in 2007: 199,560; in 2006: NS 200,160; in 2005:
NS 194,880 – Tr.) ;
(2) if a person was a resident of Kiryat Shmonah d uring the entire tax
year, then in that tax year he is entitled to a tax credit at the rate of
25% of his chargeable income from personal exertion , up to the
amount of NS 205,080 (in 2008; in 2007: NS 199,560; in 2006: NS
200,160; in 2005: NS 194,880 – Tr.);
(3) if a person was a resident of a settlement spe cified below during
the entire tax year, then in that tax year he is en titled to a tax credit
at the rates specified below of his chargeable inco me from
personal exertion, up to the amount of NS 136,680 (in 2008; in
2007: NS 132,9607; in 2006: NS 133,320; in 2005: NS 129,840 –
Tr.);
(a) Mitzpe Ramon – 25%;
(b) Dimona and Yeroham – 20%;
(c) Ofakim, Aroar, Tel Sheva, Ramat Hanegev Regiona l Council
– 16%;
(d) Ben Ami, Gonen, Yehiam, Yessod Hamaaleh, Kfar V radim,
Lehavot Habashan, Netiv Hashayara, Netivot, Evron, Acco,
Shavei Zion, Sderot and Sheikh Danun – 13%;
(e) a settlement specified in Part Two of Schedule One – 13%.
(4) Notwithstanding the provisions of paragraphs (1 ) to (3), if – in the
course of the tax year – a person became a resident of any of the
settlements specified in those paragraphs or ceased to reside
there, then he is entitled to the tax credit said i n those paragraphs
in proportion to the period of his residence in the settlement, on
condition that he resided in the settlement at leas t twelve
consecutive months.
(5) The amount of credit under this section shall n ot exceed the
amount of tax to which the assessee is liable in re spect of the
income, on which the credit is granted.
(6) The amount stated in paragraphs (1) to (3) shal l be adjusted under

40
the provisions of section 120B, and the provisions that apply to
income ceilings shall apply to it for this matter.
(c) A soldier, to whom special pay is paid, is enti tled to a tax credit of 5% of
his special pay, up to the amount of income stated in the opening
passage of subsection (b)(3), but if he is entitled to the said credit and
also to a credit under the provisions of subsection (b), then he shall
choose one of the credits.
(d) The Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe an additional deduction in res pect of assets of an
enterprise located in a new settlement area or in a development area, as
he shall prescribe and on the conditions he shall p rescribe.

11A and 11B – Repealed
Limit on reductions or benefits
11C. A tax reduction or benefit under sections 11, 11A or 11B shall not be granted
in respect of income said in Part Five “C” or in re spect of income said in
section 125C, if the tax rate applicable to it is n ot greater than 15%.

12 and 13 – Repealed
Dividend from preferred income
13A. (a) The Minister of Finance may, with approval by the Knesset Finance
Committee, direct by Order that dividends paid by c ertain categories of
companies out of preferred income specified in the Order shall be
treated like preferred income; in this section, ” preferred income” –
income from interest or dividend in respect of whic h a tax concession or
tax exemption is granted under any enactment.
(b) Dividends paid by a company said in subsection (a) in a particular tax
year shall be taken to include preferred income at a rate equal to the
ratio of the company’s preferred income to its tota l income in the year, in
which accrued the income out of which the dividend is distributed.

First time Israel residents and returning residents
14. (a) An individual who became an Israel resident for the first time and a
veteran returning resident shall – during ten years after the date on
which they became residents as aforesaid – be exemp t of tax on their
income from all the sources enumerated in sections 2, 2A and 3 that
were produced or accrued abroad or that are derived from assets
abroad, unless they made a different request in res pect of all or part of
the income; in this section:
” asset ” – except for assets that reached the individual c ompletely exempt of
tax under section 97(a)(5), beginning with January 1, 2007;
” veteran returning resident ” – an individual who returned and became an
Israel resident after he stayed abroad during at le ast ten consecutive
years.
(b) (1) Notwithstanding the provisions of paragraph (a) of the definition of
“Israel resident” or “resident”, an individual who became an Israel
resident for the first time or a veteran returning resident shall not
be deemed an Israel resident during one year after the date on
which he came or returned to Israel, as the case ma y be (in this
subsection: adjustment year), provided that – withi n ninety days
after he arrived in Israel as aforesaid – he gave n otice on a form

41
prescribed by the Director that he chose to have this subsection
applied.
(2) Notwithstanding the provisions of paragraph (1 ), if an individual
gave notice that he opted for the adjustment year a s said in that
paragraph, the adjustment year shall be included fo r purposes of
the periods specified below:
(a) the period of exemption said in subsection (a);
(b) the period said in paragraph (b)(2) of the defi nition of “Israel
resident” or “resident”;
(c) the period said in paragraph (2) of the definit ion of “foreign
occupational company” and in the definition of “”in come of
the Israel resident shareholders” in section 5(5)(e );
(d) the period said in the definition of “Israel re sident” in section
75B(a)(15);
(e) the period said in section 75P1(a1) and (c)(2)( a);
(f) the period said in section 97(b)(1);
(g) the period said in section 134B;
(h) the period said in section 135(1)(b).
(c) A returning resident shall be exempt of tax dur ing five years from the
date on which he became an Israel resident in respe ct of income
produced or accrued abroad or that stems from asset s abroad, such as
are not income from business, as specified below, u nless he made a
different request in respect of all or part pf the income:
(1) income from pension, royalties, rent, interest and dividends, that
stems from assets abroad, which the returning resid ent acquired
during the period of his stay abroad after he cease d being an
Israel resident;
(2) income from interest and dividends that stem fr om assets abroad,
which are benefited securities;
in this subsection:
” benefited securities ” – securities traded on an Exchange that
the returning resident acquired during the period o f his stay abroad
after he ceased being an Israel resident and that a re kept in an
account with a banking institution, and also securi ties traded on an
Exchange, which the returning resident acquired out of income
that is interest or dividends derived from benefite d securities or out
of income that is a capital gain from the sale of b enefited securities
and which was deposited in the same account;
” Exchange ” – a securities exchange abroad, which was approve d
by whoever is entitled to approve it under the stat utes of the state
where it operates, and also an organized market abr oad;
” account with a banking institution ” – an account with a
banking institution in which no deposits were made after the
returning resident became an Israel resident, excep t for the
deposit of income that is interest or dividends der ived from
benefited securities or income that is a capital ga in from the sale
of benefited securities;
” returning resident ” – an individual who again became an Israel
resident after he was a foreign resident during at least six
consecutive years.
(c1) If an individual became an Israel resident and is a controlling member

42
and a Director of an approved enterprise, within its meaning in the
Encouragement of Capital Investments Law, then in t ax years 2003 to
2006 he shall be exempt of tax on his income from i nterest, dividends
and rent that do not constitute income from busines s and stem from
assets abroad, which he owned before he became an I srael resident, or
from other assets that replaced them and remained h is property after he
became an Israel resident, and also on profits from the sale of those
assets, unless he requested otherwise in respect of all or part of the
income. (NOTE: Under the provisions of Amendment No. 132 th is
subsection (c1) is in effect for tax years 2003 to 2006 – r.
(d) (1) The Minister of Finance may, with approval by the Knesset
Finance Committee, make regulations according to wh ich full or
partial tax exemption will be granted to an individ ual specified
below on his income that originates abroad, during a period set by
the Minister of Finance and on conditions and with adjustments
prescribed by him, on condition that most of his bu siness activity is
abroad:
(a) an individual who for the first time became an Israel resident
and before he became a said resident he made invest ments
in Israel;
(b) an individual who ceased being an Israel reside nt,
permanently stayed abroad during the determining pe riod,
and again became an Israel resident and made invest ments
in Israel when he was not an Israel resident; for t his
purpose: the ” determining period ” –
(1) for a person who ceased being an Israel residen t
before he had reached age 18 – at least ten
consecutive years;
(2) for a person who ceased being an Israel residen t after
he had reached age 18 – at least twenty consecutive
years.
(2) The Minister of Finance may, with approval by t he Knesset
Finance Committee, prescribe that regulations made under
paragraph (1) also apply to an individual said in s ubparagraphs (a)
or (b) of the said paragraph, if he made the invest ments in Israel
within one year after the regulations under this pa ragraph went into
effect, on condition that he became a resident as s aid in those
subparagraphs between January 1, 2002, and the day on which
regulations under this paragraph go into effect, an d the Minister of
Finance may set conditions for granting tax exempti ons in addition
to the conditions set in regulations under paragrap h (1).

Income of company whose business is controlled from abroad
14A. If a company’s business and management are con trolled from abroad, and if it
receives in Israel income derived or accrued abroad , then the Minister of
Finance may, on its application, direct that it sha ll pay tax at a rate of not more
than 15% on that income and in special cases he may even exempt it of tax.

Authority to exempt
14B. The Minister of Finance may, with approval by the Knesset Finance
Committee, grant tax relief in respect of income of a social nature or in respect
of compensation, which an Israel resident individua l receives, if it is paid to him
by a foreign State or by its welfare authority, and he may also exempt the
aforesaid of income tax, all as he shall prescribe.

43

State Loan
15. The Minister of Finance may, with approval by the Knesset Finance
Committee, direct that the interest and linkage dif ferentials payable on a loan
secured by State revenue be exempt of tax, either g enerally or in respect of
interest and linkage differentials payable to forei gn residents; he also may, with
the said approval, direct that the interest paid on a loan, the repayment of
which is guaranteed by a foreign state or by a pers on recognized by the
Minister of Finance as acting in the name of and fo r a foreign state, or interest
on a loan received by the Jewish Agency for Israel, be exempt of tax.

Authority to exempt interest and linkage differenti als on deposits, savings
programs and debentures
15A. The Minister of Finance may, with approval by the Knesset Finance
Committee, exempt of tax, in whole or in part, link age differentials or interest in
the amount of the linkage differentials, that is pa yable on categories of
deposits, categories of savings programs and catego ries of debenture to
categories of assessees, in accordance with conditi ons which he set in the
said approval.

Calculation of real interest
15B. The Minister of Finance may, with approval by the Knesset Finance
Committee, prescribe a method for calculating the p art of the interest that
exceeds the rate of the index increase, on conditio ns and with adjustments he
prescribed, and he may prescribe as aforesaid in re spect of the categories of
assets or categories of assessees, all according to the period during which an
asset was held or according to some other criterion .

Exemption of certain interest
16. The Minister of Finance may direct, by an Order published in Reshumot –
(1) that income from interest payable on bonds iss ued to a foreign resident
not engaged in any business or vocation in Israel b e exempt of tax on
the amount in excess of the 25% interest deducted u nder section 161(a)
of the Ordinance, and that all or part of the linka ge differentials payable
on aforesaid bonds be exempt of tax;
(2) that a tax exemption or a tax reduction be gra nted on income from
interest payable by the State or payable, with appr oval by the Controller
of Foreign Exchange, by a banking institution, with in its meaning in the
Bank of Israel Law 5714-1954, on foreign currency d eposits held by it;
(3) that income from interest payable on debenture s issued by an Israel
borrower to the International Bank for Rehabilitati on and Development
be tax exempt, also when it is received by a foreig n resident, to whom
the debentures were transferred;
(4) that interest paid by an Israel resident body of persons on a foreign
currency loan received from a foreign resident who does not conduct
business or a vocation in Israel – the loan being u sed for one of the
purposes specified in section 1 of the Encouragemen t of Capital
Investments Law 5719-1959 – be wholly or partly exe mpt of tax.

Authority to refund tax to foreign resident
16A. The Minister of Finance may direct that all or part of tax be refunded to a
person who is not an Israel resident, if the amount of tax he paid in Israel
exceeds the amount which – because of that payment – he is allowed to
deduct in his country of permanent residence as a c redit against the tax due in

44
that country on the income he earned in or derived from Israel, also if he was
not allowed to deduct the amount or it was not give n him as a credit in the
country of his residence, because of provisions in that country for the set-off of
losses.

Certain linkage differentials
16B. The Minister of Finance may, with approval by the Knesset Finance
Committee, exempt of tax part or all of linkage dif ferentials added to the
amount of a debt or claim in designated categories of debts or claims; for this
purpose: ” linkage differentials ” – including interest in a total amount that does
not exceed the amount that would have had to be add ed in accordance with
the consumer price index increase, as said in secti on 159A(a), had the debt or
claim been linked to the index during the correspon ding period.

Income from sale of water
16C The Minister of Finance may, by Order with appr oval by the Knesset Finance
Committee and on conditions set in the Order, exemp t of tax income from the
sale of water by a person whose entire business is the supply of water.

16D and 16E. Repealed

CHAPTER TWO: DEDUCTIONS AND SET-OFFS

Article One: Deduction of Expenses

Permitted deductions
17. In ascertaining the chargeable income of any pe rson, all disbursements and
expenses that person incurred during the tax year w holly and exclusively in the
production of his income shall be deducted – unless the deduction is limited or
disallowed under section 31 – including –

Interest and linkage differentials
(1) (a) sums payable as interest or linkage differe ntials on money he
borrowed, if the Assessing Officer is satisfied tha t they are payable
on capital used in obtaining the income;
(b) if an assessee claims the deduction of interest or linkage
differentials under subparagraph (a) in a year in w hich he received
interest or linkage differentials exempt of tax und er section 9(24),
then he shall not be allowed to deduct an amount eq ual to the
amount of the said exempt interest and linkage diff erentials,
except for the larger of the following two amounts:
(1) an amount received in consideration of excess t ax paid by
him because the Assessing Officer demanded its paym ent,
or because it was deducted from him at the source;
(2) an amount received by him in consideration of that part of
the excess tax payment which does not exceed 15% of the
tax due from him according to his self assessment.
Rent
(2) rent a tenant paid on land or buildings occupie d by him for the purpose
of acquiring income;

Repairs

45
(3) amounts expended for the repair of premises, plant and machinery used
in acquiring the income, and also for the renewal, repair or alteration of
work implements, utensils or objects used as afores aid;
Bad debts
(4) bad debts incurred in a business or vocation, p roved to the satisfaction
of the Assessing Officer to have become bad during the tax year, as well
as doubtful debts to the extent that they are estim ated, to the Assessing
Officer’s satisfaction, to have become bad during t he tax year, even if
such bad or doubtful debts were due and payable bef ore the beginning
of the tax year; however, sums collected during the tax year on account
of amounts previously written off or deducted in re spect of bad and
doubtful debts shall, for purposes of this Ordinanc e, be treated as
receipts of the business or of the vocation in that year;

Employer’s payments to a benefit fund
(5) sums an employer paid – on conditions and at ra tes prescribed under
section 22 of the Control of Benefit Funds Law – as regular annual
contributions to a benefit fund, as well as sums at the said rates and
conditions, but mutatis mutandis as the case may be , paid by an
employer to the State, to a local authority or to s ome other body
designated by the Minister of Finance for this purp ose, in order to protect
his employee’s pension rights and any amount or par t thereof paid by an
employer – with the Director’s approval – to a said benefit fund or to any
said institutions or body, otherwise than as a regu lar annual contribution;

Payments to a training fund for selfemployed person s
(5a) amounts paid by an individual to a training fu nd for the selfemployed,
after they were reduced by an amount equal to 2.5% of his determining
income; said amounts shall not exceed 4.5% of his d etermining income;
for this purpose: ” determining income ” – the individual’s chargeable income from
business or vocation, before the deduction under th is paragraph, up to
an amount of NS 218,000 (in 2007; in 2006: NS219,000; in 2005:
NS213,000 – Tr.) per year;
” training fund for selfemployed persons ” – a training fund that is
designated for individuals who have income from a b usiness or
occupation.
Damage by natural agencies
(6) expenditures on measures for the prevention of soil erosion, against
floods and against other natural disasters that wil l be designated;

Air raids
(7) expenditures on air raid precautions;

Depreciation
(8) deductions for depreciation, as specified in Ar ticle Two;

Bonuses of a cooperative society
(9) amounts which a cooperative society returned to its members as an
annual bonus in proportion to the business it condu cted with each
member, on condition that –
(a) no deduction shall be allowed in an amount that exceeds that part

46
of the taxable income before payment of the bonus, the ratio of
which to the total taxable income is the same as th at of the sum of
its business with its members to the total of its b usiness
transactions;
(b) the bonus was given to members within nine mont hs after the end
of the accountancy year to which it relates, or at a later date set by
the Director;
(c) the bonuses shall be deemed to have been receiv ed by the
members at the end of the accountancy year to which they relate;
(10) repealed

Expenses connected with the payment of tax
(11) (a) expenses in connection with the preparati on of returns and the
handling of tax matters in all assessment or appeal proceedings;
however, if a Court or a books acceptability commit tee determined
that an appeal or objection was vexatious and that there was no
reasonable justification for submitting it, then le gal expenses
incidental thereto shall not be deductible; if lega l expenses were
awarded to the assessee, then the amount of expense s awarded
shall be deducted from the amount of expenses claim ed by him;
(b) expenses said in this paragraph shall not be de ductible in
connection with income from a business or vocation in respect of
which no account books were kept, or if the return is not based on
account books;

Rent paid by individual who moved temporarily
(12) rent paid by an individual for a dwelling whic h he rented in Israel and to
which he moved temporarily because of his work or v ocation, during five
years after the day on which he moved to the said d welling; that rent
shall be deductible from rent he receives in respec t of his permanent
dwelling during the same period;

Lodging expenses and rent in development area
(13) (a) amounts paid by an assessee for lodgings o r for the rental of a
dwelling in an area designated a development area u nder section
11, where the assessee is permanently employed, but where he
does not live with his family with whom he would li ve, if he did not
work there;
(b) the Minister of Finance may prescribe the ceil ing amount
deductible under subparagraph (a) and the period of the
deduction;

Other deductions
(14) other deductions to be prescribed by regulatio ns under this Ordinance.

Restrictions on the deduction of certain expenses
18. (a) A retirement grant, leave pay, convalesce nce pay, holiday pay, sick pay
and other similar expenses are deductible under sec tion 17 only in the
tax year in which they were paid to the person enti tled to them or to a
benefit fund, but aforesaid payments made to a bene fit fund in respect of
the last month of the tax year are deemed to have b een made during the
tax year if they were made within one month after t he end of the tax year.
(b) W ork income, management fees, linkage different ials or interest, or

47
other payments paid by a company controlled by not more than five
persons, within its meaning in section 76, to one o f its members who is a
controlling member, within its meaning in section 3 2(9), shall be
deductible under section 17 in a given tax year if they were paid to him
during that tax year or if he included them in the return of his income in
that tax year and if tax on them was deducted under regulations for
deduction from wages no later than three months aft er the end of the tax
year or of the special assessment period, as the ca se may be, and if it
was transferred to the Assessing Officer within sev en days after the
deduction, together with linkage differentials and interest from the end of
the tax year or special assessment period until the date of the deduction.
(b1) The Minister of Finance may, with approval by the Knesset Finance
Committee, prescribe that the provisions of subsect ion (b) not apply to
categories of payments that constitute tax exempt i ncome for a
controlling member, and he may make a said determin ation conditional.
(c) If a person’s income includes income for which a special tax rate has
been set or which is exempt of tax (hereafter: pref erred income), then
the expenses incurred by that person in order to ac quire the preferred
income shall be deductible under section 17 only ag ainst that income; if
the aforesaid expenses cannot be ascertained, then a proportional part
of the expenses incurred in producing the total inc ome shall be deducted
from the preferred income, in the ratio of the pref erred income to the
total income, but the Minister of Finance may presc ribe a different
apportionment of the expenses if he sees fit to do so under the
circumstances.
(d) (1) In this section –
“work unit ” –
(1) a building, construction of which takes longer than one year,
including its components the execution of which tak es as
aforesaid and including work said in paragraph (2) that
constitutes a part thereof, and if it is a capital asset – as long
as its use for the production of income has not beg un in the
first half of the tax year or of the special assess ment period,
irrespective of whether income from it constitutes income
under section 2(1) or as a capital gain or land app reciation;
(2) excavation work, sewage work, highway and road paving
and earth works – execution of which takes longer t han one
year;
” interest expenses ” – interest and linkage differentials deductible
under section 17, as well as interest and linkage d ifferentials on
capital used for the construction or acquisition of a capital asset,
less income from interest and linkage differentials on loans
extended to a financial institution, to the State, to a local authority,
to a Government company, to a Government subsidiary or to any
other person designated by the Minister of Finance;
” other income ” – income that is not from one of these:
(1) the sale of a work unit;
(2) the sale of land;
(3) interest and linkage differentials on loans ex tended to a
financial institution, to the State, to a local aut hority, to a
Government company, to a Government subsidiary or t o any
other person designated by the Minister of Finance;
(4) (a) during the period in which the Taxation u nder
Inflationary Conditions Law is in effect – the sale of a

48
capital asset other than unprotected negotiable
securities, within their meaning in the said Law;
(b) during the period in which the Inflationary Adj ustments
Law is in effect – the sale of the asset, as define d in
section 104;
(c) in the period after the effect of the Inflation ary
Adjustments Law – the sale of an asset, as defined in
section 104;
however, in respect of income from securities said in
this paragraph only the amount of their change in v alue or
profit from them, as the case may be, shall be take n into
account as other income;
” financial institution ” –
(1) a company or cooperative society that engages in the
acceptance of monetary deposits in current accounts , in
order to pay out of them on demand by check;
(2) a company that lawfully uses the word “bank” a s part of its
name, except for a company the name of which mentio ns
the name of a company or cooperative society to whi ch
paragraph (1) applies;
” management expenses and overhead ” – any expense that is
not an interest expense, and which the assessee doe s not
customarily charge directly against a work unit, la nd or other
income.
(2) If an assessee, whose business is the construc tion of work units,
had in the process of execution in any given tax ye ar work units or
land that constitute stock in trade, then his manag ement expenses
and overhead and interest expenses in that tax year shall be
charged to each of the aforesaid work units or land , as follows:
(a) a proportional part of the management expenses and
overhead shall be charged to each work unit, in the ratio of
the assessee’s expenses in that tax year for the ex ecution of
that work unit to the total of expenses in that tax year for the
execution of all work units, plus the amount of his other
income in that tax year;
(b) (1) a proportional part of interest expenses shall be
charged to each work unit or land, in the proportio n
between the assessee’s total cumulative expenses
until the end of the tax year for the execution of that
work unit or the acquisition of that land and the
assessee’s total cumulative expenses until the end of
the tax year for the execution of all work units an d the
acquisition of all the land, plus the amount of his other
income in that tax year; for this purpose: ” expenses
for the execution of a work unit and the
acquisition of land ” includes expenses to be charged
against a work unit and against land under this sec tion
until the end of the preceding tax year;
(2) the balance of interest expenses not charged a s said
in paragraph (1) shall be deductible, so that part
thereof, in the proportion of the preferred income
within its meaning in section 18(c) to the total of other
income, shall be related to the said preferred inco me.
(e) The income of a foreign resident, from which t ax must be deducted

49
under sections 164 or 170, shall be deductible under section 17 in the
tax year to which it relates only if it was paid in that tax year or if the tax
on it was deducted not later than three months afte r the end of the tax
year or of the special assessment period, and was t ransmitted to the
Assessing Officer within seven days after the deduc tion, together with
linkage differentials and interest from the end of the tax year or special
assessment period until the date of the deduction.

19. Repealed
Power to prescribe rules about certain deductions
20. (a) The Minister of Finance may, with approva l by the Knesset Finance
Committee, make rules on the deduction of amounts s pecified below, in
whole or in part, its period during and its annual rate:
(1) amounts paid by the owner of a building, rente d in whole or in part
under protected rental, in order to vacate a protec ted tenant, or as
participation in the construction of a sidewalk or road next to the
building, or of drainage connected to the building and for similar
purposes;
(2) amounts paid by a lessee of real estate in res pect of the lease or
for investment in the leased real estate or in conn ection therewith;
(3) amounts expended by an assessee for replanting ;
(4) other capital expenses.
(b) The Minister of Finance may, with approval by the Knesset Finance
Committee, prescribe rules –
(1) on granting additional depreciation in respect of a building let
wholly or in part under protected rental, its rate and the period
during which it is to be granted;
(2) on depreciating the undepreciated balance of a wholly or partly
uprooted plantation, if its owner planted another p lantation before
or after the uprooting, and on how to deal with dep reciation in the
determination of the original cost for purposes of depreciation and
of capital gain on the new plantation.

Deductions for scientific research
20A. (a) (1) In determining the chargeable income of a person who incurred
expenses – including capital expenses – for scienti fic research in
the fields of manufacture, agriculture, transportat ion or energy,
approved for this purpose by a person authorized by the Minister in
charge of the Ministry within whose field of activi ty the research
falls, he shall be allowed to deduct them from his total income in
the tax year during which they were incurred, on co ndition that one
of the following holds true:
(a) the research is carried out by the owner of an enterprise in
one of the said branches, or on his behalf, for the
development or advancement of his enterprise;
(b) the expenses are those of the person who condu cts the
research, who is not the owner of an enterprise in the said
fields, or they constitute participation in the fin ancing of
research carried out by another person, in return f or a right
to results of the research, which is reasonable in proportion
to the participation in research costs, and all tha t on
condition that the State participates in financing the research
by way of a grant; for this purpose: ” grant”, includes a loan

50
of a type designated by the Minister of Finance with approval
by the Knesset Finance Committee; however, expenses that
constitute such participation shall be deducted as follows: in
the tax year in which the expenses were paid out – a
proportional part, in the ratio between the number of months
from the month after the month in which they were p aid until
the end of the year, divided by 12, and the remaind er in the
following tax year; for purposes of calculating the said
proportional part, an undertaking to pay expenses i n 12
equal monthly installments shall be deemed an expen se
paid in their entirety when the first installment i s paid;
(1a) if a person participates in the financing of r esearch carried out by
another, as said in paragraph (1)(b), then he may s et off the tax
saved against tax deducted at the source from work income or
against advance payments due from him under section 175 of the
Ordinance, beginning with the month after the month in which he
paid the expenses; if, in respect of any tax year, a balance remains
to be set off, its set off will be allowed when the return for that year
is delivered; for this purpose: ” the tax saved” – the amount of tax
from the payment of which the assessee was exempted by virtue
of the deduction under paragraph (1), but for purpo ses of setting
off only against advance payments the saved tax sha ll be
calculated at the 55% tax rate for an assessee who is an
individual, and at the average tax rate for the pre ceding tax year
for an assessee who is a body of persons;
(1b) for purposes of section 190A, a set off agains t deduction at the
source or against advance payments under paragraph (1a) shall
be treated like a sum deducted at the source, as sa id in section
177;
(1c) if a person, who carries out research approved by whoever is
authorized to give approval as said in paragraph (1 ), raises from
investors in research and development amounts which , together
with the amounts he himself invests in the said res earch, exceed
the amounts spent to conduct that research, then th e excess
amount shall be deemed chargeable income for him on which the
applicable tax rate is 100% without any right whats oever to
exemption, deduction or set off, and the date of it s payment, for
purposes of computing interest and linkage differen tials under
section 159A of the Ordinance, is the date on which the excess
amount was created; the Minister of Finance shall p rescribe, with
approval by the Knesset Finance Committee, ways of calculating
the excess amount and of determining the day on whi ch it was
created;
(2) capital expenditures for scientific research, i ncurred by a person
for the advancement or development of his enterpris e, to which the
provisions of subsection (1) do not apply, may be d educted in
three equal annual installments, beginning with the tax year during
which they were incurred;
(3) the amount of a grant said in paragraph (1)(b) , given by the State
to finance scientific research, shall be subtracted from the amount
of expenses, deduction of which is allowed under th is subsection.
(b) Any amount of expenditure invested in an asset , in respect of which
depreciation is allowed under section 21, shall not be deductible under
subsection (a).

51

Overall ceiling on deductions for research and development
20A1.(a) The amount deductible in consideration of participation in the financing
of research and development carried out by another person, under
section 20A(a) and under any other statute, shall n ot exceed 40% of the
assessee’s chargeable income in the tax year in whi ch the expenses
were paid.
(b) The provisions of subsection (a) shall not app ly to amounts of
participation by an industrial holding company in a company under its
control; for this purpose: ” industrial holding company ” – a company at least 80% of whose
assets during the entire tax year, exclusive of ass ets derived from funds
received from an issue on an Exchange abroad until one year after the
date of the issue, are invested in the share capita l of industrial
companies, or in loans for at least three years ext ended to industrial
companies; ” industrial company ” – within its meaning in the Encouragement of
Industry (Taxes) Law 5729-1969; ” control ” – within its meaning in section 25.

Deduction because of research and development – add ition to base for
advance payments
20A2 The amount of tax, from the payment of which t he assessee was exempted
because of participation in the financing of resear ch and development
conducted by another, under section 20A(a) and unde r any other statute, shall
be added to the amount of tax that constitutes the base for the determination
of advance payments under section 175.

20A3. Repealed
Deduction for maintenance of foreign resident
20B. In determining the chargeable income of an ind ividual Israel resident who pays
for the maintenance of a foreign resident in accord ance with the judgment of a
competent judicial authority abroad, handed down wh ile the payor also was a
foreign resident, he shall be allowed to deduct tha t part of the maintenance
paid which exceeds an amount set by the Minister of Finance with approval by
the Knesset Finance Committee, and which does not e xceed a maximum
amount set as aforesaid.

Article Two: Deduction of Depreciation

Depreciation of assets
21. (a) A deduction shall be allowed for the depr eciation of buildings,
machinery, installations, furniture or other assets that are owned by the
assessee and used for the purpose of producing his income, including
live and other agricultural stock and plantations; the amount of deduction
shall be calculated according to percentages – set with approval by the
Knesset Finance Committee for each case or each cat egory of cases –
of the original cost to the assessee, exclusive of the cost of land on
which a building was erected or a plantation plante d, all as the case may
be, on condition that the prescribed particulars ha ve been duly
produced; for purposes of this section, a lease of real estate for a period

52
of 49 years or more shall be treated like ownership thereof; a person
who, although he has disposed of an asset, is liabl e to tax on it under
sections 83 or 84, and a person who has transferred an asset, but
reserved to himself the right to enjoy its proceeds , shall also be deemed
its owner, and the depreciation allowed him shall b e the depreciation
which would have been allowed him but for the said disposition or
transfer.
(b) If a grant is received because of the acquisit ion of an asset, in respect of
which depreciation is deductible under subsection ( a), or if a debt that
stems from a loan for the acquisition of an aforesa id asset is remitted or
written off within five years after the year in whi ch it was received, or if
value added tax was paid on the acquisition of an a sset and the
assessee deducted the tax as input tax in accordanc e with the Value
Added Tax Law 5736-1975, then the original cost of the asset, both for
this purpose and for the purposes of section 88, sh all be its aforesaid
cost, less the amount of the grant, the debt or inp ut tax, as the case may
be; this provision shall not apply to an amount cha rged with tax under
section 3(b)(2).
(c) If a person incurred expenses, in order to com ply with instructions issued
to him for the installation of special arrangements for invalids in a public
building, under section 158C of the Planning and Bu ilding Law 5725-
1965, then he shall be allowed to deduct depreciati on on those
expenses at the rate of 16.5% per year; this provis ion shall not apply to a
person who incurred the said expenses on a building , construction of
which was finished after March 31, 1981.
(d) The Minister of Finance may, with approval by the Knesset Finance
Committee, prescribe that, if a dwelling was rented out for residential use
in a certain tax year, and if its owner is not enti tled to benefits for it under
Chapter Seven “A” of the Encouragement of Capital I nvestments Law
5719-1959, then the deduction of depreciation shall be allowed as
calculated as a percentage of the value of the dwel ling, and he may –
with the said approval – make rules for calculating the value of the
dwelling.

Carrying depreciation forward from one year to anot her
22. If all or any part of depreciation cannot be de ducted in a particular tax year
because the source in respect of which depreciation is claimed did not yield
any income in that year or yielded less income than the amount deductible as
aforesaid, then the amount not deducted shall be de emed a loss for the
purposes of section 28; this provision shall not ap ply if the source in respect of
which depreciation is claimed is not a business or vocation, and in that case
the amount not deducted shall be deemed a loss perm itted to be set off in the
succeeding years against the same source only.

Restriction on depreciation deductions
23. The total of depreciation deductions deductible under the Ordinance, plus the
total of wear and tear, calculated at the prescribe d rates, during the period
before the date on which depreciation was allowed u nder this Ordinance, shall
not exceed the original cost of the assets to the a ssessee, as said in section
21, without the cost of the land on which a buildin g is built or on which a
plantation is planted, as the case may be; however, for the purpose of the
original cost of citrus plantations, depreciation d eductions and wear and tear
during the period before 1950 shall not be taken in to account.

53
Depreciation upon transfer of an asset without transfer of control
24. (a) If a depreciable asset was transferred from one person to another, and if
the Director found and decided that control of the transferred object
remained with the person who held it before the det ermining date, then
the amount of depreciation which the transferee is entitled to deduct
under sections 21 to 23 shall be the amount which t he transferor would
have been entitled to deduct, if not for the transf er; and if the transfer
took place before April 1, 1946, and the transferee deducted
depreciation under sections 21 to 23 in an amount t hat exceeds the
amount which he would have been entitled to deduct under the
provisions of this section, then the excess shall n ot be deemed to have
been deducted unlawfully, but it shall be taken int o account in calculating
the total depreciation permitted under section 23.
(a1) If a depreciable asset was sold and the seller acquired it again, then the
amount of depreciation which the seller is entitled to deduct under
sections 21 to 23 after the reacquisition shall be the amount to which he
would have been entitled, had he not sold it.
(b) The provisions of subsection (a) shall apply to a transfer of assets by two
or more persons to another person, as they apply to such a transfer by
one person to another, if the Director finds and de cides that all of the
control of the object transferred remained with the persons, each of
whom had held a part of the transferred object befo re the determining
date.
(c) The provisions of this section shall not apply to a transfer charged with
capital gains tax under Part Five, or if the capita l gain was set off against
a loss, on condition that an amount equal to the in flationary amount,
within its meaning in section 88, on which tax was paid at the rate of
10%, shall be subtracted from the original cost; th is subtraction shall also
be taken into account for purposes of the definitio n of “original cost” in
section 88.
(d) The Director’s decision under this section may be appealed under
sections 153 to 158.

Definition of control
25. For purposes of section 24, ” control” – direct or indirect control or the ability to
exercise or the right to acquire aforesaid control and, particularly, but without
derogating from the generality of the aforesaid –
(1) if control is by virtue of shares – holding or having the right to hold or to
acquire a majority of the share capital or of the i ssued share capital, or of
the voting power, or the right to hold or to acquir e them, and also the
right to receive most of the profits or to appoint a majority of the
directors, or the right to acquire an aforesaid rig ht;
(2) if control is by other means – the right to mos t of the capital, to most of
the profits, to a majority of the voting power, or to appoint a majority of
the directors, or the right to acquire an aforesaid right.

Who holds control
26. (a) In determining – for purposes of section 24 – whether control is or was
held by a certain person, the relative of that pers on, within its meaning in
section 76(d), shall be deemed to be identical with that person.
(b) If, at any time within three years after the tr ansfer, control of the
transferred object is again held by the transferor, then it shall be deemed
to have been held by him throughout.

54
Definition of determining date
26A. For purposes of section 24, ” determining date” – the date of the transfer of a
business or asset, or the date on which a transacti on was performed of which
the said transfer is a part or to which it is conne cted, or the date on which the
first of several transactions was performed of whic h the said transfer is part or
to which it is connected, all as the case may be.

Deduction for the replacement of machinery and equi pment
27. (a) If a person engaged in any business or voca tion expended a certain
amount during a certain tax year for the replacemen t of machinery and
equipment used or formerly used in that business or vocation, then – for
the determination of his chargeable income – he sha ll be allowed to
deduct an amount equal to the amount of the expendi ture incurred by
him in the acquisition of the old machinery and equ ipment, less all the
depreciation he deducted on that machinery and equi pment and the
amount received by him for their sale, or an amount equal to the amount
expended by him on the new machinery and equipment, whichever is
less; if an amount was deducted under this subsecti on, then any loss
permitted to be set off under Part Five in respect of the sale of the old
machinery and equipment shall be reduced by that am ount.
(b) Subsection (a) shall not apply to private motor vehicles, within their
meaning in the Traffic Ordinance.

Depreciation deduction at an exchange of land and i n
Evacuation and Compensation
27A. (a) In this section every term shall have the meaning it has in the Real
Estate Taxation Law, unless a different meaning is explicitly provided.
(b) W hen real estate rights are exchanged under Cha pter Five AC @ of the
Real Estate Taxation Law, the following provisions shall apply to the
deduction of depreciation and also to additional de duction for
depreciation or amortization, within their meaning in section 3 of the
Inflationary Adjustments Law:
(1) the original cost of the replacement right shal l be one of the
following:
(a) if the adjusted value of the replacement right is equal to the
sale value of the sold right – the balance of the o riginal cost
of the sold right;
(b) if the adjusted value of the replacement right is less than the
sale value of the sold right – the balance of the o riginal cost
of the exempt sold right;
(c) the provisions of subsection (b) shall apply, m utatis
mutandis, also to the sale of another unit in the c ompound to
an entrepreneur, in consideration whereof another u nit was
received, as said in Chapter Five AD @ of the Real Estate
Taxation Law, up to the ceiling value;
(2) the balance of the original cost of the sold ri ght shall be the
original cost of the part of the replacement right;
(3) the value of the additional replacement right o n the day of its
acquisition shall be its original cost;
(4) the depreciation rate prescribed for the deduct ion of depreciation
in respect of the replacement right or of the addit ional replacement
right, as the case may be, shall be the rate of dep reciation;

55
(5) the depreciation said in this section shall be allowed only if the
replacement right, part of the replacement right or the additional
replacement right is a depreciable asset.
Article Three: Set Off of Losses
Setting off a loss
28. (a) A loss incurred by a person during the tax year in a business or vocation,
which – had it been a profit – would have been asse ssable under this
Ordinance, may be set off against that person’s tot al chargeable income
from other sources in that tax year.
(b) If all of the loss cannot be wholly set off in the said tax year, then the
amount of loss not set off shall be carried forward to the subsequent
years in succession and it shall be set off against that person’s total
chargeable income from business or vocation in thos e years, including
capital gains from business or vocation, or it shal l be set off against that
person’s entire chargeable income in those years un der section 2(2), all
the conditions specified below having been met, pro vided that – if the
loss can be set off in one of these years – it shal l not be allowed to be
set off in the following year:
(1) that person had no income from business or voca tion in the year of
the set-off,
(2) that person ceased engaging in the business or vocation in which
he suffered the loss that he wishes to set off;
(3) the loss suffered by that person does not stem from a house
company, within its meaning in section 64, from a f amily company
within its meaning in section 64A or from a transpa rent company,
as defined in section 64A1(a).
(NOTE: Under the provisions of Amendment No. 154, t he provisions of
subsection (b) apply to losses from business or voc ation created in 2007
and thereafter – Tr,)
(c) Notwithstanding the provisions of subsections ( a) and (b), if the
assessee so requests a loss shall not be set off un der this section
against a capital gain which is an inflationary amo unt, or against a
capital gain, interest or dividend, if the tax rate applicable to them does
not exceed 20%.
(d) A loss incurred by a person in a citrus plantat ion, planted in grafted
condition, in the fifth and sixth years after the b eginning of the tax year in
which it was planted, shall only be set off against his income from that
plantation in the sixth and seventh years.
(e) A loss incurred by a person in a citrus plantat ion, planted in ungrafted
condition, in the sixth and seventh years after the beginning of the tax
year in which it was planted, shall only be set off against his income from
that plantation in the seventh and eighth years.
(f) The provisions of subsection (b) shall apply to any loss which cannot be
set off as said in subsections (d) and (e).
(g) For purposes of subsections (d) and (e), a citr us plantation planted after
November 30 of any year shall be treated as if it h ad been planted in the
first month of the following tax year.
(h) A loss incurred by a person from the letting of a building may be set off
against his income from that building in subsequent years.
(i) Repealed

56
(j) In this section, “chargeable income” and “capital gain ” – including
appreciation within its meaning under section 6 of the Land Appreciation
Tax Law 5723-1983 (hereafter: land appreciation).

Loss incurred outside Israel
29. Notwithstanding the provisions of section 28, t he following provisions shall
apply to a loss incurred abroad:
(1) (a) If during the tax year an Israel resident i ncurred a loss abroad
which – had it been a profit – would have been liab le to tax as
passive income, then it shall be set off against ch argeable passive
income from abroad; however, a loss from renting a building,
which stems from depreciation, may also be set off against a
capital gain upon the sale of that building; for th e purposes of this
section, ” passive income ” – income from interest, linkage
differentials, rent or royalties, which is not inco me from a business
or a vocation;
(b) if it is not possible to set off the entire los s in the tax year, as said
in subparagraph (a), the amount of loss that was no t set off shall
be transferred to the following years, one after th e other, and shall
be set off against chargeable passive income produc ed abroad
during those years, on condition that – if it is po ssible to set the
loss off in one of the years – it shall not be allo wed to be set off in
the following year; however a loss from renting a b uilding, which
stems from depreciation and which was brought forwa rd from
previous years, may also be set off against a capit al gain from the
sale of that building;
(2) if an Israel resident suffered a loss abroad fr om business or vocation,
and which – had it been a profit –would have been c hargeable to tax in
Israel, then the following provisions shall apply t o it:
(a) a loss suffered during a tax year shall be firs t set off against his
chargeable income, including capital gains, in the same tax year
from business or vocation abroad;
(b) if a balance of loss remained after the set off said in subparagraph
(a), then the said balance shall be set off against chargeable
passive income from abroad, which was left in that tax year after
the set off said in paragraph (1)(a);
(c) if a balance of loss remained after the set off said in
subparagraphs (a) and (b) and the said balance of l oss is in a
business abroad which is controlled and managed fro m Israel (in
this section: the controlled business), then it sha ll be set off – if the
assessee so requests – against chargeable income pr oduced or
accrued in Israel in that tax year;
(d) if it is not possible to set off the entire los s in that year, as said in
subparagraphs (a) and (b), and if he elected that t he provisions of
subparagraph (c) apply to him, then the amount of a said loss that
cannot be set off under subparagraphs (a) to (c) sh all be brought
forward to the following years, one after the other , and shall be set
off against the assessee’s chargeable income, inclu ding capital
gains, from business or vocation abroad in those ta x years;
(e) notwithstanding the provisions of subparagraph (d), if a balance of
loss remained after the set off said in that subpar agraph and if the
balance of loss stems from a controlled business, t hen the balance
of loss shall be set off – if the assessee so reque sts – against his
chargeable income, including capital gains or land appreciation

57
within its meaning in the Real Estate Taxation Law, from business
or vocation in Israel; an amount set off as aforesa id shall not be
carried forward for setting off in subsequent tax y ears under the
provisions of subparagraph (d);
(3) set off shall not be permitted of a loss suffer ed abroad by an Israel
resident, for which – had it been a profit – no tax would have been
payable in Israel;
(4) section 28(c) shall also apply, mutatis mutandi s, to the subject of this
section;
(5) a loss said in this section shall be allowed to be set off only if a return, as
said in sections 131 and 132, was submitted to the Assessing Officer for
the tax year in which the loss was suffered;
(6) the Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe provisions for the implementat ion of this section,
inter alia on the matter of how to prove the loss.

Article Four: General Provisions

Restriction on deductions
30. No deduction shall be allowed for expenses unde r sections 17 to 27 in an
amount greater than was necessary for the productio n of the assessee’s
income; any question on the subject of this section shall be decided by the
Director, but nothing in this section shall be cons trued as preventing a person,
who considers himself aggrieved by the Director’s d ecision, from appealing
against it in accordance with the provisions of sec tions 153 to 158.

Regulations on the deduction of expenses
31. The Minister of Finance may, with approval by t he Knesset Finance
Committee, make regulations – whether in general or for particular categories
of assessees – on the limitation or disallowance of the deduction of certain
expenses under sections 17 to 27, and in particular on –
(1) the method of calculating or estimating expense s;
(2) the amounts or rates of deductible expenses;
(3) the conditions for allowing expenses;
(4) the manner of proving expenses.

Deductions that are not to be allowed
32. In determining the chargeable income of a perso n, deductions shall not be
allowed in respect of –
(1) household or private expenses;
(2) payments or expenses, which are not money wholl y and exclusively
expended for the production of income;
(3) capital withdrawn or a sum used or intended to be used as capital;
(4) the cost of improvements;
(5) any loss or expense which is recoverable under insurance or under a
contract of indemnification;
(6) rent for and the cost of repairs of premises or of any part thereof, which
were paid or incurred not for the purpose of produc ing income;
(7) amounts paid or payable as income tax;
(8) repealed
(9) (a) (1) payment of amounts of grant in conseque nce of retirement
or in consequence of death, which are exempt of tax under

58
section 9(7a), paid by a company controlled by not more
than five persons, within its meaning in section 76 , to a
controlling member or to another in his stead, in r espect of
years of employment up to the year 1975;
(2) payments to a benefit fund paid by a company sa id in
subparagraph (1) for a member, except payments to a
benefit fund for severance pay or pension at rates and on
conditions prescribed under section 22 of the Contr ol of
Benefit Funds Law, but not more than NS 10,500 (in 2008;
in 2007: NS 10,220; in 2006: NS10,250; in 2005: NS9 ,980 –
Tr.) and exclusive of payments to a training fund, and
provided that deductions of a sum in excess of 4.5% of the
member’s determining salary shall not be allowed;
the provisions of subparagraphs (1) and (2) shall also apply
to a person, if two years have not yet elapsed sinc e the day
on which he ceased being a member; notwithstanding the
provisions of this paragraph, the Director may dire ct
otherwise if he sees fit to do so under the circums tances;
for this purpose:
” controlling member ” – a person who, directly or indirectly, alone
or with a relative holds one of the following:
(a) at least 10% of the issued share capital or at least 10% of
the voting power;
(b) the right to hold at least 10% of the issued sh are capital or at
least 10% of the voting power, or the right to acqu ire them;
(c) the right to receive at least 10% of the profit s;
(d) ” the right to appoint a director; ” relative ” – within its meaning in section 76(d);
” member ” – a controlling member who has, alone or together with
his spouse, or whose spouse has, directly or indire ctly, not less
than 5% of the issued share capital, or of the voti ng power, or of
the right to hold or to acquire each of these, or o f the right to
receive profits; however, the rights of a spouse th at was acquired
before marriage or inherited shall not be taken int o account for this
purpose: ” determining salary ” – as defined in section 3(e);
(b) the provisions of subparagraph (a) shall not ap ply to the amount of
a grant in consequence of death, which is exempt of tax under
section 9(7a), or to an amount of grant in conseque nce of death
which does not exceed NS 10,220 (in 2007; in 2006: NS10,250; in
2005: NS9,980 – Tr.) per working year, whichever is the smaller
amount.
(10) (a) premiums paid by a company to insure the l ife of a controlling
member in its own favor, within its meaning in para graph (9),
except aforesaid premiums paid to a benefit fund;
(b) premiums paid by a partnership in its own favor to insure the life of
a partner, or paid by a partner in his own favor to insure the life of
his partner, when the insured person has at least 1 0% of the
capital of the partnership or of the right to its p rofits;
(11) expenses in respect of a benefit granted by an employer to his
employees which cannot be attributed to a particula r employee, except
for expenses that by their nature are proved not to be intended to confer
personal benefits on an employee; expenses within t he limits of amounts
prescribed in regulations under section 31 for the maintenance of a

59
vehicle in the employer’s possession and used by his employees and the
benefit of its use cannot be related to a certain e mployee; expenses that
cannot be deducted as aforesaid shall be deemed wor k income of the
employees.
(12) amounts paid for an activity which is prohibit ed under sections 5A and
5B of the W ireless Telegraph Ordinance [New Version ], 5732-1972;
(13) payments paid as supplements under section 179 of the National
Insurance Law [Consolidated Version] 5728-1968;
(14) (a) expenditures for the acquisition of insura nce against loss of
working capacity;
(b) notwithstanding the provision of subparagraph ( a), if the income in
respect of which insurance against loss of working capacity was
acquired is income under section 2(1) or (2), and i f the insurance
is preferential insurance, then deductions will be allowed for
expenditures for the acquisition of the preferentia l insurance up to
3.5% of the income under section 2(1) or of the emp loyee’s salary,
as the case may be, which is liable income, on cond ition that
deductions under this subparagraph not be allowed i n respect of
the said income that exceeds the amount that equals the total
average wage in the economy in the tax year, divide d by three;
however, if the employer paid for his employee to a benefit fund on
account of the employer’s benefit component an amou nt that
exceeds 4% of the employee’s salary, then the diffe rential between
the rate paid as aforesaid by the employer in respe ct of income
under section 2(2) and 4% shall be subtracted from the rate said in
the opening passage;
for the purpose of this paragraph: ” preferential insurance” –
insurance against loss of working capacity, and if the insurance
was acquired before the insured person had reached age 60, if the
following two conditions also hold true for the ins urance:
(1) the insurance period – other than group insuran ce –
continues at least until the insured person reaches age 60;
(2) if the insurance event occurs before the insure d person
reaches age 60, then the moneys under the insurance will
be paid from the date on which the insurance event occurred
until the end of the period of loss of working capa city or until
the insured person at least reaches age 60, whichev er
comes first;
” insurance against loss of working capacity ” – as defined in
section 3(a); ” average wage in the economy ” and “employer’s benefit
component ” – as defined in section 3(e3)(2);
” salary ” – work income other than the value of the use of a vehicle
made available to the employee;
(15) educational expenses, including expenses for t he acquisition of an
academic education or for the acquisition of a prof ession, other than
expenses for supplementary professional training th at is not for the said
acquisition of an education or profession, but for the maintenance of the
what exists.

Restrictions on deductibility and on reduction of advances because
of faulty returns
32A. Notwithstanding the provisions of any statute, an assessee shall not be
allowed to deduct expenses or to reduce advance pay ments under section

60
175(d) in respect of payments to which the obligation to deduct at the source
applies, unless returns which the assessee must sub mit under sections 161,
166 or 171, as the case may be, have been submitted to the Assessing
Officer, in which are stated the name, address and identity number of the
person to whom or for whom payments were made, and in respect of a body of
persons – another identifying number, all in an acc urate manner that enables
the Assessing Officer to identify the payment’s rec ipient.

Restriction on deductions, credits and set-offs bec ause of unacceptable books
33. (a) The Assessing Officer may refuse to allow t he deduction of expenses
according to accounts submitted by an assessee who did not keep
acceptable books, and he may assess the expenses to the best of his
judgment.
(b) If an assessee did not keep acceptable books in a particular tax year,
then he shall not be allowed to set-off losses from earlier years against
his income in that year, and if the assessee was re quired to keep books
in a particular tax year and his books were found t o be unacceptable
under aggravating circumstances, then no deductions or set-offs shall be
allowed him in that year for bad debts and losses a nd a loss for that year
shall not be recognized.
(c) If an assessee was required to keep books in a particular tax year and
did not keep books, or kept books but did not base his return on them,
then in that year he shall not be allowed deduction s and set-offs for
depreciation, interest, lost debts and losses, and a loss for that year shall
not be recognized.
(d) If an assessee was required to keep books in a particular tax year and
did not keep acceptable books, then in that tax yea r he shall not be
allowed a tax credit under section 121A.

CHAPTER THREE: DEDUCTIONS, CREDITS AND CHILDREN’S PENSIONS

Definitions
33A. In this Chapter –
” credit point ” – an amount of NS 2,136 (in 2004 to 2008 – Tr.), linked to the
index as said in section 120A, set off against the tax for that year; (Amendment
No. 136 provides that the underlined words shall no t apply in tax years 2005 to
2008; however, if at any time during those years th e index rises to more than
5% above the index known on January 1, 2004, then t his reservation no longer
applies, beginning with the next following tax year – Tr.)
” pension point ” – an amount equal to the amount of a credit point , at its value
on December 31, 1996, adjusted under the provisions of section 120B in
respect of pension points and divided by twelve.
Credit for Israel resident
34. Two credit points shall be taken into account i n calculating the tax of an
individual who was an Israel resident in the tax ye ar.

Credit for oleh
35. (a) In calculating the tax of an oleh (new immigrant – Tr.), the following shall
be taken into account –
(1) 1/4 credit point for each of the first eightee n months after his aliyah
(immigration – Tr.) to Israel;

61
(2) 1/6 credit point for each of the twelve months thereafter;
(3) 1/12 credit point for each of the twelve month s thereafter.
(b) If the chargeable income of a registered spouse includes income of his
spouse who is an oleh and if the tax on their incom e is calculated jointly,
then the credit points said in subsection (a) shall be taken into account,
but if the income of the spouse who is not the regi stered spouse does
not exceed an amount equal to five times the amount of the credit points
said in subsection (a) and in section 38, then the income of the spouse
who is not the registered spouse shall not be inclu ded in the chargeable
income of the registered spouse and the said credit points shall not be
taken into account in calculating the tax of the re gistered spouse.
(c) The said credit shall be granted for a tax year wholly or partly within the
period of the said 42 months, according to the numb er of months that
the oleh resided in Israel in that year, and it sha ll only be granted the first
time he becomes an oleh; on his application, a cons ecutive period of
absence from Israel of not less than six months and not more than three
years shall not be included in the count of 42 mont hs.
(d) In this section, ” oleh” – a person who holds an oleh’s visa or an oleh’s
certificate under the Law of Return 5710-1950, or a person entitled to a
said visa or certificate who holds a visa and permi t of temporary
residence under the Entry into Israel Law 5712-1952 , or a person who
belongs to a category of persons who the Minister o f Finance
determined shall for the present purpose be treated like olim, but
exclusive of a person whose Israel citizenship was withdrawn under
section 10(d) of the Citizenship Law 5712-1952.
(e) Notwithstanding the provisions of subsection (c ), the Minister of Finance
may, with approval by the Knesset Finance Committee , prescribe –
(1) rules for the grant of credits under subsectio n (a) to a person who
in the past came within the definition of oleh;
(2) other provisions, either generally or in respe ct of particular cases,
on the beginning of the 42 month period and the int erruption of its
continuity.

Credit for travel to place of work
36. In calculating the tax of an individual Israel resident, 1/4 credit point shall be
taken into account as a travel credit.

Credit for women
36A. In calculating the tax of a woman, 1/2 credit point shall be taken into account.

Credit for a spouse
37. In calculating the tax of a beneficiary individ ual Israel resident, who proved to
the Assessing Officer’s satisfaction that he suppor ted his spouse during the tax
year, one credit point shall be taken into account; for purposes of this section,
” beneficiary individual @ – an individual, if he or his spouse has reached t he
retirement age, or if he or his spouse is blind or disabled within the meaning of
those terms in section 9(5)(a).

Credit for a working spouse
38. (a) If the chargeable income of an individual I srael resident, who is a
registered spouse, includes the income of his spous e, and if it is proved
to the Assessing Officer’s satisfaction that his sp ouse’s income was
obtained by personal exertion from any business or vocation or from

62
employment, including income from personal exertion as said in
paragraphs (1) to (6) of its definition in section 1, then in calculating his
chargeable income 1/4 credit point shall be taken i nto account under
section 36, 1 1/2 credit points if they are not ent itled to a pension point
under section 40(a) and 1 3/4 credit points if they are entitled to an
aforesaid pension point, and in respect of a benefi ciary individual, as
defined in section 37, a credit point said in that section shall also be
taken into account.
(b) Notwithstanding the provisions of subsection (a ), if the income of the
spouse who is not the registered spouse does not ex ceed an amount
equal to five times the amount of the said fraction al credit points, as the
case may be, then the income of the spouse who is n ot the registered
spouse shall not be included in the chargeable inco me of the registered
spouse and the said fractional credit points shall not be taken into
account.

Credit for spouse who helps
39. In calculating the tax of an individual Israel resident whose spouse helps him in
obtaining his income from any business or vocation during at least 24 hours in
each week during nine months of the tax year, then 1 1/2 credit points shall be
taken into account if he is not entitled to a pensi on point under section 40(a)
and 1 3/4 credit points if he is entitled to an afo resaid pension point, and in
respect of a beneficiary individual, as defined in section 37, a credit point said
in that section shall also be taken into account, p rovided that – if in respect of
his spouse he is also entitled to credits under sec tion 38, then he shall be
granted the credits under one of the two sections, at his choice.

Credit for discharged soldier
39A. In calculating the tax on the income from pers onal exertion of a discharged
soldier, part of a credit point shall be taken into account for each month of the
first 36 months after the month in which he conclud ed his regular service, as
specified below:
(1) 1/6 of a credit point – if he or she served reg ular service –
(a) if a man – of at least 23 whole months;
(b) if a woman – of at least 22 whole months’
(2) 1/12 of a credit point – if he or she served re gular service –
(a) if a man – of less than 23 whole months;
(b) if a woman – of less than 22 whole months;
for this purpose: ” discharged soldier ” and “regular service ” – as defined in
the Absorption of Discharged Soldiers Law 5754-1994 .

Pension and credit points for children
40. (a) An individual Israel resident is entitled t o pension points for each of his
children, as prescribed in section 109 of the Natio nal Insurance Law
[Consolidated Version] 5728-1968; the pension point s shall be paid by
the National Insurance Institute under the National Insurance Law.
(b) (1) If an Israel resident individual, who is th e parent of a single parent
family, has children who during the tax year had no t yet reached
age 19 and were maintained by him, but is not entit led to credit
points under section 37, then, in calculating his t ax, in addition to
the pension points under subsection (a) in respect of the children
who live with him, 1/2 credit point shall be taken into account in

63
respect of each child in the year of its birth and in the year of its
maturity, and one credit point in respect of each c hild beginning
with the tax year after the year of its birth until the tax year before
the year of its maturity; and in respect of his bei ng the parent of a
single parent family – one additional credit point only.
(2) If parents live separately and the maintenance of their children is
shared by them, then the parent who is not entitled to a credit point
under paragraph (1) shall receive one credit point or part thereof,
according to his share in the maintenance.
(3) For purposes of this subsection:
“year of birth ” – the tax year in which the child was born;
” year of maturity ” – the tax year in which the child reached age
18.

Credit point for divorced man who has remarried
40A. In calculating the tax of a divorced person wh o pays, or whose spouse pays
maintenance to his former spouse and who is married to another spouse, one
credit point shall be taken into account.

Credit point for a juvenile
40B. In calculating the tax of an individual, if he or his spouse has reached age 16,
but has not yet reached age 18, one credit point sh all be taken into account.

Half a credit point for individual who completed st udies for a bachelor’s
or master’s degree
40C. (a) In calculating the tax of an individual Is rael resident (in this section:
individual) a credit point shall be taken into acco unt, if he is entitled to
receive a bachelor’s degree and half a credit point if he is entitled to
receive a master’s degree from an institution of hi gher education.
(b) The credit point or half credit point said in this section, as the case may
be, shall be taken into account during a number of years equal to the
number of years of his academic studies, on conditi on that not more than
three tax years be taken into account for studies f or a bachelor’s degree
and not more than two tax years for studies for a m aster’s degree.
(c) One credit point said in this section for stud ies for a bachelor’s degree
shall be taken into account beginning with the tax year after the tax year
in which his studies for the bachelor’s degree were completed, and half
the credit point for studies for the master’s degre e beginning with the tax
year after the tax year in which his studies for th e master’s degree were
concluded.
(d) Notwithstanding the provisions of subsections (a) to (c) –
(1) if the individual is entitled to receive a doct orate in medicine or
dentistry, then a credit point shall be taken into account during
three tax years and half a credit point during two tax years,
beginning with the tax year after the tax year in w hich his studies
for the degree of doctor were concluded;
(2) if the individual studied in a direct program t owards the degree of
doctor, then one credit point for studies for a bac helor’s degree
shall be taken into account beginning with the tax year after the tax
year in which his studies for the bachelor’s degree were
concluded, and during the number of tax years said in subsection
(b) in respect of studies for the bachelor’s degree ; furthermore,
half a credit point shall be taken into account dur ing two tax years,

64
beginning with the tax year after the tax year in which his studies
for the doctorate were concluded.
(e) The credit point or the half credit point said in this section, as the case
may be, shall be taken into account for studies tow ard only one
bachelor’s degree or only one master’s degree, and after the individual
presented to the Assessing Officer certification th at he had completed
his studies and that he is entitled to the said deg ree.
(f) in this section –
“Council of Higher Education Law ” – the Council of Higher Education
Law 5718-1958; ” institution of higher education ” – within its meaning in the Council of
Higher Education Law; ” degree ” – a recognized degree, within its meaning in the Council of
Higher Education Law.

Half a credit point for concluding professional stu dies
40D. (a) In calculating the tax of an individual Is rael resident, half a credit point
shall be taken into account, if he completed profes sional studies and is
entitled to a professional certificate, on conditio n that he submitted
certification of the conclusion of his studies and of his entitlement to the
said professional certificate to the Assessing Offi cer.
(b) The half credit point said in this section sha ll be taken into account
during a number of tax years that is equal to the n umber of years of
professional studies, on condition that it be taken into account in not
more than three years.
(c) The half credit point said in this section sha ll be taken into account
beginning with the tax year after the tax year in w hich his studies were
concluded.
(d) In this section,
“professional studies ” – studies for a certain profession, with a study
program identical at least with the 1,700 study hou rs common at
institutions of higher education, as defined in sec tion 40C;
“professional certificate” – a certificate awarded at the conclusion of
professional studies and recognized by a Government Ministry.

No duplication
40E. If the conditions set in section 40C and 40D h old true for an individual, then he
shall be entitled to choose whether a credit point or half a credit point be taken
into account in the calculation of his tax under se ction 40C or half a credit point
under section 40D.
————————————————— —————————————————————
Note: Section 72 of Amendment No. 147 inserts the f ollowing section 40F, with effect
in tax years 2005 and 2006:
Credit point for person who returned to work
40F. In the tax calculation of an individual Israel resident one sixth of a credit point
shall be taken into account per month of work, in t he course of six consecutive
months of work, if all the following hold true:
(1) before the month, in respect of which he claime d the credit said in this
section, he had work income in at least six consecu tive months;
(2) the employment in respect of which he had the w ork income said in
paragraph (1) began between July 1, 2005, and June 30, 2006;
(3) before he began to work, as said in paragraph ( 2), he did not have any
work income during at least twelve consecutive mont hs;
(4) during the period of 36 months that preceded th e period said in

65
paragraph (3) he had work income during at least twelve consecutive
months;
for the purposes of this section:
” work income ” – income under section 2(1) or (2);
” work” – includes engagement in a business or vocation.
————————————————— —————————————————————
Spouse who was married during part of the year
41. If a spouse who is not a registered spouse was married during part of the tax
year, then – for purposes of calculating the tax to which he is liable – he shall
be entitled –
(1) in respect of the period in which he was not ma rried – to one twelfth of
the credit points under sections 34, 36, 40(b) and 40B, multiplied by the
number of months of the tax year during which he wa s not married;
(2) in respect of the period in which he was marri ed – to one twelfth of the
credit point under section 66, multiplied by the nu mber of months of the
tax year during which he was married.

42 and 43 – Repealed
Credit for expense of maintaining a relative in an institution
44. In calculating the chargeable income of an indi vidual Israel resident, if during
the tax year he or his spouse paid for the maintena nce of a completely
paralyzed, permanently bedridden, blind or mentally unsound child, spouse or
parent and also of a retarded child, in a special i nstitution, then a 35% tax
credit shall be allowed on that part of the amounts paid that exceed 12.5% of
his chargeable income; the Minister of Finance may, by regulations, set
conditions for entitlement to tax credits under thi s section. (Ceiling of entitling
income: in 2008: NS 144,000 for an individual, NS 2 30,000 for a couple; in
2006 and 2007: NS140,000 and NS224,000; in 2005: NS 136,000 and NS
218,000 – Tr.

Credit for incapacitated persons
45. (a) If an Israel resident had a paralyzed, blin d or retarded child during the
tax year, or if his spouse had an aforesaid child, then in calculating his or
his spouse’s tax two credit points shall be taken i nto account for each
such child.
(b) repealed
(c) An individual shall be entitled to credit point s under subsection (a) only if
he did not receive tax credit under section 44 for the same child.
(d) The Minister of Finance may set conditions for entitlement to credit points
under this section. (Ceiling of entitling income: in 2008: NS144,000 f or an
individual, NS 230,000 for a couple;: in 2006 and 2 007: NS140,000 and,
NS224,000; in 2005: NS136,000 and NS 218,000 – Tr.)

Credit for insurance premiums and benefit fund cont ributions
45A. (a) An individual shall be given a tax credit of 25% of the amount paid by
him or his spouse in the tax year –
(1) for insuring his life or the life of his spouse with an insurance
company, if he is an Israel resident;
(2) as payment to a benefit fund to the credit of o ne of them, other
than payments to a pension benefit fund and other t han payments
to a benefit fund which is a training fund.
(b) An individual shall be given a tax credit ofr 3 5% of the amounts he or his
spouse paid in the tax year to a pension benefit fu nd, or which they paid

66
as aforesaid to the State, to a local authority or to some other body
designated by the Minister of Finance in order to m aintain his or his
spouse’s pension rights, or paid as aforesaid for s urvivors’ pension
insurance.
(b1) A beneficiary member shall receive a tax credi t, as said in subsections
(a) and (b), also for amounts he paid for the insur ance of his child’s life in
an insurance company, to a benefit fund to his chil d’s credit or for the
maintenance of his child’s pension rights, subject to the conditions said
in those subsections, as the case may be, on condit ion that in that tax
year that child was of age eighteen or older.
(c) In this section –
“life insurance ” – insurance against the risk of the insured perso n’s
death, without any savings component, which does no t include pension
payments to survivors; ” survivors’ pension insurance ” – insurance against the risk of the
insured person’s death, without a savings component , which includes
pension payments to survivors; ” insured income “, “entitling income ” and “beneficiary member ” – as
defined in section 47.
(d) Notwithstanding the provisions of subsections ( a) and (b), the total
amount in respect of which credit shall be given to an individual who is
not a beneficiary member for amounts paid as said i n those subsections
shall not exceed the larger of the amounts specifie d below:
(1) the amount of NS 1,728 (in 2008; in 2007: NS 1,680 – Tr.);
(2) the lower of the following two amounts: (a) the total of amounts paid as said in subsection s (a) and (b);
(b) (1) in respect of an individual who had no wo rk income in
the tax year – 5% of his entitling income, provided that
the total amount for which he shall be given credit for
payments for survivors’ pension insurance , as said in
subsection (b) not exceed 1.5% of the individual’s
entitling income;
(2) in respect of an individual who did have wor k income
in the tax year – 7% of his entitling income, provi ded
that the total amount, in respect of which credit w ill be
given for amounts paid for survivors’ pension
insurance as said in subsection (b) not exceed 1.5%
of the individual’s entitling income, and that the total
amount for which credit shall be given in respect o f the
amounts paid for life insurance as said in subsecti on
(a)(1), for survivors’ pension insurance as said in
subsection (b) and in respect of income that is not
from work shall not exceed 5% of the individual’s
entitling income;
(e) Notwithstanding the provisions of subsections ( a) to (b1), the total
amount in respect of which credit shall be given to a beneficiary member
for amounts paid as said in those subsections shall not exceed the
larger of the amounts specified below:
(1) the amount of NS 1,680 (in 2008 – Tr.);
(2) the lower of the following two amounts: (a) the total of amounts paid as said in subsection s (a) to (b1);
(b) (1) in respect of a beneficiary member who did not have
insured income in the tax year – 5% of his chargeab le
income up to the amount of NS 180,096 (in 2008; in

67
2007:NS175,200 – Tr.) per year, on condition that the
total amount, in respect of which credit will be gi ven for
amounts paid for survivors’ pension insurance, as s aid
in subsection (b), not exceed 1.5% of the beneficia ry
member’s entitling income;
(2) in respect of a beneficiary member who did hav e
insured income in the tax year – the amount obtaine d
by adding the amounts specified below:
(a) 7% of his entitling income that is insured income, on condition that the total amount in
respect of which credit will be given for amounts
paid for survivors’ pension insurance, as said in
subsection (b), not exceed 1.5% of his said
income, and that the total amount in respect of
which credit will be given for amounts paid for
life insurance under subsections (a)(1) and (b1)
and for survivors’ pension insurance under
subsection (b) does not exceed 5% of his said
income;
(b) 5% of his chargeable income that is not insur ed
income, up to the amount of NS 180,096 (in
2008; in 2007: NS172,800 – Tr.) per year, less
the amount of NS 88,800 (in 2008; in 2007:
NS86,400 – Tr.) or the amount of his insured
income, whichever is the smaller amount, on
condition that the total amount, in respect of
which credit will be given for amounts paid for
survivors’ pension insurance, as said in
subsection (b), does not exceed 1.5% of his
liable income that is not insured income.

45B. Repealed
Contribution to a public institution
46. (a) If a person contributed in a certain tax y ear an amount in excess of NS
380 (in 2006 and 2007 – Tr.) to a national fund or to a public institution
within its meaning in section 9(2) and designated f or this purpose by the
Minister of Finance with approval by the Knesset Fi nance Committee,
then he shall be credited to the tax he owes in tha t year in the amount of
35% of the amount of the contribution, if he is an individual, and at the
percentage of the contribution prescribed in sectio n 126(a) if it is a body
of persons, but in no tax year shall credit be give n for a total amount of
contributions in excess of 30% of the assessee’s ch argeable income in
that year, or in excess of NS 4,013,000 (in 2008; in 2007: NS 4,000,000;
in 2006: NS 2,218,000;in 2005: NS 2,165,000 – Tr.), whichever is less
(hereafter: credit ceiling); any amount contributed in that tax year in
excess of the credit ceiling shall be credited agai nst tax in accordance
with the provisions of this section during the foll owing three tax years,
one after the other, on condition that in each of t he said three tax years
no credit be allowed in respect of a total amount o f contributions in
excess of the credit ceiling.
(a1) If a public institution said in subsection (a) did not submit two successive
annual reports, or if the submitted reports show th at it does not duly keep
books or that a substantive part of its activity is not for a public purpose,

68
then the Minister of Finance may cancel its designation for purposes of
subsection (a).
(a2) The renewal of a designation, which was cancel ed as said in subsection
(a1), requires approval by the Knesset Finance Comm ittee.
(b) The amounts in subsection (a) shall be adjuste d in every tax year,
according to the rate of index increase from the in dex published in
August before the tax year to the index published i n August of the tax
year; the minimum amount increased as aforesaid sha ll be rounded off
to the nearest sum that is a multiple of NS 10, and the maximum amount
increased as aforesaid shall be rounded off to the nearest sum that is a
multiple of NS 1000; the Director shall publish a n otice in Reshumot on
the amounts increased and rounded off as aforesaid.
(c) In this section, ” national fund” – the Jewish Agency for Israel, the World
Zionist Organization, the United Israel Appeal and the Jewish National
Fund.
(d) (1) If the account books of a public institutio n were declared
unacceptable, and if that determination is no longe r subject to
objection or appeal, then the Director may cancel t he designation
under subsection (a) from that day forward.
(2) The institution shall inform the public of a sa id cancellation, at the
time and in the manner prescribed by the Director.

Overall ceiling on tax benefits for contributions a nd R&D
46A. Notwithstanding the provisions of any statute, the total amount in respect of
which a credit will be allowed in a certain tax yea r for contributions under
section 46 and a deduction for participation in the financing of research and
development carried out by another person under sec tion 20A and under the
Income Tax Law (Benefits for Securities that Financ e Scientific Research and
Development) 5744-1983, shall not exceed 50% of the assessee’s chargeable
income in that year; for this purpose: ” chargeable income” – before the
deduction for participation in research and develop ment.

Credit for contribution – addition to base for adva nce payments
46B. The amount of tax, from the payment of which a person was exempted
because of contributions under section 46 and under any other statute, shall
be added to the amount of tax that serves as base f or the determination of his
advance payments under section 175.

Deduction of payments, benefits or pensions
47. (a) In this section –
(1) “entitling income ” – the total chargeable income of an individual,
before the deduction under this section and under s ection 47A, as
specified below, as the case may be:
(1) in respect of an individual who only had work i ncome – up to
the amount of NS 88,800 per year (in 2008; in 2007: NS
86,400 – Tr.) ;
(2) in respect of an individual who had no work inc ome – up to
the amount of NS 126,000 per year (in 2008; in 2007: NS
122,400 – Tr.) ;
(3) in respect of an individual who had work income and income
that is not work income, in respect of the work inc ome – up
to the amount said in paragraph (1), and in respect of the
income that is not work income – up to the amount s aid in
paragraph (2), less his work income, or less the am ount said

69
in paragraph (1), whichever is less, on condition that his
work income be taken into account first;
(2) repealed
(3) ” income of a self-employed member ” – the individual’s total
liable income before the deduction under this secti on and under
section 47A, up to the amount of NS 90,000 per year (in 2008; in
2007: NS 86,400 – Tr.) , less his insured income;
(4) ” insured income ” – work income, in respect of which the
employer paid for his employee during the tax year amounts to a
savings benefit fund or to a pension benefit fund, and also work
income in respect of which the employee is entitled to a pension
under a statute or contract;

(5) ” additional income ” – the smaller of the following amounts:
(1) an individual’s total liable income before dedu ction under
this section and under section 47A, which is not in sured
income, up to the amount of NS 90,000 per year in 2008; (in
2007: NS 86,700 – Tr.) ;
(2) the individual’s total liable income before the deduction
under this section and under section 47A up to the amount
of NS 360,000 (in 2008; in 2007: 345,600 – Tr.) per year,
less his insured income or the amount of NS 90,000 (in
2008; in 2007; NS 86,400 – Tr.) , whichever is larger;
(6) ” individual member ” – an individual who is not a beneficiary
member, for whom one of the following holds true:
(1) he was born before 1961;
(2) during the tax year he had work income, in resp ect of which
he is entitled to a pension under a statute or cont ract;
(7) ” beneficiary member ” – an individual, in respect of whose income
amounts were paid for him during the tax year to a pension benefit
fund in an amount that was not less than 16%of the average wage
in the economy in that tax year;
(8) ” average wage in the economy ” – as defined in section 3(e3)(2).

————————————————— —————————————————————
Under the provisions of section 6 of Amendment No. 153, the above paragraph (8)
shall be read as follows:
in tax year 2007:
(8) “average wage in the economy ” – 90% of the average wage in
the economy, as defined in section 3(e3)(2).
in tax year 2008:
(8) “average wage in the economy ” – 95% of the average wage in
the economy, as defined in section 3(e3)(2).
————————————————— —————————————————————
(b) If during the tax year an individual member or his spouse paid to a
benefit fund for pension or benefits for the benefi t of one of them, or if
during the tax year amounts an individual who is no t a beneficiary
member or his spouse paid only to a pension benefit fund for the benefit
of one of them – also if he directed that after his death his right be
transferred to an institution recognized as a publi c institution for
purposes of section 9(2) – or if they paid as afore said to the State, to a
local authority or to another body designated by th e Minister of Finance,
in order to maintain the pension right of one of th em, then the amounts
paid as aforesaid shall be deductible, on condition that the deduction

70
does not exceed –
(1) 7% of his entitling income other than work income; however, if he
paid only for a pension and the amount paid exceeds 12% of his
aforesaid income, then– in respect of the part in e xcess of 12% –
he shall be allowed an additional deduction of up t o 4% of that
income;
(2) the lower of these amounts: (a) 5% of his entitling income which is work income that is not
insured income;
(b) 5% of his liable income that is work income, up to an amount
of NS 360,000 (in 2008; in 2007: NS 345,600 – Tr.) per year,
less his insured income;
(b1) if, during the tax year, a beneficiary member or his spouse paid amounts
to a savings benefit fund or to a pension benefit f und to the beneficiary
member’s credit, and if a beneficiary member during the tax year paid
said amounts to the credit of his child, who in the tax year was aged 18
or more, then he shall be allowed to deduct the amo unts paid as
aforesaid, on condition that the deduction not exce ed the following, as
the case may be:
(1) in respect of amounts paid to a pension benefit fund – 11% of the
income of a self-employed member;
(2) in respect of amounts paid to a pension benefit fund for which
deduction was not allowed under paragraph (1), and in respect of
amounts paid to a savings benefit fund – 7% of the additional
income; however, if the amounts paid as aforesaid t o a pension
benefit fund exceed 12% of his additional income, t hen in respect
of the part in excess of the said 12% he shall be a llowed an
additional deduction that shall not exceed 4% of th e additional
income, all on condition that no deduction be allow ed under this
paragraph in respect of amounts deposited for the b eneficiary
member with a pension benefit fund, the amount of w hich does not
exceed 16% of the average wage in the economy.
(b2) An amount deducted under subsection (b) is not deductible under
subsection (b1), and vice versa.
(c) An amount deducted under subsection (b) or (b1) shall not be taken into
account for the purposes of section 45A.
(d) The Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe for particular categories of p ersons deductions at
rates higher than those said in subsection (b), on conditions and with
restrictions which he shall prescribe,

Deduction for National Insurance and parallel tax p ayments
47A. (a) If in a tax year an individual paid insura nce contributions under the
National Insurance Law [Consolidated Version] 5728- 1968 (hereafter:
“the Insurance Law”) and parallel tax under the Par allel Tax Law 5733-
1973 (hereafter: “parallel tax”) in respect of inco me that is not work
income, then he shall be allowed a deduction of 52% of the amounts
paid by him, except for supplementary payments unde r section 179(a) of
the Insurance Law, provided that the deduction does not exceed his
chargeable income before the deduction.
(b) The provisions of subsection (a) shall also app ly to an individual whose
employer is not obligated to pay parallel tax for h im or to pay National
Insurance contributions for him, and who is obligat ed to pay them in
respect of his own work income.

71
(c) If an individual’s employer is not obligated to pay parallel tax for him and
he himself also is not obligated to pay parallel ta x, and also if another
individual is exempt of paying parallel tax, then h e shall be allowed to
deduct 52% of the amounts which he paid for health insurance – other
than dental health insurance – to a body designated by the Minister of
Finance after consultation with the Minister of Hea lth, up to the amount
of parallel tax which would have applied to him, ha d he been obligated to
pay it.
(d) The provisions of this section in respect of th e Parallel Tax Law shall
only apply to the period that ends on December 31, 1996.

47B. Repealed
Remuneration and refund of expenses paid to pension counselor as
payments to a benefit fund
47C. (a) The Minister of Finance may prescribe cond itions, under which – for the
purposes of sections 3(e3), 17(5a), 45A and 47 – re muneration and the
refund of expenses paid to a pension counselor shal l be treated like
payments to a benefit fund; if the Minister of Fina nce prescribed as
aforesaid, then the conditions, ceilings and restri ctions prescribed in the
said sections shall apply, mutatis mutandis, to the remuneration and the
refund of expenses paid as aforesaid.
(b) In this section, ” pension counselor” – as defined in the Control of
Financial Services ( Pension Counseling and Pension Marketing) Law
5765-2005.

Credits for residents of an area
48. The Minister of Finance may prescribe, by Order with approval by the Knesset
Finance Committee, that all or some of the provisio ns of sections 34, 36 and
37 also apply – mutatis mutandis – to some or all r esidents of an area who are
not Israel citizens, as if they were Israel residen ts; for this purpose: “area”,
” resident of an area ” and “Israel citizen ” – as defined in section 3A.

Credits for a foreign worker
48A. The Minister of Finance may prescribe that som e or all of the provisions of this
Chapter on credits shall not apply to foreign emplo yees or to categories of
foreign employees designated by him, or that they a pply to them partly on
conditions he shall prescribe; for this purpose: ” foreign employee” – as
defined in the Foreign Employees (Prohibition of Un lawful Employment and
Assurance of Fair Conditions) Law 5751-1991, even i f for purposes of this
Ordinance he is deemed a resident.

PART FOUR: CALCULATION OF INCOME IN SPECIAL CASES

CHAPTER ONE: INSURANCE COMPANIES

General insurance companies
49. (a) Notwithstanding the provisions of this Ordi nance, if a company carries
on a general insurance business, whether its earnin gs or profits are

72
derived wholly in Israel or partly in Israel and partly outside Israel, then
its earnings or profits on which tax is due shall b e determined in the
following manner:
(1) from the total amount of gross premiums and int erest and other
income received or receivable in Israel shall be de ducted the total
of premiums returned to insured persons and paid fo r reinsurance;
(2) from the balance computed as aforesaid shall be deducted a
reserve for risks unexpired at the end of the tax y ear, calculated at
the percentage adopted by that company for those ri sks in relation
to all its business; and to it shall be added the b alance of the
reserve so calculated for risks unexpired at the be ginning of the
tax year, on condition that the percentage adopted shall not
exceed a percentage reasonable and appropriate in e ach
particular case;
(3) from the net amount computed under paragraph (2 ) shall be
deducted –
(a) the amount of actual losses, less the amount re covered in
respect of those losses under reinsurance;
(b) management and agency expenses in Israel;
(c) a fair share of the expenses of the head office , which is
outside Israel.
(b) If, during any period within the tax year or th e year before it, the company
actually discontinued its business in Israel in any category of insurance,
then no reserve shall be deducted in respect of tha t category of
insurance.

Life insurance companies
50. Notwithstanding the provisions of this Ordinanc e, if a company carries on a life
insurance business, either exclusively or in additi on to general insurance
(hereafter: life insurance company), then its profi ts from life insurance business
shall be taken to be equal to the amount of profits calculated according to
section 49, while creating the reserves according t o actuarial calculation and
mutatis mutandis as the case may be, on condition t hat no reserves be allowed
in an amount that exceeds the amount of reserves ca lculated on the basis of
that actuarial calculation, which is reasonable and appropriate to each
particular case.

Expenses of a life insurance company
51. Expenses incurred by a life insurance company f or the acquisition of life
insurance contracts, including payments to agents, shall be deemed expenses
in the year in which they were incurred or transfer red to the agent’s credit,
whether or not the company included them in its pro fit and loss account in
respect of that year.

Life insurance companies that receive premiums from abroad
52. If a life insurance company receives most of it s premiums from abroad, then its
profit shall be taken to be a proportional part of its investment income, in the
ratio of the amount of premiums received in Israel to the total amount of
premiums received, or its actual income from invest ments in Israel, whichever
is the larger amount, after the expenses of the bra nch or agency in Israel and a
fair share of the expenses of the company’s head of fice, which is located
outside Israel, were deducted from the amount of th e profits.

Foreign insurer who received premiums from insuranc e in Israel

73
53. If a person who is not an Israel resident carries on an insurance business and
if premiums were paid to him for the insurance of a ssets in Israel, or for
insurance against a contingency liable to arise onl y in Israel, or if they were
paid by insured persons who are Israel residents, o therwise than through a
branch or agent in Israel authorized to issue polic ies on his behalf, then he is
deemed to have derived profits in Israel from that insurance business and
those profits are deemed to be 10% of the total amo unt of premiums paid to
him as aforesaid; however, if that person submitted to the Assessing Officer a
return of his profits from the said transactions, a nd if that return satisfies the
Income Tax Director, then those profits shall be ca lculated in accordance with
the provisions of section 49 or sections 50 to 52, all as the case may be.

CHAPTER TWO: COOPERATIVE BODIES

Article One: Kibbutzim

Definitions
54. (a) In this Article –
“kibbutz ” – a kibbutz or a kvutza incorporated as a coopera tive society
under the model rules approved by the Registrar of Cooperative
Societies for societies of that category; ” member “, in relation to a kibbutz – an individual who was a member of
that kibbutz at the end of the tax year.
(b) The provisions of this Article do not derogate from the provisions of
section 9(2).

Assessment of a kibbutz
55. Notwithstanding the provisions of this Ordinanc e, the assessment of a kibbutz
and of all its members shall be made according to t he provisions of sections 56
to 60.

Chargeable income
56. The value of the maintenance which the kibbutz, by virtue of membership,
provided for its members and for their spouses and children who are not
members, is deemed part of the chargeable income of the kibbutz and not
income of its members.

Tax
57. (a) A kibbutz shall pay tax in an amount equal to the total amount of tax
which its members would have to pay, if all its cha rgeable income were
equally distributed among them and if it were their only chargeable
income; for this purpose sections 34 to 46A and 47, and the provisions
of Chapter Three in Part Four, except for section 6 6 therein, shall apply
in accordance with the composition of the kibbutz m embers’ families;
however, in respect of the allowance of deductions under section 47, a
member’s income from outside the kibbutz, in respec t of which he is
entitled to benefits, a grant or a pension, shall n ot be taken into account.
(b) (1) In order to calculate the tax, to which th e kibbutz is liable, the
kibbutz may demand that a separate calculation be m ade of its
chargeable income after it was divided among its me mbers under
subsection (a), up to the amount of NS 43,080 (in 2 008; in 2007 –
NS 41,880 Tr.) for each married couple of kibbutz members on

74
condition that all the following hold true:
(a) the two kibbutz member spouses work at entitlin g work;
(b) the following conditions prescribed in section 66(e) have
been complied with –
(1) in paragraph (2) – (a) subparagraph (a), and for this purpose it shall
be read as if “at the regular place of business”
had been replaced by “at entitling work”;
(b) subparagraph (c); (2) in paragraph (3);
(c) the kibbutz kept accurate records about the wor k of all
kibbutz members, both within the kibbutz and outsid e it.
For the purposes of this paragraph, the chargeable income of the
kibbutz that was calculated for the purposes of sub section (a), less
chargeable income that is not income under section 2(1) or (2),
shall be deemed the chargeable income in respect of which the
kibbutz may demand separate calculation.
(2) Notwithstanding the provisions of subsection (a ), the provisions of
section 66(c) shall apply to the separate calculati on.
(2a) The provisions of sections 38 and 39 shall not apply to the income,
in respect of which separate calculation was demand ed, as said in
this subsection.
(3) The Minister of Finance may, with approval by t he Knesset
Finance Committee, prescribe additional conditions and
adjustments – also on the matter of chargeable inco me in respect
of which the kibbutz may demand separate calculatio n – in respect
of the application of the provisions of section 66( c), and as part
thereof he may designate categories of workers who shall be
deemed to have worked at entitling work during 36 h ours per
week, all on conditions which he shall prescribe;
in this section – ” entitling work ” – work in a branch of the kibbutz, which directly or indirectly
produces income under section 2(1) or work for whic h income is paid
under section 2(2), all on condition that it is not work that – directly or
indirectly – is work of supplying daily needs of ki bbutz members;
” kibbutz ” – as defined in section 54.

Credit points for children
58. A kibbutz shall be entitled to the credit point s to which its members would be
entitled under section 38, if the children were mai ntained by them.

Training fund for kibbutz members
58A. (a) In calculating the chargeable income of a kibbutz, amounts shall be
deductible that were paid by the kibbutz to trainin g funds for kibbutz
members and kept in the names of the kibbutz member s, after an
amount equal to 2.5% of the kibbutz’ determining in come was subtracted
from them; the said amounts shall not exceed 4.5% o f the kibbutz’
determining income.
(b) Amounts paid to a kibbutz member by a training fund for kibbutz
members, as said in subsection (a), shall be deemed income for
purposes of this Article when they are received, an d the provisions of
section 9(16a) shall apply, mutatis mutandis, as if the kibbutz member
were an employee.
(c) For purposes of this section –

75
“determining income ” – the chargeable income of the kibbutz before
the deduction according to subsection (a), up to an amount of NS
218,000 per year (in 2007; in 2006: NS219,000; in 2005: NS213,000 –
Tr.) , multiplied by the number of kibbutz members for w hom the kibbutz
pays to a training fund for kibbutz members; ” kibbutz member ” – a member as defined in section 54, on condition
that the following hold true for him:
(1) he has reached age 21 in the tax year and has n ot yet reached
age 70;
(2) no amounts in addition to the amounts said in s ubsection (a) are
deposited for him with a training fund;
(3) he regularly and permanently works in the kibbu tz or on its behalf;
” training fund for kibbutz members ” – a training fund designated for
kibbutz members.

59 and 60 – Repealed
Article Two: Moshavim and Agricultural Societies

Moshavim shitufiyim and the like
61. The Director may, at his discretion, direct tha t the provisions of Article One
apply to the assessment of moshavim shitufiyim or o f other cooperative
societies for agricultural settlement and of their members, if it is proved to his
satisfaction that the way business is conducted in the said societies is similar
in character to that of a kibbutz.

Agricultural cooperative society
62. A cooperative society classified as an agricult ural cooperative society for
purposes of the Stamp Duty Ordinance shall, in any particular tax year, be
treated like a partnership for the purposes of this Ordinance, if the society so
claimed in a return under section 131 in respect of that tax year, specifying the
names and addresses of its members and the share of its chargeable income
due to each of them in that tax year, on condition that the decision to claim as
aforesaid was adopted at a general meeting of the s ociety in compliance with
its bylaws, and that a majority of its members gave their written consent
thereto.

Article Three: Partnerships and House Property Companies

Partnerships
63. (a) If it was proven to the Assessing Officer’s satisfaction that a business or
vocation is carried on by two or more persons joint ly, then –
(1) the share of the partnership’s income, to whic h each partner is
entitled in the tax year, ascertained in accordance with the
provisions of this Ordinance, is deemed that partne r’s income, and
it shall be included in the return of income which he must make
under the provisions of this Ordinance;
(2) the precedent partner – that partner whose nam e is the first of the

76
names of Israel resident partners to appear in the partnership
agreement or, if that precedent partner is not acti ve, the precedent
active partner – shall, at the Assessing Officer’s request, make
and deliver a return of the partnership’s income in every year, as
ascertained in accordance with the provisions of th is Ordinance,
and there he shall specify the names and addresses of the other
partners in the firm and the share of the said inco me to which each
partner is entitled for that year; if none of the p artners is resident in
Israel, then the return shall be made and delivered by the Israel
resident attorney, agent, manager or factor of the firm;
(3) the provisions of this Ordinance on non-deliver y of returns or of
particulars required by notice from the Assessing O fficer shall
apply to the said return.
(b) If it was not proven to the Assessing Officer’s satisfaction that a business
or vocation is carried on jointly by two or more pe rsons, then the gains or
profits from that business or vocation shall be dee med to have accrued
to that one of the persons entitled to a share ther eof, whom the
Assessing Officer shall choose, and the assessment shall be made
accordingly; if an assessment was made as aforesaid , then the
partnership shall not be deemed a body of persons f or the purposes of
section 162.
(c) No provision of this section shall prevent an A ssessing Officer’s decision
– in the exercise of the discretion given to him by this section – from
being appealed according to sections 153 to 158.
(d) The Minister of Finance may, by Order, designat e categories of
partnerships that shall be deemed companies for pur poses of this
Ordinance; when he has so designated, then the part nership shall – for
the purposes of this Ordinance – be treated like a company, and an
amount distributed by the partnership to the partne rs shall be treated like
a dividend; for this purpose: ” partnership” – a partnership, the units of
which were issued according to a prospectus and are listed for trading
on the Tel Aviv Stock Exchange or on any other Exch ange designated
for this purpose by the Minister of Finance.
(e) (1) The Director may order, in respect of certa in limited partnerships
which he designated and which have income from busi ness under
section 2(1), that all or some of the chargeable in come of a limited
partner, who meets all the conditions set by the Di rector, be
deemed a capital gain under Part Five, during a per iod of not more
than 183 days, all on conditions and with adjustmen ts which he
prescribed; for this purpose: ” limited partnership” and “limited
partner ” – within their meaning in the Partnership Ordinan ce [New
Version] 5735-1975.
(2) The Minister of Finance may, in regulations wit h approval by the
Knesset Finance Committee, extend the effect of an order made
by the Director under paragraph (1) to a period, on conditions and
with adjustments which he shall prescribe.

House property companies
64. The income of a small company, within its meani ng in section 76, all the assets
and business of which is the holding of buildings, shall – on the company’s
application – be deemed the income of the company’s members, and the
apportionment of that income among some or all of t he company’s members
for purposes of assessment shall be made as the Dir ector may direct; if a
person believes that a direction by the Director di scriminates against him, then

77
he may appeal against it to a Court, as said in sections 153 to 158.

NOTE: The following Article Four and section 64A we re repealed by Amendment No.
132,but that repeal will only go into effect when r egulations are promulgated under
the provisions of section 64A1. Since those regulat ions – in respect of “transparent
companies” – have not yet been promulgated, Article Four and section 64A on
“family companies” still remain in effect.- Tr.
Article Four: Family Companies

Family companies
64A. (a) The chargeable income and the loss of a co mpany, the members of
which are relatives who under section 76(d)(1) are deemed one person
(hereafter: family company), shall be deemed – acco rding to an
application submitted to the Assessing Officer not later than one month
before the beginning of a certain tax year or three months after its
incorporation, all as the case may be – the income or loss of the member
with the right to the largest part of the company’s profits, or of the
member designated by the company in its application as one of the
persons with rights to the largest equal shares of its profits, his written
consent having been attached to the application (in this section: the
assessee), and the following provisions shall apply :
(1) profits distributed out of the company’s profit s in years, in which
the tax to which it is liable was calculated under this section
(hereafter in this section: benefit period) shall b e treated as if they
had not been distributed, and that even if they wer e distributed
after the benefit period or after the company cease d being a family
company;
(2) if the company paid salaries or wages to its me mbers, then it shall
not have the obligation of employers to pay in thei r respect
employers tax and savings loan;
(3) retirement grants or death grants paid by the c ompany to its
members in respect of the years in which it was a f amily company
shall not be allowed as its expense and shall not c onstitute income
for its members; payments paid by the company to be nefit funds in
respect of the said years shall not be recognized a s expenses, and
the members’ wages shall not be deemed work income for
purposes of section 47;
(4) in respect of advances, the amounts that are th e basis for the
assessee’s and the company’s advances shall be join ed;
(5) the tax on the company’s income, including adva nces, may be
collected either from the company or from the asses see;
(6) losses incurred by the assessee before the bene fit period cannot
be set off against the company’s income;
(7) when a share in a family company is sold, the c onsideration shall
be reduced – for the purposes of section 88, both f or the seller and
the buyer – by an amount equal to that part of the profits accrued
in the company during the benefit period and not di stributed by it,
which is proportional to the share’s right to the c ompany’s profits;
amounts subtracted as aforesaid shall not be deemed profits
available for distribution for the purposes of sect ion 94B.
(a1) If, within the tax year, one of the conditions said in subsection (a) ceases
to apply to the assessee, then another member, to w hom the condition

78
applies and about whom the company gave notice when it submitted the
return under section 131 for that year, shall becom e the assessee; if the
company did not notify as aforesaid, then the compa ny shall cease to be
a family company entitled to the application of the provisions of
subsection (a) (hereafter: entitled family company) .
(b) (1) An entitled family company may inform the A ssessing Officer, up
to the date on which the return under section 131 i s submitted, that
it withdraws its application to be deemed an entitl ed family
company in the tax year to which the return refers; when the family
company has informed as aforesaid it shall cease to be an entitled
family company, and it shall have to pay – on the d ate of
submission of the said return – employers tax for t hat year, which
shall be treated – notwithstanding the provisions o f section 4 of the
Employers Tax Law 5735-1975 – as if it had been inc ome tax and
not a deduction for which the employer is responsib le.
(2) A company that ceased being a family company c annot apply
again to be an entitled company before three tax ye ars have
passed after the year in which it ceased to be an e ntitled company.
(c) The provisions of this section shall not remove a family company from
being a company for the purposes of sections 9(14) and 19 and for the
purposes of the Encouragement of Industry (Taxes) L aw 5729-1969,
other than Chapter Five thereof.

Article Five: Transparent Companies

Transparent company
64A1. (a) In this section –
“shareholder ” – a member of a transparent company;
” chargeable income ” – including land appreciation, within its meaning
in the Real Estate Taxation Law; ” transparent company ” – an Israel resident company for which all the
following hold true:
(1) it is not a public company, as defined in secti on 1 of the
Companies Law, and under its Articles it cannot be converted into
a public company;
(2) the number of its shareholders does not exceed 50 or a larger
number, if the Director so approved on conditions h e set, and for
this purpose spouses and their children, heirs of a shareholder or
purchasers from a shareholder by an involuntary sal e shall be
deemed a single shareholder;
(3) all its shareholders are individual residents o f Israel;
(4) its shares are of one category, except for shar es that carry voting
rights, and shareholders are not able to change the rights vested
by virtue of their shares, except for changes in vo ting rights;
(5) the right to the company’s profits is accorded only by virtue of the
shares;
(6) a shareholder’s right to profits is equal to hi s right to the company’s
assets upon its liquidation;
(7) the company is not a financial institution, as defined in the Value
Added Tax Law;
(8) the company requested that it be deemed a trans parent company,
by a notice signed by all its shareholders and deli vered to the

79
Assessing Officer within 60 days after its incorporation;
” benefit years ” – the tax years in which the company was a transp arent
company;
(b) The chargeable income of a transparent company, including its income
from dividends and its losses, shall – for the purp oses of tax calculation,
the tax rate and the set off of losses, and also fo r purposes of tax
exemption – be deemed the income or loss of its sha reholders,
according to their parts of the rights to the compa ny’s profits, and the
following provisions shall apply:
(1) profits distributed out of the company’s charge able income shall
not be deemed income;
(2) for this matter, ” profits distributed” – the chargeable income, plus
income exempt of tax, less the tax that applies to the shareholder
in respect of the income, if it was paid by the com pany and it did
not debit him accordingly;
(3) (a) the transparent company’s losses during the tax year, which
were related to a shareholder, shall first be set o ff against
that shareholder’s income from the transparent comp any, in
accordance with the provisions of the Ordinance;
(b) losses that were related to a shareholder in pr evious tax
years shall be allowed to be set off only against t hat
shareholder’s chargeable income and shall not be al lowed to
be set off against the transparent company’s income ;
(c) repealed
(4) classification of the chargeable income or the loss, as the case
may be, which was related to a shareholder as said in this section,
to a source of income shall be according to the sou rce of income
from which it was produced or accrued for the trans parent
company, but such income shall not be deemed income from
personal exertion, unless the shareholder played an active role in
the company;
(5) in respect of credit for foreign taxes, as defi ned in section 199, a
shareholder is entitled to his proportional share o f the foreign tax
that the transparent company paid;
(6) in respect of a shareholder’s advances, as said in section 175, his
proportional part of the transparent company’s char geable income,
including its income from dividends or its losses, shall be added to
the turnover that is the basis for advances;
(7) the tax on a transparent company’s income, incl uding advances,
may be collected either from the company or from it s shareholders,
in the amount of the tax due on their proportional parts of the
transparent company’s profits;
(8) the following provisions shall apply to the sa le of a share in a
transparent company:
(a) for purposes of section 88, there shall be subt racted – from
the consideration in respect of the seller, and fro m the
original cost in respect of the purchaser – an amou nt equal
to part of the amount of undistributed profits accr ued in the
company during the benefit years, the proportion of which to
the total of undistributed profits is as the propor tion of the
share’s rights to the profits of the transparent co mpany to all
rights to its profits; for this purpose: ” profits ” – the chargeable income of the transparent
company in the benefit years, less its losses in th ose years,

80
on condition that the result obtained is not a negative
amount; ” purchaser ” includes a person who bought shares from the
transparent company;
(b) the provisions of section 94B shall not apply i n respect of the
benefit years;
(c) for purposes of calculating capital gains, an a mount equal to
the losses related to the seller of the share durin g the benefit
years shall be subtracted from the adjusted origina l cost, up
to the amount of the adjusted original cost; for th is purpose:
” losses ” – an amount equal to the chargeable income
related to a shareholder, less losses related to hi m, provided
it is a negative amount;
(9) if the holder of a share in an transparent comp any sold shares,
then he shall inform the transparent company of the sale within 90
days after the sale;
(10) the provisions of Part Five “B”, except for Ch apter Three there,
shall not apply to a transparent company;
(11) (a) the transfer of assets from a transparent company,
liquidation of which has begun, to its shareholders in
accordance with their parts of the rights in it sha ll not be
charged tax under this Ordinance or under the Real Estate
Taxation Law (in this paragraph: the taxes), on con dition that
the transferred asset did not change its designatio n during
the transfer, as said in sections 85 and 100 and in section
5B of the Real Estate Taxation Law; however, if the sale
does not become liable to Land Appreciation Tax bec ause
of the provisions of this paragraph, the sale shall be liable to
acquisition tax at the rate of 0.5%; the Minister o f Finance
may, with approval by the Knesset Finance Committee ,
designate instances in which exemption from the tax es
under this subparagraph shall not apply when the co mpany
is liquidated, on conditions he shall set; for this purpose:
” Land Appreciation Tax ” and “Acquisition Tax ” – within
their meaning in the Real Estate Taxation Law;
(b) The Minister of Finance may, with approval by t he Knesset
Finance Committee, prescribe conditions, provisions and
restrictions in respect of this paragraph, includin g the matter
of determining the original cost of the assets of a transparent
company in liquidation, the day of acquisition and the
acquisition cost, as defined in the Real Estate Tax ation Law,
as well as provisions in respect of losses and the distribution
of income and also on instances, in which an increa se in the
value of assets is to be taxed.
(c) (1) The Minister of Finance may, with approval by the Knesset
Finance Committee, make rules in respect of a trans parent
company that has ceased to comply with the conditio ns and
provisions prescribed in this section, including th e determination
that the company shall cease to be a transparent co mpany; if he
so determined, then it cannot again come to be cons idered a
transparent company;
(2) if a company ceased being transparent, because of a violation of
one of the provisions of this section, then it may – with the
Director’s approval and on conditions set by him – request that it

81
be wound up according to the provisions of subsection (b)(11)
within one year after the end of the tax year in wh ich the said
violation occurred; for this purpose, the day of th e violation shall be
deemed the day on which liquidation proceedings beg an.
(d) Notwithstanding the provisions of this Ordinanc e, the following
provisions shall apply to matters of assessment, ob jection and appeal:
(1) if an assessment was made for the transparent c ompany, then the
Assessing Officer may – notwithstanding the provisi ons of this
Ordinance –determine or amend the assessment of a s hareholder
in accordance therewith within two years after the end of the year
in which the company’s assessment was made or at a time when
he may assess the shareholder’s income, whichever i s later;
(2) the transparent company may object to or appeal against the
assessment made for it according to the provisions of sections 150
or 153, as the case may be; a shareholder may objec t or appeal
as aforesaid against relating the transparent compa ny’s
chargeable income or losses and against the effect, which the
assessment made for the transparent company had on his
income, but not against the assessment made for the company.
(e) The Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe rules, provisions, conditions and restrictions for
purposes of this section, including –
(1) determination of the original cost;
(2) the consideration;
(3) assessment proceedings;
(4) the right to appeal and appeal procedures;
(5) prescribing an advance for the company – notwit hstanding the
provisions of subsection (b)(6) – according to the company’s
calculated basis for advances, at the rate he shall prescribe, rules
for relating the said advance to the shareholders, and rules for
setting off an advance for excess expenditure, as s aid in section
181B;
(6) relating and distributing the income according to the rights to
profits, and rules for rounding off the shareholder s’ proportional
parts of the rights to profits;
(7) tax obligation and tax payment under circumstan ces, under which
the company’s shares are sold in the course of the year;
(8) returns to be submitted by the transparent comp any and its
shareholders;
(9) provisions on the restriction on a set off of l osses;
(10) provisions on active officers of the company, as said in subsection
(b)(4).

CHAPTER TWO “A”: REAL ESTATE INVESTMENT FUND
Definitions
64A2. (a) In this Chapter – “means of control “, “substantive shareholder “, “original cost “,
” relative ” and “real capital gain ” – as defined in section 88;
” income in the amount of depreciation expenses ” – income in the
amount of the depreciation expenses deductible in r espect of productive
real estate under the provisions of this Ordinance or under the provisions

82
of the Inflationary Adjustments Law; “chargeable income ” – including land appreciation;
” exceptional income ” of a real estate investment fund – the following:
(1) income from the sale of business stock;
(2) income other than income specified in subparagr aphs (a) to (c),
the total of which exceeds 5% of the Fund’s total i ncome in the tax
year;
(a) income from productive real estate and income f rom the sale
of building rights on real estate that was producti ve real
estate on the day of its acquisition;
(b) income from securities traded on an Exchange, f rom State
loans and from deposits;
(c) income which is deemed business income under se ction 7
of the Inflationary Adjustments Law;
for the purposes of this paragraph: ” income ” includes real estate appreciation;
” tax ” – including Land Appreciation Tax under sections 6 or 7 of
the Real Estate Taxation Law; ” real estate ” – including real estate abroad and exclusive of r eal
estate association rights; ” real estate held for a short time ” – real estate, for which less
than four years passed from the day of its acquisit ion by a real
estate investment fund until the day of its sale, i ncluding a tax
exempt sale; ” productive real estate ” – real estate, the rental of which and
activities connected with its rental produce income under section
2(1) or (6) for the real estate investment fund, on condition that
buildings stand on it with a total area equal to at least 70% of the
area that can be built under the scheme that applie s to it, including
movables used directly for activity on that real es tate, other than –
(1) real estate for uses designated by the Minister of Finance, if
the management services of that real estate are pro vided by
that real estate investment fund or by its relative ;
(2) real estate that is business stock of the Fund; for the
purposes of this definition,
” scheme ” –
(a) in respect of real estate in Israel –within its meaning in
the Planning and Building Law 5725-1965;
(b) in respect of real estate abroad – the scheme u nder
the Law of the state in which it is located;
” asset ” – any property, real or movable, and also any
prospective or vested right or benefit, all whether located in
Israel or abroad; ” issue and consideration assets ” – State loans, deposits
or cash derived from money specified in paragraphs (1) to
(3) of this definition, held during periods no long er than the
periods specified in those paragraphs:
(1) money received from a first issue of the Fund’s
securities, which were listed for trading on the St ock
Exchange in Israel – during two years after the day of
issue;
(2) money received from an additional issue of the Fund’s
securities, which were listed for trading on the St ock
Exchange in Israel – during one year after the day of

83
issue;
(3) consideration from the sale of real estate – du ring one
year after the day of the sale;
” real estate investment fund ” – a company for which the
conditions said in section 64A3 hold true.
(b) Every other term in this Chapter shall have the meaning it has in the
Real Estate Taxation Law, except when a different p rovision is expressly
stated.

Real estate investment fund
64A3. (a) A real estate investment fund is a compan y for which all the following
hold true:
(1) it was incorporated in Israel and the control and management of its
business is in Israel;
(2) its shares were listed for trading on an Excha nge in Israel within
twelve months after its incorporation, and they are traded there;
(3) from the time of its incorporation until the p rovisions of this
Chapter began to apply to it, it had no assets, act ivity, income,
expenses, losses or obligations, other than for its activity as a real
estate investment fund;
(4) the provisions of Part Five “B” or the provisi ons of section 70 of the
Real Estate Taxation Law did not apply to the trans fer of an asset
to it;
(5) all the following took place on June 30 and on December 31 of
each tax year:
(a) the value of its assets that are productive rea l estate,
debentures, securities traded on an Exchange, State loans,
deposits and cash was not less than 95% of the tota l value
of all its assets;
(b) the value of its assets that are productive rea l estate and
issue and consideration assets was not less than 75 % of the
total value of its assets, or less than NS 200 mill ion;
(c) the value of its assets that are productive rea l estate in Israel
is not less than 75% of the value of all its assets that are
productive real estate;
(d) the amount of loans it took, also by way of iss uing
debentures or capital notes, does not exceed an amo unt
equal to 60% of the value of the assets that are pr oductive
real estate, plus 20% of the value of its other ass ets;
(6) 50% or more of the means of control in it are h eld – directly or
indirectly – by more than five shareholders; for th is purpose:
(a) members of a benefit fund, persons insured by a n insurance
company in respect of its insured persons’ investme nt, and
unit holders in a joint investment trust fund shall be deemed
shareholders in the Fund;
(b) a person and his relative shall be deemed one s hareholder;
(7) the chargeable income was transferred to the sh areholders as
said in the provisions of section 64A9;
(8) an auditor’s certification of compliance with t he conditions
enumerated in paragraphs (1) to (7) was attached to the return it
submitted under section 131.
(b) For the purposes of subsection (a)(5), the ” value” of an asset – one of
the following, at the Fund’s choice, on condition t hat its choice in respect
of each tax year apply to all its assets:

84
(1) the original cost or the acquisition value of the asset, as the case
may be, its amount having been adjusted from the da y of
acquisition to the date on which the value is exami ned;
(2) the price to be expected at a sale of the asset by a willing seller to
a willing buyer, the asset being free of any encumb rance to secure
any debt, mortgage, or other right intended to secu re a payment.
(c) The Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe provisions on determining the value, also in
respect of assets that will or will not be taken in to account for the
purposes of subsection (a)(5).
(d) (1) If one of the conditions enumerated in subs ection (a) ceases to
hold true for the company, then it shall cease bein g a real estate
investment fund.
(2) Notwithstanding the provisions of paragraph (1 ), if one of the
conditions specified under subsection (a)(5) ceased to hold true on
one of the dates prescribed there, then it shall be deemed to have
held true on that date if it comes to hold true aga in within three
months and continues to hold true continuously duri ng at least one
year; if it did not come to hold true again as afor esaid, then the
company shall cease to be a real estate investment fund on the
date specified in subsection (a)(5), on which the s aid condition first
ceased to hold true.
(3) If the company has begun to be wound up, then it shall cease to
be a real estate investment fund.
(4) The company may inform the Assessing Officer t hat it elected not
to be a real estate investment fund; when it has no tified as
aforesaid, it shall cease to be a real estate inves tment fund from
the day it stated in the notification, or on the th irtieth day after the
notice was given, whichever is later.

Income from a real estate investment fund
64A4. (a) For the purposes of tax calculation, tax rates and the set-off of losses,
the chargeable income of a real estate investment f und, which was
transmitted to the shareholders as said in section 64A9, shall be
deemed the shareholders’ chargeable income (in this Ordinance:
shareholders’ chargeable income).
(b) The shareholders’ chargeable income shall be c harged tax on the day
on which it was transferred to them.
(c) Notwithstanding the provisions of subsection ( a), in respect of tax rates –
(1) exceptional income shall be charged tax at th e rate of 70%,
without any right to exemption, deduction, credit o r set-off;
(2) chargeable income from the sale from real est ate held for a short
time shall be charged tax at the rates said in sect ions 121 or 126,
as the case may be.
(d) The chargeable income of shareholders shall be classified as to its
source according to the source from which it was pr oduced or accrued to
the Fund, and the following provisions shall apply to this matter:
(1) the income shall not be deemed income from pe rsonal exertion;
(2) income in the amount of depreciation expenses shall be deemed
income from capital gain or from appreciation, as t he case may be.
(e) The chargeable income of a Real Estate Investm ent Trust, which is not
chargeable income of the shareholders, shall be cha rged tax according
to the following provisions:
(1) chargeable income from the sale of real estat e held for a short

85
time shall be charged tax at the rate prescribed in section 126;
(2) exceptional expenses shall be charged tax at the rate of 60%;
(3) other chargeable income shall be charged tax under the provisions
of any statute.
(f) The chargeable income of a shareholder shall b e exempt of tax, on
condition that it is not exceptional income, if the shareholder is one of the
following:
(1) a pension benefit fund, a savings benefit fun d and a severance
pay benefit fund;
(2) the resident of a reciprocating state, who ma nages a retirement
age savings plan or a long term savings plan that e ssentially
resembles a savings benefit fund, and also a pensio n fund that is
the resident in a reciprocating country or is manag ed by the
resident of a reciprocating country, on condition t hat the profits
they receive are exempt of tax in their country of residence
because they are profits on savings for the retirem ent age.
(g) Foreign taxes paid by a real estate investment fund may be deducted
from the income, in respect of which they were paid , and notwithstanding
the provisions of this Ordinance the Fund and its s hareholders shall not
be given any credit for them.
(h) Losses suffered by a real estate investment fu nd shall not be set off
against the income of its shareholders.

Tax deduction
64A5. (a) W hen a real estate investment fund pays t he chargeable income of its
shareholders, it shall deduct tax according to the following provisions:
(1) from real estate appreciation or from capital gains, other than from
the sale of real estate held for a short time, and also from income
in the amount of depreciation expenses – at the rat es prescribed
in section 91, or in section 48A of the Real Estate Taxation Law,
as the case may be;
(2) from exceptional income – at the rate of 70%;
(3) from other chargeable income – at the maximum tax rate
prescribed in section 121 or at another tax rate se t by the Minister
of Finance with approval by the Knesset Finance Com mittee, or at
the tax rate prescribed in section 126(a), as the c ase may be;
(4) from chargeable income transmitted to a share holder that is an
exempt trust fund, as defined in section 88 – as sp ecified in
subparagraphs (a) to (c) of this paragraph, as the case may be,
and notwithstanding the provisions of section 129C tax paid under
this paragraph shall be deemed the final tax to whi ch the exempt
trust fund is liable, and in its respect it shall n ot be entitled to any
exemption, deduction, credit or set-off whatsoever:
(a) from real estate appreciation or from capita l gains, other
than from the sale of real estate held for a short time – no
tax shall be deducted;
(b) from exceptional income – at the rate of 60%;
(c) from other chargeable income – at the rate of 25%.
(b) Notwithstanding the provisions of subsection (a ), when income other
than exceptional income is paid to shareholders sai d in section 64A4(f),
tax shall not be deducted.
(c) (1) If chargeable income was transferred to sha reholders and before
its transfer it was charged to tax under the provis ions of section
64A4(e), then it shall be deemed dividend income an d the

86
provisions of subsection (a) shall not apply to it, and the tax that
the Fund shall deduct shall be the tax that it must deduct from
dividend payments to its shareholders or from divid end payments
to its substantive shareholders, as the case may be .
(2) The shareholder shall not be given any credit for the tax paid by
the Fund, as said in section 64A(e).
(d) The Assessing Officer may give written permissi on that tax shall not be
deducted as said in subsection (a), or that less th an the prescribed rates
be deducted, if he concludes that the shareholder’s chargeable income
is not liable to tax or that the tax on it is less than the rates prescribed in
subsection (a).
(e) The deducted amounts shall be paid to the Asses sing Officer on the
prescribed date and a return shall be attached to t hem, as prescribed.

Assessment, objection, contestation, appeal and col lection
64A6 Notwithstanding the provisions of this Ordinan ce and the provisions of the Real
Estate Taxation Law, the following provisions shall apply to assessment,
objection, contestation, appeal and collection:
(1) The Assessing Officer or the Director, as defi ned in the Real Estate
Taxation Law, as the case may be, may – according t o the provisions of
the Ordinance or of the said Law – determine the ch argeable income of
a real estate investment fund and assess the tax it must pay even after
the chargeable income was transmitted to the shareh olders;
(2) the real estate investment fund alone has the right to object, contest or
appeal against the assessment made for it according to the provisions of
the Ordinance or of the said Law; a shareholder may contest or appeal
against the effect of the real estate investment fu nd’s assessment on his
income, but not against the assessment of the Fund;
(3) any additional tax on the shareholders’ charge able income in
consequence of assessment proceedings shall be coll ected only from
the real estate investment fund and tax refunds in respect of the said
income shall be refunded only to the Fund.

Reduced acquisition tax
64A7. Notwithstanding provisions under the Real Est ate Taxation Law, if a real
estate investment fund acquired a real estate right from a company against the
allocation of shares in the Fund, then the Fund sha ll pay acquisition tax at the
rate of 0.5%, on condition that the acquisition was made no later than twelve
months after the date on which it became a real est ate investment fund and
before its shares were listed for trading on an Exc hange, and that the Director
approved the real estate sale in advance.

Set-off of loss suffered by a shareholder
64A8. A loss suffered in the tax year by a sharehol der from the sale of a share in the
real estate investment fund may be set off as said in section 92 or against the
chargeable income of shareholders that the fund tra nsferred to him in that
year, except for exceptional income transferred to him.

Transferring chargeable income to shareholders and distribution of profits
64A9.(a) The chargeable income of a real estate inv estment fund shall be
transferred to the shareholders according to the pr ovisions of
paragraphs (1) or (2), as the case may be, on the d ate prescribed in
them:
(1) at least 90% of the Fund’s chargeable income, other than real

87
estate appreciation or profits from the sale of productive real
estate, plus exempt income and less nondeductible e xpenses –
until April 30 of the year after the year in which the income was
produced or accrued;
(2) capital gains or real estate appreciation ear ned by the fund upon
the sale of productive real estate – up to twelve m onths after the
date of sale of the real estate; this provision sha ll not apply to real
estate appreciation upon the sale of a real estate right, if the
following two conditions hold true:
(a) the appreciation was exempt of tax, as said in the provisions
of Chapter Five “C” of the Real Estate Taxation Law ,
because the right sold by the Fund was exchanged ag ainst
a real estate right in other productive real estate ;
(b) the exchange was made during the period pres cribed in the
said provisions.
(b) (1) Notwithstanding the provisions of the defi nition of “profits” in
section 302(b) of the Companies Law, a real estate investment
fund may make a distribution also out of income in the amount of
the depreciation expenses, on condition that the di stribution was
made until April 30 of the year after the year in w hich the income
was produced or accrued.
(2) If the Fund distributed income as said in par agraph (1), then the
income shall be reduced by the amount of depreciati on expenses
distributed out of profits distributable to shareho lders under the
provisions of the Companies Law and also out of the capital gains
or real estate appreciation from the sale of that p roductive real
estate.

Provisions for a company that ceased being a real e state investment fund
64A10. If a company ceased being a real estate inve stment fund, then the following
provisions shall apply:
(1) the provisions of this Chapter shall apply to chargeable income produced
by or accrued to the Fund up to the day on which it ceased to be a real
estate investment fund (in this section: the last d ay) and to the
chargeable income transferred to the shareholders u ntil April 30 of the
year after the year in which it was produced or acc rued;
(2) the provisions of this Chapter shall not apply to income produced or
accrued to the company after the last day.

Powers of the Minister of Finance
64A11. The Minister of Finance may, with approval b y the Knesset Finance
Committee, prescribe the following provisions in re spect of the income of a real
estate investment fund and of the income transmitte d to its shareholders,
including the matter of land appreciation tax:
(1) taxation of chargeable income, which a shareho lder received in respect
of the period in which the share was owned by anoth er person, including
the determination that in respect of aforesaid inco me there shall be no
right to a tax exemption, and including the determi nation of the tax rate
applicable to some or all the profits and of the ra te applicable to the tax
deduction, notwithstanding the provisions of sectio n 64A5;
(2) classification of part of the capital gain upo n the sale of a real estate
investment fund share as income to which the provis ions of Part Two
apply, with prescribed conditions and adjustments;
(3) transmission of the chargeable income to the s hareholders, the ways of

88
transmission and how it is to be related to the Fund’s income, profits or
real estate appreciation to which it is entitled, a nd also provisions that
rule out the setting off of losses;
(4) other conditions and adjustments necessary for the implementation of
this Chapter, also on the matter of a company that ceased to be a real
estate investment fund.

CHAPTER THREE: INCOME OF SPOUSES

Registered spouse
64B. (a) The Assessing Officer may determine, by no tification to both spouses,
that one of them is a registered spouse for purpose s of this Law, when
his chargeable income – in the tax year two years b efore the tax year
first under consideration for this purpose– was mor e than 50% of the
total chargeable income of the two spouses.
(b) Notwithstanding the provisions of subsection (a ), the two spouses
together may notify the Assessing Officer in writin g, at least three
months before the beginning of a certain tax year, that they choose that
the other spouse be deemed the registered spouse, o n condition that his
income in the tax year before the tax year in which the notification was
given amounted to at least 25% of the income of his spouse; for
purposes of this subsection and of subsection (d)(2 ): “income during
the tax year ” – exclusive of a spouse’s income from a source de pendent
on the source of income of his spouse according to section 66(d).
(c) If neither of two spouses had any chargeable in come in the tax year said
in subsection (a), then the Assessing Officer may d ecide that one of
them is the registered spouse, and that without der ogating from their
right to act under subsection (b).
(d) (1) Subject to the provisions of subsection (b) , the determination or
choice of the registered spouse shall remain in eff ect for no less
than five tax years, except when the spouses no lon ger are
spouses or by a decision of the Director.
(2) Notwithstanding the provisions of paragraph (1) , if during a tax
year the income of the spouse registered by choice was less than
25% of his spouse’s income in that tax year, then t he Assessing
Officer may designate a registered spouse for that tax year.
(e) The Director may prescribe, by rules, ways of d etermining and choosing
a registered spouse.

Joint calculation
65. The income of spouses shall – for the purposes of this Ordinance – be
deemed the income of the registered spouse and shal l be charged in his
name; in respect of income from a transparent compa ny, as defined in section
64A1, and of income from interest, discount or link age differentials (for
purposes of this section: interest) and also of inc ome transmitted from a real
estate investment fund, as defined in section 64A2, or of capital gain, the
registered spouse’s said income shall be deemed to include also the said
income of his child who in the tax year has not yet reached age 18, unless the
assets from which came the interest income, from th e real estate investment
fund or from capital gain, were received by way of inheritance or if they
stemmed from compensation or insurance payments rec eived for a bodily
injury;

89
for the purposes of this section:
“preferred interest” – interest or discount and also profits paid on ass ets that
are savings programs, deposits, benefit funds or de bentures listed for trading
on an Exchange, or joint investment fund units, unl ess those assets were
received by inheritance;
“preferred capital gain” – each of the following, unless it was received by
inheritance:
(1) capital gain from the sale of a security listed for trading on an Exchange
in Israel or abroad;
(2) capital gain from the sale of a joint investmen t fund unit;
(3) income from a futures transaction, to which app lies the tax rate that
applies to the sale of a security listed for tradin g on an Exchange;
“unit” – as defined in the Joint Investment Trusts Law.

File in the name of spouses
65A. (a) The file kept by the Assessing Officer on the income of spouses shall
bear the names of both spouses.
(b) The provision of subsection (a) shall not apply until the end of tax year
1998, in respect of files opened before January 1, 1989, except by
decision of the Director or according to a written application submitted by
the spouses or by one of them to the Assessing Offi cer.

Separate calculation
66. (a) Notwithstanding the provisions of section 6 5 –
(1) a spouse who is not the registered spouse may d emand that the
tax on his income from personal exertion in busines s or vocation
or from employment – including income from personal exertion as
said in paragraphs (1) to (7) of the definition of that term in section
1 – be calculated separately, but in respect of afo resaid income
which is a pension, a separate calculation shall be made if it is
paid in respect of work income for which the spouse who is not the
registered spouse would have been entitled to a sep arate
calculation or if the spouse who is not the registe red spouse was
entitled – during the last five years before paymen t of the pension
began – to a separate calculation in respect of the income by
virtue of which the pension is paid;
(2) for the purposes of tax calculation, the income of both spouses
other than from personal exertion shall be added to the income of
that spouse, whose income from personal exertion is greater; if the
spouses had no income from personal exertion, then the income
not from personal exertion shall be deemed the inco me of the
registered spouse;
(3) for the purposes of income from a transparent c ompany, as
defined in section 64A1, of income from a real esta te investment
fund, as defined in section 64A2, and of income fro m interest or
from capital gain, the income of the registered spo use shall be
deemed to include also the said income of his child who has not
yet reached age 18; for the purposes of this sectio n: “interest ” –
as defined in section 65.
(b) Notwithstanding the provisions of subsection (a ) and of section 65, if a
spouse had income from property which he owned a ye ar before his
marriage, or from property which he inherited while he was married, then
he may claim separate tax calculation on the said i ncome; however, if
the said spouse has other income on which tax is ca lculated separately,

90
then the income said in this subsection shall be added to the other
income.
(c) The following provisions shall apply to the sep arate tax calculation:
(1) each of the spouses is entitled to the deductio ns, credits and credit
points under sections 34, 35, 36, 45A, 47, 47A and 121A, to the
tax benefit under section 10 and to the tax reducti on under section
11, and the woman shall be entitled to an additiona l credit point
against the tax on her income from personal exertio n;
(2) for the purpose of a beneficiary individual’s entitlement under
section 37, as defined in that section, only half a credit point shall
be taken into account, and there shall be no entitl ement to credit
points under sections 38 and 39;
(3) only the registered spouse shall be entitled t o pension points
under section 40(a); the woman shall be entitled to half a credit
point under section 36A, and – further against the tax due on her
income from personal exertion – to credit points fo r her children as
follows:
(a) half a credit point for each of her children in the year of its
birth and in the year of its maturity;
(b) one credit point for each of her children begin ning with the
tax year after the year of its birth until the tax year before the
year of its maturity;
For this purpose: ” year of birth” and “year of maturity ” – as
defined in section 40(b)(3).
(d) The provisions of subsection (a) shall apply on ly if the income of one
spouse came from a source independent of the income of the other
spouse, and the income of one spouse shall not be d eemed as
aforesaid if it came – inter alia – from one of the following:
(1) the business or vocation of the other spouse;
(2) a company, in which both spouses or the other s pouse, directly or
indirectly, have a management right or 10% of the v oting rights,
unless the recipient of the income received aforesa id income from
the company during a reasonable period of not less than one year
before the marriage or of five years before his spo use had any
right, direct or indirect, in the company;
(3) a partnership, in which both spouses or the ot her spouse, directly
or indirectly, have not less than 10% of the capita l or of the right to
profits, unless the recipient of the income receive d aforesaid
income from the partnership during a reasonable per iod of not less
than one year before the marriage or of five years before his
spouse had any right, direct or indirect, in the pa rtnership.
(e) (1) In this section, ” regular place of business” – the place where the
spouses regularly conduct their business or occupat ion or the
place where they regularly work, on condition that it is not a
dwelling unit used for residential purposes by the spouses or by
one of them, but the Minister of Finance may – with approval by
the Knesset Finance Committee – prescribe condition s under
which a dwelling unit may be recognized as a regula r place of
business.
(2) Notwithstanding the provisions of subsection (d ), spouses may
claim that the tax be calculated separately on thei r income as
specified in subsection (a) up to the amount of NS 43,080 (in
2008; in 2007: NS41,880; in 2006: NS 42,000; in 200 5: NS 25,008

91
– Tr.), if the following conditions apply:
(a) in order to obtain the income for which separat e calculation
is claimed each of the spouses worked at the regula r place
of business at least 36 hours per week during a per iod of ten
or more months during the tax year; if a separate c alculation
is claimed in respect of part of a tax year – if ea ch of the
spouses worked as aforesaid during a period, which stands
in proportion to the period in respect of which sep arate tax
calculation is claimed as is the proportion between the
aforesaid ten months to the entire tax year; for th is purpose,
lawful absence from work shall be treated like work ;
(b) the spouses have no income under sections 2(1) or (2),
other than the said income designated by the Minist er of
Finance in regulations with approval by the Knesset Finance
Committee;
(c) notice of the claim was delivered to the Assess ing Officer at
least one month before the beginning of the period for which
the separate tax calculation is claimed; if the Ass essing
Officer is satisfied that it was not possible to de liver the
notice until the said time, then it may be delivere d at another
time.
(3) The effect of the notice of a claim for separat e tax calculation is for
three tax years, which begin at the beginning of th e first tax year in
respect of which the separate calculation was claim ed, and as
long as the conditions that entitle to separate cal culation hold true
for the spouses.
(4) The provisions of sections 38 and 39 shall not apply to income, in
respect of which separate calculation is claimed, a s said in this
subsection.

General provisions
66A. (a) (1) The spouse who is not the registered s pouse may also object or
appeal on any matter under this Ordinance in respec t of his part of
the income
(2) If one of the spouses objected or appealed, the n the other can do
so in respect of the same tax year only within 30 d ays after the
Assessing Officer informed both spouses of the obje ction or
appeal submitted by one of them.
(b) Provisions of this Ordinance on collection and penalties shall also apply
to the spouse who is not the registered spouse in r espect of his part of
the income, but the spouse who is not the registere d spouse shall not be
accused of an offense and shall not have to pay an administrative fine
for any act or omission, which the registered spous e is obligated to
perform or to omit, if he proves that the act or om ission was committed
without his knowledge and that he took all reasonab le steps to prevent it.
(c) The Assessing Officer shall inform the spouse w ho is not the registered
spouse of any action by the Assessing Officer, whic h is likely to affect his
tax liability, and the times set for procedures whi ch a person may take
under this Ordinance shall, for this purpose, begin on the day on which
the notification was received.
(d) If the spouses gave notice that they have chose n the registered spouse
under section 64B(b), then tax debts created during the period of
marriage may be collected from whoever was the asse ssee or from the
previous registered spouse, or from the spouse regi stered when the

92
collection is made; the provisions of this subsection shall also apply,
mutatis mutandis, to tax refunds.

Income of a foster family
66B. Out of the income of a foster family, receive d from the State or from a local
authority for the care of children referred to it, three quarters shall be deemed
income from the wife’s personal exertion, and she o r her husband may
demand that a separate calculation be made in respe ct thereof under section
66.

Income of husband and wife on an agricultural farm
67. (a) Income obtained by the personal exertion of husband and wife on an
agricultural farm and which, under section 2(8), is chargeable in respect
of one of them shall, for the purposes of this Ordi nance, be deemed
income of the husband and the wife in equal parts, and the provisions of
section 38 shall apply to it, but a separate tax ca lculation under section
66 shall not be permitted.
(b) Notwithstanding the provisions of subsection ( a), if income is obtained by
the personal exertion of a spouse and it has been p roven to the
Assessing Officer’s satisfaction that his spouse wo rks mainly outside the
farm, then three fourths of the income from the far m shall be deemed the
income of the person who works mainly on the farm, and the man or the
woman may demand that a separate calculation under section 66 be
made in respect of the three fourths or the one fou rth of the income from
the farm, as the case may be, which is credited to the woman.

CHAPTER THREE “A”: ISRAEL RESIDENT WHO STAYS ABROAD

Israel resident who stays abroad
67A. The Minister of Finance may, with approval by the Knesset Finance
Committee, make rules concerning the deductions and credits that will be
allowed an individual Israel resident who has incom e from personal exertion
that was produced or accrued abroad, including said income that was related
to a shareholder in a transparent company, as defin ed in section 64A1, and on
the tax rate applicable to the said income and to o ther income accrued to him
in the year in which he had the said income, all af ter considering especially the
length of time abroad, the fact that he was sent fr om Israel to produce the said
income and of the living conditions in the country in which that individual
stayed in order to produce the said income.

CHAPTER THREE “B”: PARTICIPATION EXEMPTION FOR ISRAEL HOLDING COMPANIES

Definitions
67B. In this Chapter – “substantive shareholder ” and “relative ” – as defined in section 88;
” income ” includes real estate appreciation;
” Israel holding company ” – a company for which the entitling conditions sa id
in section 67C(a) hold true; ” held company ” – a body of persons for which the provisions of s ection 67D

93
hold true; “share package ” – shares in a held company, which give the right to at least
10% of the profits and which the Israel holding com pany held for at least
twelve consecutive months; ” entitling share ” – a share that is part of a share package;
” shares ” in a body of persons that is not a company – righ ts to its profits or
voting rights in it; ” asset ” – as defined in section 64A2;
” undistributed profits ” of an Israel holding company – all the following:
(1) chargeable income produced or accrued in the ta x year;
(2) real estate appreciation from the sale of a rea l estate right or a real
estate association right during the tax year;
(3) income exempt of tax during the tax year;
all after subtracting from the income the taxes pai d on it Israel or abroad, and
profits distributed out of it during that year; ” chain of companies ” – two or more bodies of persons, which directly o r
indirectly hold each other.

Israel holding company
67C. (a) An Israel holding company is a company for which all the following
conditions hold true (in this Chapter: the entitlin g conditions):
(1) it was incorporated in Israel and all its busin ess is controlled and
managed only from Israel;
(2) it is not a public company, as defined in secti on 2 of the
Companies Law, and not a financial institution, as defined in the
Value Added Tax Law;
(3) it is not a family company, to which the provis ions of section 64A
apply, and not a transparent company, as defined in section 64A1;
(4) the provisions of Part Five “B” did not apply a t its incorporation,
and provisions of the said Part or of section 70 of the Real Estate
Taxation Law did not apply to the transfer of an as set to it;
(5) the following two conditions holds true in the course of 300 days or
more of each tax year, beginning with the tax year after the year in
which it was incorporated:
(a) the original cost of its shares in held compani es, plus the
balance of loans it extended to the held companies,
amounts to no less than NS 50 million;
(b) the original cost of its shares in held compani es, plus the
balance of loans which it extended to the held comp anies
amounts to 75% or more of the original cost of all its assets,
including the balance of loans which it extended to held
companies;
(6) it did not have any income under section 2(1), except for income
for services provided to a held company, and except for income
which – under section 7 of the Inflationary Adjustm ents Law – is
deemed income from business;
(7) it chose that the provisions of this Part apply to it, by a notice that
was signed by all its shareholders and was delivere d to the
Assessing Officer within ninety days after its inco rporation.
(b) If an entitling condition did not apply to the company in the year of its
incorporation and in the following year, then it sh all be deemed never to
have been an Israel holding company.
(c) If one of the entitling conditions ceased to ho ld true for an Israel holding
company after the period said in subsection (b), th en it shall cease to be

94
an Israel holding company from the beginning of the tax year in which
the entitling conditions ceased to hold true.
(d) An Israel holding company may inform the Direct or, by a notice signed
by all its shareholders, that it chooses to cease b eing an Israel holding
company; having so announced, it shall cease being an Israel holding
company from the beginning of the tax year after th e tax year in which
the notice was delivered to the Director.

Held company
67D. A body of persons, for which all the following hold true, is a held company:
(1) it is a foreign resident located in a reciproca ting state and it submits a
return of its income in that foreign state, or it i s a foreign resident the
place of residence of which is in a state where the tax rate applicable to
the income of bodies of persons from business activ ity was 15% or more
when the Israel holding company first bought its sh ares;
(2) 75% or more of its income in the tax year, whic h was produced or
accrued outside Israel, is income that – if it were liable to tax in Israel –
would be chargeable as business income under sectio n 2(1); when
calculating the said income a proportional part of the income of linked
companies shall be added, but income from managemen t fees paid by a
relative, the consideration from asset sales and di vidends out of the
income of linked companies shall not be taken into account; for the
purposes of this paragraph: ” asset ” – other than securities traded on an Exchange, wh ich were
issued by a company in which the held company is no t a controlling
member; ” proportional part of the income of linked companies ” – the
proportional part of a body of persons in the incom e of a foreign resident
body of persons, in which it has a direct or indire ct right to profits, in the
proportion of its right to profits, provided that a right to less than 10% of
the profits shall not be taken into account; the in direct share of the body
of persons in the said rights shall be calculated b y multiplying the
percentages of the right to profits in each body of persons in the chain of
companies, which it holds directly or indirectly;
(3) the cost of its assets in Israel does not excee d 20% of the cost of all its
assets throughout the tax year; for purposes of thi s paragraph: “assets
in Israel ” includes rights in a foreign resident body of per sons, the main
assets of which are direct or indirect rights to as sets located in Israel;
(4) its income in the tax year that was produced or accrued in Israel –
including from the sale of real estate or of real e state association rights –
does not exceed 20% of all its income in the tax ye ar.

Exemption for the income of an Israel holding compa ny
67E. (a) An Israel holding company shall be exempt of tax on all the following:
(1) capital gains on the sale of entitling shares;
(2) dividends received in respect of entitling shar es, if distributed
during a period of not less than twelve consecutive months, during
which the Israel holding company was a substantive shareholder
of the held company;
(3) interest, dividends and capital gains from secu rities traded on the
Exchange in Israel;
(4) interest and linkage differentials received fro m a financial
institution, as defined in the Value Added Tax Law.
(b) No credit shall be given for foreign taxes in r espect of income that is tax

95
exempt under the provisions of subsection (a).
(c) The Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe tax exemptions for interest re ceived by an Israel
holding company from a held company, if the interes t was paid during a
period he prescribed and at an interest rate he pre scribed, all on
conditions and with adjustments which he prescribed .
`
Dividends distributed by an Israel holding company
67F. (a) A dividend received by a foreign resident shareholder in an Israel
Holding Company shall be charged tax at the rate of 5%.
(b) A dividend received by an Israel resident share holder in an Israel holding
company shall be charged tax at the rates said in p aragraphs (1) or (2),
as the case may be;
(1) if the recipient of the dividend is an individu al – at the rate
prescribed in section 125B, as the case may be;
(2) if the recipient of the dividend is a body of p ersons –
(a) if the dividend was distributed out of earnings said in section
67E(a)(3) or (4) – at the rate prescribed in sectio n 126(a);
(b) if the dividend was distributed out of earning s said in section
67E(a)(1) or (2) – at the rate prescribed in sectio n 126(c);
(c) in the case of any other dividend – at the rate prescribed in
section 126(b) or (c), as the case may be.

Conceptual dividend
67G. (a) An Israel resident, who at the end of the tax year was a direct or indirect
shareholder of an Israel holding company, shall be deemed to have
received his proportional share of the undistribute d profits as a dividend
at the end of the tax year, and he shall be charged tax on those profits
as said in section 67F(b).
(b) The provisions of subsection (a) shall not app ly to a shareholder who
indirectly was a shareholder in an Israel holding c ompany through
another shareholder who is an Israel resident, if t he provisions of
subsection (a) apply to the other shareholder, and that in respect of the
part of undistributed profits, in respect of which the other shareholder
was charged tax according to subsection (a).
(c) If an Israel resident shareholder received a d ividend, the direct or
indirect source of which is the income of an Israel holding company, then
the dividend shall not be charged tax, if tax under the provisions of
subsection (a) was paid in its respect by him or by the person from
whom he received the shares by a tax exempt sale or by inheritance; if a
loss was set off against the income said in subsect ion (a), then for the
purposes of this subsection it shall be deemed that tax under subsection
(a) was paid on the income set off as aforesaid.

Special provisions for persons who were Israel resi dents
67H. Notwithstanding the provisions of section 67F( b) and section 67G, the
following provisions shall apply to an individual s hareholder in an Israel holding
company, who held its shares before he first became a veteran Israel resident
or a returning resident, as said in section 14(a) a nd (c):
(1) dividends he received from an Israel holding c ompany during the period
in which he was entitled to benefits under section 14(a) or (c), as the
case may be, shall be charged tax at the rate of 5% ;
(2) the provisions of section 67G in respect of his share of undistributed
profits shall not apply to aforesaid profits, which stem from dividends

96
received by the Israel holding company from a foreign resident company,
the shares of which it acquired before he became an Israel resident as
said in section 14(a) or (c), and to the profits th at stem from the Israel
holding company’s capital gains upon the sale of sh ares in a foreign
resident company, the shares of which were acquired as aforesaid, all
during the period in which – under sections 14(a) o r (c) or 97(b) –said
income would have been exempt of tax for the shareh olders, had they
received it directly.

Selling the share of an Israel holding company
67I. (a) W hen a share in an Israel holding company is sold by an Israel resident,
he shall be given credit against the tax that appli es to the capital gain, in
an amount equal to the tax he or the person from wh om he received the
shares in a tax exempt sale or by inheritance paid on undistributed
profits under section 67G in respect of the sold sh are, on condition that
he had not yet received them as a dividend; the amo unt of tax paid as
aforesaid shall be adjusted at the rate of the inde x increase from the end
of the year in which the undistributed profits were treated as if they had
been received as a dividend, until the date of the sale, but credit shall
not be given in an amount greater than the tax that applies to the sale of
the share.
(b) The provisions of section 94B shall not apply to the sale of a share in an
Israel holding company in respect of profits availa ble for distribution, as
defined in section 94B, in respect of which the sel ler paid tax under
section 67G(a).

Company that ceased to be an Israel holding company
67J. (a) For the purposes of this section:
“entitling part of the real capital gain ” – the real capital gain, multiplied
by the ratio of the period from the day of acquisit ion until the end of the
final year to the period from the day of acquisitio n until the day of sale;
” balance of real capital gain ” – the differential between the real capital
gain and the entitling part of the real capital gai n;
” final year “, for the purposes of a company that ceased being an Israel
holding company – if it ceased under section 67C(c) – the year before
the year in which the entitling condition ceased to exist, and if it ceased
under section 67C(d) – the year in which it gave no tice under the said
section.
(b) W hen a company ceased to be an Israel holding company, then the
following provisions shall apply:
(1) if, in any year after the final year, the com pany sold an asset in
respect of which – had it been sold while it was an Israel holding
company – the company would have been exempt of tax on its
sale under the provisions of section 67E(a), then t he company
shall be exempt of tax on part of the entitling rea l capital gain and
liable to tax on the balance of the real capital ga in;
(2) if in any year after the final year the compa ny distributed to foreign
residents a dividend, the source of which are profi ts the company
accrued during the years when it was an Israel hold ing company,
or if its source is the entitling part of the real capital gain, then it
shall be charged tax at the rate of 5%;
(3) if an Israel resident directly or indirectly is a shareholder in the
company, then he shall be treated as if, at the end of the year in
which the company sold an asset said in paragraph ( 1), he

97
received his proportional part of the entitling real capital gain as a
dividend, and on it he shall be charged tax as said in section
67F(b), and the provisions of sections 67F and 67G, respectively,
shall apply.

Restriction on applicability of section 75B
67K. (a) In this section, ” controlled foreign company ” and “unpaid profits ” –
as defined in section 75B(a).
(b) If a held company is a controlled foreign comp any, then the provisions of
section 75B shall not apply to the Israel holding c ompany that holds it
and to its controlling members who are Israel resid ents, in respect of
profits not paid by the held company; a shareholder shall not be deemed
an Israel resident only because he is shareholder o f an Israel holding
company.

CHAPTER FOUR: FOREIGN RESIDENTS

68. Repealed
Conditions for granting relief to foreign residents
68A. (a) A foreign resident body of persons shall n ot be entitled to tax relief,
reductions or exemptions under this Ordinance becau se of its being a
foreign resident, if Israel residents are controlli ng members of it, or are
the direct or indirect beneficiaries of or entitled to 25% or more of the
income or profits of the foreign resident.
(b) The Minister of Finance may prescribe ways of p roof for the purposes of
this section.
(c) In this section:
“means of control ” and “together with another ” – as defined in section
88; ” controlling members ” – shareholders who directly or indirectly, alone,
with another or together with another Israel reside nt, hold more than
25% of one or more of the means of control.

Appointing a representative
68B. (a) If, under section 60 of the Value Added Ta x Law, a foreign resident is
required to appoint a representative, then he shall appoint as
representative – also for the purposes of the Ordin ance – an individual
Israel resident or an Israel resident body of perso ns that has a business
in Israel.
(b) The representative shall be authorized to repor t to the Assessing Officer,
to accept income and profits for the foreign reside nt, and to pay the tax
that the foreign resident must pay only out of the foreign resident’s
assets.
(c) If the foreign resident did not appoint a repre sentative as said in
subsection (a), then the representative appointed u nder the Value
Added Tax Law shall be his representative for the p urposes of the
Ordinance.
(d) The Minister of Finance shall, with approval by the Knesset Finance
Committee, prescribe provisions for the implementat ion of this section
and also provisions on the returns the representati ve must submit.

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Non-residents
69. The Minister of Finance may make rules in respe ct of individuals who are not
Israel residents, in order to prescribe –
(1) what deductions and credits may be allowed a sa id individual;
(2) the individuals or the categories of individual s to whom those deductions
or credits shall apply.

Exemption of foreign resident ship owner
70. The profits of a person who is not an Israel re sident and who engages in the
business of a ship owner or ship charterer (in this Ordinance: foreign resident
ship owner) are exempt of tax, to the extent that t he exemption was
determined by agreement between the state to which the foreign resident ship
owner belongs and the State of Israel, or if the Mi nister of Finance certified that
that state acts as if an agreement providing for th e said exemption were in
effect between that state and the State of Israel.

Profits of foreign resident ship owner from Israeli cargo
71. Subject to the provisions of section 70, the en tire profit of a foreign resident
ship owner whose owned or chartered ship calls at a n Israel port, which was
derived from the carriage of passengers, mails, dom estic animals or goods (all
hereafter: cargo) loaded in Israel, shall be deemed income produced in Israel;
this provision shall not apply to goods brought to Israel only for transshipment.

Calculation of profits of foreign resident ship own er with certificate
72. (a) If a foreign resident ship owner produces a certificate from any income
tax authority, certifying the following two data:
(1) the ratio of his profits or losses from shippin g business during any
accounting period, as computed by that authority fo r income tax
purposes and without deducting depreciation, to his total receipts
from the carriage of cargo;
(2) the ratio of the amount of deducted depreciatio n, as computed by
that authority, to his total receipts from the carr iage of cargo;
then his profits derived in Israel from shipping bu siness for that period,
before deducting any depreciation, shall be an amou nt proportional to
his receipts from the carriage of cargo shipped in Israel, as is the ratio of
his total profits according to the certificate, for that period, to his total
receipts from the carriage of cargo.
(b) The said certificate shall be one issued on beh alf of any income tax
authority, with regard to which the Assessing Offic er is satisfied that it
computes and assesses the ship owner’s full profits from his shipping
business on a basis that is not materially differen t from that prescribed
by this Ordinance.

Calculation of profits of foreign resident ship own er in other cases
73. If, when the assessment is made, the provisions of section 72 cannot for any
reason be applied satisfactorily, then the profits derived in Israel may be
calculated as a fair percentage of the full amount of receipts from the carriage
of cargo loaded in Israel; however, if any person w as assessed in any tax year
on the basis of such a percentage, then he shall be entitled to demand – at
any time within six years after the end of that tax year – that his tax liability for
that year be recalculated on the basis prescribed i n section 72.

Ship on a casual call
74. If the Assessing Officer decides that a ship th at belongs to a particular foreign

99
resident ship owner called at a port in Israel incidentally and that further calls
by that ship or others under the same ownership are improbable, then the
provisions of sections 71 to 73 shall not apply to the profits of that ship and no
tax shall be charged on them.

Air transport and wireless communications
75. If a foreign resident carries on the business o f air transport or the business of
transmitting messages by cable or by wireless teleg raphy, then he shall be
assessable to tax as if he were a foreign resident ship owner; the provisions of
section 70 to 73 shall apply, mutatis mutandis, to the computation of the profits
or earnings of such business.

Foreign journalist and foreign sportsman
75A. The Minister of Finance may, with approval by the Knesset Finance
Committee, make regulations on the deductions and c redits to be allowed
foreign journalists from journalistic work, as well as on the tax rate applicable
to the said income, and he may also make aforesaid regulations in respect of
foreign sportsmen on their income from sports activ ity; for this purpose:
” foreign journalist ” – a foreign resident registered with the Foreign Press
Association of Israel, who came to Israel in order to engage in journalistic
work, his income from journalistic work being recei ved from a foreign resident;
” journalistic work ” – the preparation of journalistic articles for pe riodicals or of
reports broadcast by electronic mass media, or assi stance in the preparation of
aforesaid reports; ” foreign sportsman ” – a foreign resident who came to Israel in order to
engage in sports activity; ” sports activity ” – regular participation in games and sports compe titions, in
training or in preparation for them, other than act ivity as a trainer in the sphere
of sports, all in an Israel sport association or sp ort club.

CHAPTER FOUR “A”: CONTROLLED FOREIGN COMPANY

Israeli controlling members in a controlled foreign company
75B. (a) In this section –
(1) “controlled foreign company ” – a foreign resident body of
persons, for which all the following hold true:
(a) its shares or the rights in it are not listed f or trading on an
Exchange; however, if they are listed in part, then less than
30% of the shares or of the rights of that body of persons
were offered to the public;
(b) most of its income in the tax year is passive i ncome or most
of its profits derive from passive income, and in r espect of a
body of persons in a chain of companies, which is d irectly
held by a business company (in this section: held b ody), and
also in respect of any body of persons that is dire ctly or
indirectly held by the held body – if most of the b usiness
company’s total income or profits stem from passive income;
for this purpose, the amount of income, the amount of profits
and the amount of passive income shall be calculate d
according to the applicable tax laws, as defined in section
5(5)(c);

100
(c) the tax rate that applies to its passive income in the foreign
countries does not exceed 20%;
(d) (1) more than 50% of one or more of its means o f control
are directly or indirectly held by Israel residents or by
Israel citizen residents of an area, as defined in
section 3A, or more than 40% of one or more of its
means of control are held by Israel residents, who –
together with a relative of one or more of them – h old
more than 50% of one or more of its means of contro l,
or an Israel resident has the right to prevent the
adoption of substantive management decisions in it,
including decisions on dividend distributions or on
winding up, and all that at one of the following ti mes:
(a) at the end of the tax year;
(b) on any day during the tax year and on any day i n
the following tax year;
for this purpose, ” relative” – as said in section 76(d),
who is a foreign resident;
(2) the proportion held, as said in subparagraph (1 ), in
respect of indirect holdings in a certain body of
persons in a chain of companies (in this section: t he
certain body) shall be calculated according to the
following provisions:
(a) if the holdings in each of the bodies of person s
in the chain of companies that indirectly hold the
certain body exceed 50%; then the proportion of
the holding in it shall be calculated according to
the rate of direct holdings in it;
(b) if the rate of holdings in one of the bodies of
persons in the chain of companies that hold it
indirectly is less than 50%, then the indirect
holdings in it by means of that chain of
companies shall be taken to be a holding at the
rate of zero;
(2) ” means of control ” – as defined in section 88;
(3) ” controlling member ” – an Israel resident who directly or
indirectly, alone or with another, holds at least 1 0% of one of the
means of control in a body of persons at one of the following
times:
(1) at the end of the tax year;
(2) on any day during the tax year and on any day d uring the
following tax year;
(4) ” together with another ” – together with his relative and also
together with a person who is not his relative, if they are Israel
residents and if there is regular direct or indirec t cooperation
between them by agreement concerning substantive ma tters of the
company;
(5) ” passive income ” –
(a) each of the following kinds of income, other th an income
which – had it been produced or accrued in Israel – would
under Israel tax laws have been deemed income from
business or profession:
(1) income from interest or linkage differentials;
(2) income from dividends;

101
(3) income from royalties;
(4) income from rent;
(5) consideration for the sale of an asset, within its
meaning in section 88, which was not an asset used
by the company in a business or in a vocation;
(b) any income that stems from an income or a consi deration
said in subparagraph (a), even if it is income from business
or occupation;
(6) ” total income and profits ” of a business company – its income
and profits and also its proportional part, direct or indirect, of the
income and profits of any body of persons in the ch ain of
companies which it directly or indirectly holds; fo r this purpose, the
business company’s indirect proportional part of af oresaid profits
shall be calculated by multiplying the proportional right by the
profits of each body of persons in the chain of com panies which
the business company holds indirectly;
(7) ” business company ” – a foreign resident body of persons, most
of the income and profits of which are not passive income;
(8) ” controlling member’s proportional part of unpaid pr ofits” – a
proportional part of all unpaid profits, in accorda nce with the
controlling member’s direct and indirect right to p rofits in the
controlled foreign company on the last day of its t ax year; for
purposes of this section, a controlling member’s in direct part of
unpaid profits shall be calculated by multiplying t he right to the
profits of every body of persons in the chain of co mpanies which
he holds indirectly;
(9) repealed
(10) ” foreign tax ” – the tax which – under the tax laws applicable i n a
foreign country – is due on income in that country;
(11) ” relative ” – as defined in section 88, who is an Israel resi dent;
(12) ” unpaid profits ” – profits that stem from the passive income of a
controlled foreign company that was produced during the tax year,
other than profits that stem from dividends receive d from a foreign
resident body of persons that was proven – to the A ssessing
Officer’s satisfaction – to stem from income on whi ch foreign tax
was paid at a rate in excess of 20%, which in the c ourse of that
year were not paid to persons with rights in it; in the calculation of
said profits the taxes due on the passive income of the controlled
foreign company and its losses in that year and its losses brought
forward from preceding years that stemmed from the said sources
shall be subtracted; for this purpose, the amounts of profit, of
foreign tax and of loss shall be calculated in acco rdance with the
applicable tax laws, as defined in section 5(5)(c);
(13) ” applicable tax rate ” – the amount of foreign tax which the
controlled foreign company was charged in respect o f its passive
income in the tax year, divided by the total of its profits that stem
from passive income in that year;
(14) ” chain of companies ” – two or more bodies of persons, which
directly or indirectly hold each other;
(15) “Israel resident ” – including an Israel citizen resident in an area
as defined in section 3A, and exclusive of a person who became
an Israel resident for the first time or a veteran returning resident,
as said in section 14(a), when ten years have not y et passed since
he became an Israel resident as aforesaid.

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(b) (1) if a controlled foreign company has unpaid profits, then its
controlling member shall be treated as if he had re ceived his
proportional share of those profits as a dividend;
(2) if means of control were acquired in the course of the year, then
the controlling member’s proportional part of the u npaid profits
shall be calculated according to the proportional p eriod in which he
held means of control in the course of the tax year in which they
were acquired;
(3) the provisions of paragraphs (1) and (2) shall not apply to a
controlling member who controls another controlling member in
respect of unpaid profits of the controlled foreign company, if the
provisions of the said paragraphs apply to the othe r controlling
member in respect of the unpaid profits.
(c) (1) If an obligation to pay foreign tax applies to the controlled foreign
company in the state of its residence, inter alia b y deduction at the
source in respect of a dividend distribution, then a tax credit shall
be allowed in the amount of the foreign tax that wo uld have been
paid if the unpaid profits had been distributed as a dividend;
however, if the income under this section is income that stems
from a company in a chain of companies that is not held directly by
the controlling member, then to the aforesaid credi t shall be added
the foreign tax that would have been paid in respec t of the
distribution of dividends by each of the companies in the chain of
companies and for which full or partial credit cann ot be obtained
by any of the companies in the chain; for purposes of the
calculation of the credit under this paragraph the amount of foreign
tax that would have been paid as aforesaid and for which no credit
can be obtained shall be taken into account, multip lied by the
proportional right to profits in each body of perso ns in the chain of
companies, which is directly or indirectly held by the controlling
member.
(2) The amount of credit said in paragraph (1) shal l not exceed the
tax, to which the controlling member is liable in I srael on his
chargeable income under this section.
(3) If the company is the resident of a state that is not a reciprocating
state, then a credit under paragraph (1) shall be g iven on unpaid
profits in a controlled foreign company only if the controlling
member proved to the Assessing Officer’s satisfacti on that a
foreign tax obligation would apply if the said prof its were
distributed as a dividend in that year and the rate of the foreign tax
that would have applied to a said distribution.
(d) If a dividend was actually paid to the sharehol der of a controlled foreign
company out of profits on which he or his alternate paid tax under the
provisions of subsection (b), then a credit shall b e given against the tax
that applies to the actually paid dividend; the cre dit shall be in the
amount of tax paid under the provisions of subsecti on (b), but not more
than the amount of the tax he paid on that part of the said profits which
were paid as a dividend, and it shall be adjusted a ccording to the rate of
the index increase from the end of the tax year in which the profits were
charged to him under subsection (b) and until the d ate of the actual
dividend payment; if a credit balance remains under the provisions of
this subsection, then it may be subtracted in comin g the tax years, one
after the other, from the tax that will be paid on dividends actually paid
out in those years out of the undistributed profits of that controlled

103
foreign company; for this purpose: “his alternate” – whoever received a
share from a shareholder in a tax exempt sale.
(e) (1) If a controlling member sold all or some of his means of control in
a controlled foreign company, then he shall be exem pt of the tax
that applies to that sale in the amount of the tax he paid in
preceding tax years as said in subsection (b) on un paid profits in
respect of the means of control that are being sold , and which had
not been distributed as dividends until the date of the sale; the
amount of tax paid as aforesaid in preceding tax ye ars shall be
adjusted at the rate of the index increase from the end of the tax
year in which it was paid until the date of sale of the said means of
control;
(2) the amount of the credit shall not exceed the t ax that applies to the
said capital gain after any lawfully allowed set-of f and deduction.
(f) The Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe provisions on trusteeship and also provisions for
the implementation of this section, rules on report s by a controlling
member on his means of control in a controlled fore ign company and on
reporting the controlled foreign company’s income.

CHAPTER FOUR “B”: TRUSTEESHIPS

Definitions
75 C. In this Chapter –
“means of control “, “substantive shareholder “, “relative ” and
” consideration ” – as defined in section 88;
” trustee income ” – income produced or accrued from trusteeship ass ets;
” vesting ” – transferring an asset to a trustee under a trus teeship, not for
consideration; ” trust asset holding company ” – a body of person that directly or indirectly
holds trusteeship assets for the trustee; ” distribution ” – transfer of an asset or of income by the truste e to the
beneficiary or to his credit, while the trusteeship is in existence or because of
its liquidation; ” creator ” of a trusteeship – within its meaning in section 75D;
” trusteeship protector ” – the person who – under the trusteeship document s
– has the power to appoint and to dismiss the trust ee, to give the trustee
orders, or whose approvals are needed for the trust ee’s acts;
” trustee ” – a person in whom assets or income from assets w ere vested, or
who holds assets in trusteeship; wherever in this C hapter the word “trustee”
appears, that means a trustee in this position in t he trusteeship at hand; for this
purpose vesting in a trust asset holding company sh all be treated like vesting
in the trustee, and a body corporate specified in S chedule One “A” shall be
deemed a trustee; the Minister of Finance may add, by Order, bodies corporate
to Schedule One “A”; ” trusteeship ” – an arrangement, under which the trustee holds t he trusteeship
assets for the benefit of the beneficiary in Israel or abroad, whether defined as
a trusteeship under statutes applicable to it, or d efined in some other manner;
” irrevocable trusteeship ” – a trusteeship that is not a revocable trusteesh ip,
on condition that a lawfully certified affidavit by the creator of the trusteeship
and by the trustee was delivered to the Assessing O fficer on a form and at the
time prescribed by the Director, stating that it is an irrevocable trusteeship;

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“revocable trusteeship ” – a trusteeship for which at least one of the fol lowing
holds true:
(1) it is possible to cancel it or to transfer or r eturn the asset or the income
to the creator, his spouse, his estate or to a held body of persons, all
either directly or indirectly;
(2) the creator or his spouse are one or more of th e beneficiaries, or the
creator or his spouse can become a beneficiary;
(3) one or more of the beneficiaries is a child of the creator, who in the tax
year has not reached age eighteen, or there is a po ssibility to transfer an
asset or income directly or indirectly to his afore said child, on condition
that the creator or his spouse is still alive;
(4) one or more of the beneficiaries are bodies of persons, which are not
public institutions as defined in section 9(2), in which 10% or more of any
means of control are held by the creator, by his sp ouse or by his child
who has not yet reached age eighteen if the creator or his spouse is still
alive, all either directly or indirectly (in this d efinition: held body of
persons);
(5) the trustee or the protector of the trusteeship is the creator or a held
body of persons;
(6) the trustee or the protector of the trusteeship is a relative of the creator,
unless it was proven to the Director’s satisfaction that there was a
special justification for the relative’s appointmen t as trustee, and that the
appointment does not demonstrate any ability to dir ect the trustee’s
activity or to issue instructions on the matter of the trusteeship; for
purposes of this definition: ” relative” – as defined in paragraphs (1) to
(3) of the definition of “relative” in section 88;
(7) the creator or his relative are able to direct the trustee’s activity or to give
him instructions on the way the trusteeship and its assets are managed,
its beneficiaries are changed, or trust assets and trust income are
distributed to beneficiaries, or his approval is re quired for acts of the
trustee, or he is able to order the trusteeship to be cancelled or the
trustee to be replaced, otherwise than for statutor y grounds, all whether
directly or indirectly;
(8) the identity of one or more of the beneficiarie s is not known, or the
identity of a direct or indirect holder of shares i n a beneficiary that is a
body of persons is not known, unless it is proven t o the Assessing
Officer’s satisfaction that that beneficiary cannot be the creator, his
spouse, the creator’s child who has not reached age eighteen, or a held
body of persons,
(9) the beneficiaries of a trusteeship have been re placed or new ones were
added, without instructions to that effect having b eing included in the
trusteeship documents;
(10) no certified affidavit was delivered on the fo rm and at the time prescribed
by the Director, as said in the definition of “irre vocable trusteeship”;
” trusteeship created by foreign residents ” – a trusteeship said in section
75I; ” trusteeship under a will ” – a trusteeship said in section 75L;
” foreign resident beneficiary trusteeship ” – a trusteeship said in section
75J; ” trusteeship of Israel residents ” – a trusteeship said in section 75G;
” beneficiary ” in a trusteeship – within its meaning in section 75E;
” asset ” – any property, real or movable, and also any pro spective or vested
right or benefit, all whether in Israel or abroad; ” trustee assets ” – assets vested in the trustee or acquired or rec eived by him,

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also if held for him by a trust asset holding company, even if registered in its
name; ” foreign resident “, in respect of a creator – including a creator wh o was a
foreign resident at the time of his death; ” Israel resident ” – including an Israel citizen who is resident in an area, as
defined in section 3A, and in respect of a creator – including a creator who was
an aforesaid Israel resident or Israel citizen at t he time of his death.

Creator of a trusteeship
75D. (a) A person who directly or indirectly vested an asset in a trustee is the
creator of a trusteeship, and the following shall a lso be deemed creators:
(1) a person who directly or indirectly was a subst antive shareholder
in a body of persons, when the body of persons vest ed the asset
in the trustee;
(2) a person who directly or indirectly held one or more categories
whatsoever of means of control in a body of persons , when the
body of persons vested the asset in the trustee, an d he or his
relative are beneficiaries of that trusteeship;
(3) if a trustee vested an asset or income in anoth er trustee after the
last of the creators died or after the beneficiarie s of the trusteeship
were changed, all without a provision to that end h aving been
included in the trusteeship documents, then the ben eficiary shall
also be deemed a creator of the trusteeship under w hich the other
trustee operates or in a trusteeship in which the b eneficiaries were
changed, as aforesaid, as the case may be, unless i t was proven
to the Assessing Officer’s satisfaction that the be neficiary had no
influence on the said vesting or on the change of b eneficiaries;
(4) if the beneficiary was able to control or influ ence – directly or
indirectly – the manner in which the trusteeship is managed, the
trust assets, the designation of beneficiaries othe rwise than by
virtue of designation by the creator, the appointme nt or
replacement of trustees, or the distribution of tru st assets or trust
income to beneficiaries, then the beneficiary shall also be deemed
a creator;
(5) if, in a trusteeship created by foreign residen ts, an asset vested in
the trustee was transferred from an Israel resident – he and his
Israel resident relative being beneficiaries of the trusteeship – then
the said Israel resident shall be deemed a creator of that
trusteeship.
(b) If a trustee vested an asset or income in anoth er trustee, then the
creator who vested the asset or income in the trust ee shall be deemed
the person who vested it in the other trustee, and the trustee shall not be
deemed a creator.

Beneficiary of a trusteeship
75E. A person entitled to benefit directly or indir ectly from the trust assets or trust
income is a beneficiary of the trusteeship, includi ng the following:
(1) a person who will be entitled to be an aforesai d beneficiary when a
condition is fulfilled or when a date prescribed in the trusteeship
documents has been reached; however, if a person’s rights are
conditional on the demise of the creator or of anot her, then he shall not
be deemed a beneficiary as long as the creator or t he other beneficiary
still are alive;
(2) a still unborn beneficiary;

106
(3) an indirect beneficiary through a chain of trusteeships;
(4) a person who directly or indirectly holds one o r more of any category of
means of control in the beneficiary, which is a bod y of persons other
than a public institution defined in section 9(2).

Tax liability of trust income
75F. (a) Trust income shall be charged tax in the y ear in which it was produced or
accrued.
(b) Trust income shall be treated as the creator’s income or the beneficiary’s
income, as the case may be, as specified in section s 75G, 75I, 75J or
75L.
(c) The trustee shall be the person assessed and c harged tax in respect of
trust income and of acts with trust assets.
(d) The tax rate at which trust income shall be ch arged is the maximum tax
rate prescribed in section 121.
(e) Notwithstanding the provisions of subsection ( d), if a special tax rate is
prescribed for a certain category of an individual’ s income, then trust
income of the same category shall be charged at the tax rate so
prescribed.
(f) A tax exemption for income limited by a ceilin g shall not apply to trust
income, and the provisions of section 11 and the pr ovisions of Chapter
Three in Part Three also shall not apply to it.
(g) Trust income or chargeable trust income shall be determined under the
provisions of this Ordinance, also if the trustee i s a foreign resident and
also if the trusteeship is under foreign Law or if the provisions of foreign
Law apply to it.
(h) Losses suffered by a trust (in this Chapter: t rust losses) cannot be set off
against the income of the creator or the beneficiar y, and the tax that
applies to trust income cannot be set off against t he tax that applies to
income of the creator or of the beneficiary, except when this Chapter
explicitly makes a different provision.
(i) Losses by the creator or by the beneficiary ca nnot be set off against the
trust income, and the tax that applies to the creat or’s and the
beneficiary’s income cannot be set off against the tax that applies to the
trust income, excerpt when this Chapter explicitly makes a different
provision.
(j) In respect of the calculation of capital gain on the trustee’s sale of an
asset that was vested in the trustee exempt of tax or not liable to tax,
which was vested in him for no consideration, and i n respect of the
calculation of depreciation on a said asset, the or iginal cost of the asset,
the balance of its original cost and the day of the asset’s acquisition
shall be determined as they would have been for the creator, and
the amount of depreciation shall be the amount the creator was entitled
to deduct in respect of that asset.
(k) The place of residence of an unborn beneficiar y shall be determined
according to the place of residence of his parents.

Charging the trustee’s income in the hands of the c reator or the beneficiary
75F1. (a) Notwithstanding the provisions of section 75F(c), the following are
assessable and chargeable to tax in respect of the trustee’s income and
in respect of acts with trust assets:
(1) in a trusteeship of Israel residents –the creat or who was an Israel
resident in the tax year, and if more than one crea tor was an Israel
resident in the tax year, then only one of them (he reafter:

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representative creator);
(2) in a trusteeship under a will that under sectio n 75L is deemed an
Israel resident –a beneficiary who is an Israel res ident in the tax
year, and if more than one beneficiary was an Israe l resident in the
tax year, then only one of them (hereafter: represe ntative
beneficiary);
on condition that that all the conditions specified in subsection (b) , as
the case may be, were complied with in the said tru steeships and the
provisions in subsection (c) shall apply.
(b) (1) There is no Israel resident trustee in the trusteeship;
(2) the trustee in the trusteeship gave notice tha t he elected the
application of the provisions of this section and d eclared that he
undertakes to communicate to the representative cre ator or to the
representative beneficiary, as the case may be, all the information
he needs in order to have full information about th e trustee’s
income or the trust assets;
(3) in respect of a trusteeship of Israel resident s – all the creators,
including the representative creator, gave notice o f their choice of
the representative trustee as assessable and charge able and of
the applicability of the provisions of this section ;
(4) in respect of a trusteeship under a will that under section 75L is
deemed an Israel resident – all the beneficiaries, including the
representative beneficiary gave notice of their cho ice of the
representative beneficiary as assessable and charge able and that
the applicability of the provisions of this section ;
(5) notices said in paragraphs (2), (3) or (4) sha ll be submitted to the
Assessing Officer on forms prescribed by the Direct or, together
with the return under section 131(a)(5b)(4) for the first tax year in
which the trustee and all the creators or the trust ee and all the
beneficiaries opted for the applicability of the pr ovisions of this
section.
(c) (1) The choice of the trustee and creator or of the trustee and
beneficiary, as the case may be, shall also apply i n the tax years
after the first tax year as said in subsection (b)( 5), and they shall
not have the right to retract their decision if the representative
creator or the representative beneficiary, as the c ase may be, is
still alive and still is an Israel resident or as l ong as there is no
Israel resident trustee of the trusteeship.
(2) The provisions of section 75F, other than subs ection (c) thereof,
shall apply to the representative creator or th e representative
beneficiary, as the case may be, all in the manner and in the
amount that the trustee would have been assessed or charged, if
not for the choice of the provisions of this sectio n.
(3) The provisions of any statute on the tax payme nt, reporting,
collection and penalties shall apply to the represe ntative creator or
the representative beneficiary, as the case may be, in respect of
the trustee’s income and in respect of the trust as sets.
(4) A final tax debt of the representative creator or the representative
beneficiary, as the case may be, may be collected f rom the
trustee, and a final tax debt of the representative creator also from
all the creators, also if he ceased being an Israel resident; for this
purpose, “final tax debt” – as defined in section 7 5O(f).
(5) The provisions of section 75O(d) shall apply, except that “if the
trustee” shall be replaced by “if the representativ e creator or the

108
representative beneficiary, as the case may be”.
(d) W herever this section speaks of a representativ e creator or a
representative beneficiary, that is in the relevant trusteeship.

Trusteeship of Israel residents
75G. (a) (1) A trusteeship of Israel residents is a trusteeship in which – at the
time of its creation – at least one creator and at least one
beneficiary were Israel residents, and at least one creator and at
least one beneficiary thereof were Israel residents in the tax year.
(2) A trusteeship that is not a trusteeship created by foreign residents
and not a foreign resident beneficiary trusteeship shall also be
deemed a trusteeship of Israel residents.
(3) Notwithstanding the provisions of paragraphs (1 ) and (2), a
trusteeship under a will shall not be deemed a trus teeship of Israel
residents.
(4) A trusteeship shall be deemed a trusteeship of Israel residents,
whether it is a revocable or an irrevocable trustee ship.
(b) In a trusteeship of Israel residents the trust income shall be treated like
the creator’s income and the trust assets shall be created like the
creator’s assets.
(c) A trusteeship of Israel residents shall be dee med an Israel resident, also
when the creator ceased being an Israel resident, a nd the trust income
shall be treated like the income of an individual I srael resident and the
trust assets like the assets of an individual Israe l resident.
(d) In a trusteeship of Israel residents vesting i n the trustee by an individual,
carried out not for consideration, shall not be dee med a sale for the
purpose of the provisions of Part Five.
(e) If a trusteeship became a trusteeship of Israe l residents after one creator
thereof became an Israel resident for the first tim e, a veteran returning
resident or a returning resident, as said in sectio n 14(a) or (c), then the
provisions under sections 14(a) or (c), 16 or 97(b) or (b3), as the case
may be, shall also apply to the trust income, in ad dition to the provisions
of section 75F.
(f) Distribution of an asset of a trusteeship of I srael residents shall be
charged tax or shall be exempt of tax for the purpo ses of Part Five, as it
would have been if the asset had been transferred d irectly from the
creator to the beneficiary; for this purpose the cr eator shall be deemed
an Israel resident, even if at the time of the dist ribution he is a foreign
resident; if a trusteeship had several creators, an d if the transfer from at
least one of them to the beneficiary would have bee n liable to tax, had it
been carried out directly, then the distribution sh all be liable to tax.
(g) The provisions of section 75F(a) to (i) and (k ) and of subsections (b), (c)
and (e) shall not apply to trust income in a truste eship of Israel residents
that is an irrevocable trusteeship distributed to a n Israel resident
beneficiary, and it shall be deemed the beneficiary ‘s income on condition
that all of the following hold true:
(1) the distribution took place before six months h ad elapsed after the
end of the tax year in which the income was produce d or accrued
or up to the date for submission of the return for the said tax year,
whichever was earlier;
(2) the income was included in the return submitted by the trustee
under section 131 as distributed income, and it was not taken into
account in the calculation of the trustee’s income or chargeable
income;

109
(3) the income was included in the return submitted by the beneficiary
under section 131 for that tax year;
(4) the trustee and the beneficiary attached to the ir returns under
paragraphs (2) and (3), as the case may be, a notic e of the
distribution and of their choice that the distribut ed trust income be
deemed the beneficiary’s income;
(5) if income was produced by or accrued from diffe rent sources of
income, then it shall be deemed to have been distri buted
proportionally from each said source of income, unl ess the writ of
trusteeship prescribed that the distributed income was earmarked
for the beneficiary who received it.
(h) The provisions of section 75F and of subsection s (b) to (h) shall not
apply to a trusteeship of Israel residents that is a revocable trusteeship,
in which there is only one creator who is an Israel resident, if the creator
and the trustee gave notice of their choice that th e creator be
assessable and chargeable to tax for the trust inco me; for this purpose a
creator and his spouse shall be deemed a single cre ator, provided the
spouse is an Israel resident; a said application sh all be submitted to the
Assessing Officer together with the return under se ction 131 for the tax
year in which the trusteeship was created; when suc h an application has
been submitted, the following provisions shall appl y:
(1) the creator shall be the assessee and the perso n liable to tax in
respect of the trust income, and he must submit a r eturn thereon
under section 131 as long as the creator still is a live;
(2) the creator’s final tax debt in respect of the trust income may also
be collected from the trust assets and from trust i ncome;
(3) the creator’s and trustee’s choice shall also a pply in coming tax
years, and they cannot withdraw their choice as lon g as the creator
is alive and an Israel resident.
The provisions of this subsection shall apply as lo ng as the creator is an
Israel resident.
(i) The provisions of section 100A shall not apply to a trusteeship of Israel
residents on the day on which the creator ceases to be an Israel
resident, as long as the trusteeship is an aforesai d trusteeship.

Trusteeship that ceased being a trusteeship of Israel residents
75H. (a) A trusteeship shall cease being a trustees hip of Israel residents from the
date on which one of the conditions prescribed in s ection 75G(a) ceased
to apply (in this section: the final day).
(b) If a trusteeship ceased being a trusteeship of Israel residents and
became a foreign resident beneficiary trusteeship, then for the purposes
of the provisions of Part Five the trust assets sha ll be deemed to have
been sold to a foreign resident on the final day`.
(c) If a trusteeship ceased being a trusteeship of Israel residents and
became a trusteeship created by foreign residents, then the provisions of
section 100A shall apply on the final day, mutatis mutandis.

Trusteeship created by foreign residents
75I. (a) A trusteeship created by foreign residents is a trusteeship, all creators of
which were foreign residents when it was created an d in the tax year, or
all its creators and all its beneficiaries are fore ign residents in the tax
year.
(a1) A trusteeship shall be deemed a trusteeship c reated by foreign
residents, irrespective of whether it is a revocabl e trusteeship or an

110
irrevocable trusteeship.
(b) The provisions of section 75G – except for its subsections (a), (c) and (h)
– shall apply to a trusteeship created by foreign r esidents, mutatis
mutandis.
(c) A trusteeship created by foreign residents sha ll be deemed a foreign
resident, and the trust assets shall be deemed asse ts held by a foreign
resident and the trust income the income of a forei gn resident individual;
if the creators are residents of several foreign co untries, then the trust
assets shall be deemed to be held in proportional p arts by individual
residents of their creators’ countries of residence , and the trust income
shall be deemed to have been produced or accrued fo r individual
residents of those countries, in proportion to the value of the assets
vested in the trustee by each creator, as it was on the day of vesting.

Foreign resident beneficiary trusteeship
75J. (a) A foreign resident beneficiary trusteeship is a trusteeship in respect of
which all the following held true in the tax year, on condition that the
provisions of section 75G(a)(1) do not hold true fo r it and that it is not a
trusteeship under a will:
(1) it is an irrevocable trusteeship; for purpose s of this section a
trusteeship shall not be deemed a revocable trustee ship only
because of the provisions of section 75D(a)(3) or ( 4);
(2) all its beneficiaries are individual foreign residents, whose identity
is known; for this purpose an unborn beneficiary sh all be deemed
a beneficiary whose identity is known;
(3) at least one of its creators is an Israel res ident;
(4) if, at the time it was created, the condition s said in paragraphs (1)
to (3) held true for it, then the following also he ld true –
(a) the trusteeship documents explicitly provide that no Israel
resident beneficiary can be added;
(b) in a notice that the creator submitted under section 75P1 it
was declared that in it there is no Israel resident beneficiary
and no Israel resident beneficiary whose entitlemen t under
the trusteeship is conditional on his ceasing to be an Israel
resident, and that no beneficiary as aforesaid can be added
to it.
(b) In a foreign resident beneficiary trusteeship t he trust assets shall be
deemed the beneficiary’s assets and the trust incom e the beneficiary’s
income.
(c) A foreign resident beneficiary trusteeship shal l be deemed a foreign
resident, and the trust assets shall be deemed asse ts held by an
individual foreign resident, and the trust income s hall be deemed the
income of an individual foreign resident; if the be neficiaries are residents
of several foreign countries, then the trust assets shall be deemed to be
held in proportional parts by individual residents of the beneficiaries’
countries of residence, and the trust income shall be deemed to have
been produced or accrued for individual residents o f those countries, in
proportion to their shares of the trust income and the trust assets.
(d) In respect of the provisions of the Ordinance, vesting a trustee in a
foreign resident beneficiary trusteeship shall be c harged tax, as it would
have been if the asset had been transferred directl y by the creator to the
foreign resident beneficiary.
(e) A distribution to the beneficiary of a foreign resident beneficiary
trusteeship shall not be deemed a sale for purposes of the provisions of

111
Part Five.
(f) Every year the trustee shall attach to the retu rn he submits under section
131, on a form prescribed by the Director, a notice about every
distribution made in the course of the tax year, in cluding the names of
the beneficiaries and the amounts distributed to th em, as well as a
declaration said in subsection (a)(4)b), but if the trustee does not have to
submit a return under section 131 for that tax year , then he shall submit
the said declaration to the Assessing Officer until April 30 of the year
after the tax year.

Partnership that ceased to be a foreign resident be neficiary trusteeship
75K. (a) If one of the beneficiaries of a trusteesh ip became an Israel resident for
the first time, a veteran returning resident or a r eturning Israel resident,
as said in section 14(a) or (c), then the trusteesh ip shall cease being be
a foreign resident beneficiary trusteeship; beginni ng with that day, the
provisions of section 75G shall apply to the truste eship, as well as
provisions under sections 14(a) or (c), 16 or 97(b) or (b3), as the case
may be, as they would have applied, if the income w ere produced
directly by the beneficiary who became an Israel re sident.
(b) If the trustee did not submit the notification and declaration said in
section 75J(f) for a certain tax year, then it will be deemed that there was
an Israel resident beneficiary in the trusteeship i n that tax year and the
provisions of section 75G shall apply.
(c) If the Assessing Officer concluded that – in s pite of the creator’s and the
trustee’s declarations – the conditions said in sec tion 75J(a)(4)(b) were
not complied with, or that the trusteeship is a rev ocable trusteeship, then
the trusteeship shall be deemed not to have been a foreign resident
beneficiary trusteeship from the beginning and the Assessing Officer
shall assess the trust income accordingly; fo r the purposes of this
section, a trusteeship shall not be deemed a re vocable trusteeship
only because of the provisions of section 75D(a)(3) or (4); if, when the
said assessment is being made, the trustee has fina l assessments for
preceding years, then the Assessing Officer may – n otwithstanding the
provision of any statute – assess the trust income in those years within
two years after the end of the tax year in which he concluded as
aforesaid.

Trusteeship under a will
75L. (a) A trusteeship under a will is a trusteeshi p for which all the following hold
true:
(1) the trusteeship was created under a will;
(2) all creators of the trusteeship are testators who were Israel
residents at the time of their demise.
(b) In a trusteeship under a will the trust income shall be deemed the
beneficiary’s income and the trust assets shall be deemed the
beneficiary’s assets.
(c) (1) If there is at least one Israel resident beneficiary in the trusteeship
under a will, then the trusteeship shall be deemed an Israel
resident, and the trust income shall be treated lik e an Israel
resident’s income and the trust assets shall be tre ated like assets
held by an Israel resident.
(2) If there is no Israel resident beneficiary in the trusteeship under a
will, then the provisions of subsections (c) and (e ) of section 75J
shall apply to the trusteeship.

112
(d) Vesting in the trustee in a trusteeship under a will and distribution to a
beneficiary in a said trusteeship shall not be deem ed sales for the
purposes of Part Five.
(e) The provisions of section 75F and of this sect ion, other than subsections
(d) and (g), shall not apply to a trusteeship under a will with only one
beneficiary who is an Israel resident, if the benef iciary and the trustee
requested that the beneficiary be assessable and ch argeable to tax; for
this purpose, a beneficiary and his spouse shall be deemed one
beneficiary, provided the spouse is an Israel resid ent; a said request
shall be submitted to the Assessing Officer as said in section 75G(h),
and the provisions prescribed in paragraphs (1) to (3) of the said section
shall apply, mutatis mutandis.
(f) The provisions of section 75G(g) shall also ap ply, mutatis mutandis, to
trusteeships under a will.
(g) If under the trusteeship under a will at least one beneficiary becomes an
Israel resident for the first time, a veteran retur ning resident or a
returning resident, as said in section 14(a) or (c) , and if in that tax year
there was no other Israel resident beneficiary in t he trusteeship, then – in
addition to the provisions of section 75F – the pro visions of sections
14(a) or (c), 16 or 97(b) or (b3), as the case may be, shall also apply to
the trust income.
(h) If the beneficiary of a trusteeship under a wi ll ceased to be an Israel
resident, then on that date the provisions of secti on 100A shall apply,
mutatis mutandis.

Vesting by a body of persons
75M. If a body of person vested an asset in a trust ee, then the following provisions
shall apply: (1) the vesting shall be deemed a sale for purposes of the
provisions of the Ordinance;
(2) the vested asset shall be treated like a divid end distributed to the
individual shareholders, who directly or indirectly hold rights in that body
of persons.

Distribution to the beneficiaries after the end of the trusteeship
75N. (a) If a trusteeship of Israel residents or a trusteeship created by foreign
residents came to an end and if, after its assets w ere distributed, losses
remained that had not been set off and which – had they been profits –
would have been liable to tax in Israel, then the l osses shall be deemed
losses of the creator; if the trusteeship had sever al creators, then a
proportional part of the losses shall be deemed the loss of each of the
creators, according to the value of assets vested i n the trustee, as it was
at the time of the vesting.
(b) If a foreign resident beneficiary trusteeship or a trusteeship under a will
came to an end, and if, after its assets were distr ibuted, losses remained
that had not been set off and which – had they been profits – would have
been liable to tax in Israel, then the losses shall be deemed losses of the
beneficiary; if the trusteeship had several benefic iaries, then a
proportional part of the losses shall be deemed the loss of each of the
beneficiaries, according to his proportional part i n the distribution of the
assets and the income, as it was during the four ye ar period that ended
at the end of the year in which the trusteeship end ed.
(c) At the end of the trusteeship the trust losses shall be classified
according to sources of income, as they were classi fied by the trustee,
and the losses of the trustee transferred from prev ious tax years shall be

113
deemed transferred losses of the creator or of the beneficiary, as the
case may be.
(d) In respect of the calculation of the capital g ains byf a beneficiary to
whom an asset was distributed and in respect of the asset’s
depreciation, its original price, the balance of it s original price, and the
day of its acquisition shall be as they would have been for the trustee,
and the amount of depreciation shall be the amount which the trustee
was entitled to deduct in respect of that asset.

Provisions on tax payments, collection, returns and penalties
75O. (a) The provisions of any statute on the payme nt of tax, on returns,
collection and penalties shall apply to the trustee in respect of the trust
income and the trust assets, except where an explic itly different
provision is made in this Chapter.
(b) In a trusteeship of Israel residents a final t ax debt of the trustee may be
collected from each of the creators, even if he cea sed being an Israel
resident.
(c) The provisions of subsection (b) shall also ap ply, if the Assessing Officer
found in respect of a certain foreign resident bene ficiary trusteeship that
– notwithstanding the creator’s and the trustee’s d eclarations – the
conditions prescribed in section 75J(a)(4)(b) were not complied with.
(d) If the trustee has a final tax debt, then it c an also be collected from every
beneficiary, to whose credit distribution was made after the beginning of
the tax year, in respect of which the debt exists, whether the trusteeship
has ended or not; however, no more shall be collect ed from any
beneficiary than the final tax debt or than the amo unt or the value of the
assets he received in the distribution, whichever i s less.
(e) The trustee of a trusteeship created by foreig n residents, the trustee of a
foreign resident beneficiary trusteeship, and also a trustee of a
trusteeship created under a will in which there is no Israel resident
beneficiary does not have to submit a return under section 131 about the
trust income created or accrued abroad, also if the trustee is an Israel
resident and if he submitted a return under section 131 about income
produced or accrued in Israel.
(f) In this section, ” final tax debt” – as defined in section 119A(d), and also
fines imposed under this Ordinance or under the Tax es (Arrears Fine)
Law 5741-1980.

General provisions
75P. (a) If a trusteeship had more than one trustee , then the trustees are jointly
and severally liable for the tax applicable to the trust income.
(b) A trust asset holding company shall not be obl igated to submit a return
under section 131 or to pay tax in respect of trust income or in respect of
trust assets that it holds for a trustee.
(c) The fact that a trustee is an Israel resident does not create a tax liability
or an obligation to submit a return in respect of t rust income, in addition
to the obligations specified in this Chapter, such as would not exist if all
the trustees were foreign residents.

Creator’s obligation to give notice
75P1.(a) If, in a tax year, an Israel resident crea tor created a trusteeship or vested
an asset or income from an asset in a trustee, then he must submit a
notice to the Director within 90 days after creatio n of the trusteeship or
after the vesting, as the case may be.

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(a1) In respect of a creator who became an Israel resident for the first time or
a veteran returning resident as said in section 14( a) the provisions of
subsection (a) shall not apply during ten years fro m the date on which he
became an Israel resident as aforesaid, on conditio n that – during the
entire said period – he vested only assets abroad o r income from assets
abroad; at the end of the said ten years the provis ions of subsection (a)
shall apply, but the notice said there shall be sub mitted until April 30 of
the first tax year after the end of that period; if the obligation to submit a
return under section 131 applies to the creator, th en the said notice shall
be submitted when the return is submitted.
(b) The notice said in subsection (a) shall be sub mitted on the form
prescribed by the Director, and the following shall be specified in it:
(1) the particulars of each of the creators and of each of the
beneficiaries, the particulars of the trustee and o f the trusteeship
protector, if there is one, and the residential sta tus of each of
these;
(2) the particulars of the assets vested in the tru stee or of which the
income was vested in the trustee, including the ori ginal cost, the
balance of the original cost and the day of acquisi tion, all as
defined in section 88, the value of the acquisition and the date of
acquisition within their meaning in Chapter Three o f the Real
Estate Taxation Law, and the balance of the acquisi tion value, as
defined in section 47 of the said Law, as the case may be, as well
as particulars of the income from the said assets t hat was vested
in trustee;
(3) the date on which the said assets or income, as the case may be,
were vested.
(c) (1) W ithout derogating from the provisions of s ubsection (a), a creator
of a trusteeship created by foreign residents that became a
trusteeship of Israel residents or a foreign benefi ciary trusteeship
because the creator became an Israel resident must submit a
notice to the Director by April 30 of the tax year after the tax year in
which the creator became an Israel resident, but if the creator is
under obligation to submit a return under section 131 – at the
time for submitting the return; a said notice shall be submitted on a
form prescribed by the Director and the particulars said in
subsection (b) shall be specified in it, but in res pect of the
particulars of the assets and income, as said in su bsection (b)(2),
the creator shall specify the particulars of the as sets and income
that he vested in the trustee during the five years before the tax
year in which the creator became an Israel resident .
(2) Notwithstanding the provisions of paragraph (1 ) –
(a) a creator said in paragraph (1), who became an Israel
resident for the first time or a veteran returning resident as
said in section 14(a) shall not be obligated to giv e notice as
said in that paragraph during ten years after the d ate on
which he became an Israel resident as aforesaid, on
condition that – when he became an Israel resident – the
trustee in the trusteeship had only assets abroad o r income
from assets abroad and that during that entire peri od only
aforesaid assets or income were vested in the trust ee; at the
end of the said ten years the provisions of paragra ph (1)
shall apply, but the dates for the submission of th e notice
said in that paragraph shall be in the first tax ye ar after the

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said period ended, as the case may be; if, during the said
ten years assets in Israel or income from assets in Israel
were vested in the trustee, then the provisions of paragraph
(1) shall apply, but the dates for the submission o f the notice
said in that paragraph shall be in the first tax ye ar after the
said period ended;
(b) a creator said in paragraph (1), who became an Israel
resident for the first time or a veteran returning resident as
said in section 14(a) shall have to give notice as said in that
paragraph at the times stated there, if – when he b ecame an
Israel resident – the trustee in the trusteeship ha d assets in
Israel or income from assets in Israel; however, in respect of
the particulars of the assets and of the income sai d in
subsection (b)(2) the creator shall only specify th e
particulars of the assets in Israel and of the inco me from
assets in Israel, which the creator vested in the t rustee
during the five years before the tax year in which the creator
became an Israel resident.

Obligation of trustee to submit notice
75P2.(a) The trustee of a trusteeship shall submit a notice to the Director, on a
form prescribed by the Director, on the following m atters:
(1) the creation of a trusteeship under a will – wi thin ninety days after
provisions of the will on setting up the trusteeshi p were carried out;
(2) a change of the category of a trusteeship – unt il April 30 of the tax
year after the tax year in which the category of th e trusteeship was
changed, but if the trustee is under obligation to submit a return
under section 131(a)(5b) in respect of that trustee ship – at the time
for submitting the return; the provisions of this p aragraph shall not
apply to the change in the category of a trusteeshi p to a
trusteeship of Israel residents because one creator thereof or one
beneficiary thereof, as the case may be, became an Israel resident
for the first time or a veteran returning resident as said in section
14(a), on condition that – when he became an Israel resident as
aforesaid – the trustee in the trusteeship had only assets abroad
or income from assets abroad.
(3) the conclusion of a trusteeship of Israel resid ents, the conclusion
of a trusteeship under a will that is deemed an Isr ael resident
trusteeship under section75L(c)(1) or the conclusio n of a
trusteeship that at its conclusion held assets in I srael – until April
30 of the tax year after the tax year in which the trusteeship was
concluded; however, if the trustee or the creator i s under obligation
to submit a return under section 131(a)(5b) in resp ect of that
trusteeship – at the time for submitting the return ; a said notice
shall include the particulars of the assets that we re distributed to
beneficiaries because of the conclusion of the trus teeship, and in
respect of a trusteeship that held assets in Israel at the time of its
conclusion – particulars of the assets in Israel th at were distributed
to beneficiaries because of the conclusion of the t rusteeship.
(b) The provisions of subsection (a) shall apply to a creator who elected to
be assessable and chargeable, to a representative c reator and to a
representative beneficiary, as the case may be, acc ording to provisions
under sections 75F1, 75G(h) or 75L(e), mutatis muta ndis.

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Obligation of beneficiary to submit notice
75P3. (a) If an Israel resident beneficiary received an asset that is not money from
a trustee in a distribution, even if the distributi on is not liable to tax in
Israel, then he must submit a notice to the Directo r until April 30 of the
tax year after the tax year in which the said distr ibution took place, but if
the beneficiary is under obligation to submit a ret urn under section 131 –
on the date forf submission of the return.
(b) A notice said in subsection (a) shall be submi tted on a form prescribed
by the Director, and on it the beneficiary shall sp ecify the particulars of
the asset he received in the distribution and the d ate of the distribution.

Restrictions on applicability
75Q. The provisions of this Chapter shall not apply to each of the following:
(1) a trust fund, as defined in section 88, and al so a joint investment trust
fund abroad;
(2) a benefit fund;
(3) a trusteeship created to secure a certain obli gation;
(4) an estate manager, a Court-appointed custodian , a trustee in
bankruptcy, an appointee under section 350 of the C ompanies Law, a
company liquidator, a receiver;
(5) a religious endowment that is a public institu tion, as defined in section
9(2);
(6) a trustee as defined in section 102.

The Minister’s authority
75R. The Minister of Finance may, with approval by the Knesset Finance
Committee, prescribe as follows:
(1) provisions on granting credit to a trustee, cre ator or beneficiary in
respect of taxes which the trustee, creator or bene ficiary in that
trusteeship paid to a foreign state on income that was charged tax both
in Israel and abroad;
(2) provisions on how to calculate the trustee’s ch argeable income or the
capital gain upon the sale of trust assets, includi ng the matter of setting
the original cost and the day of acquisition;
(3) provisions on taxing the trustee’s income propo rtionally, according to the
shares of individual foreign resident beneficiaries or individual foreign
resident creators, on the conditions he prescribed, and the necessary
adjustments, and for this purpose provisions on cap ital gains tax liability
in respect of vesting, the amendment of assessments and the
determination of income also after the dates prescr ibed in this
Ordinance;
(4) conditions, limitations, provisions and adjustm ents for the purposes of
this Chapter, including the matter of a trusteeship that ceased being a
trusteeship of Israel residents, a trusteeship crea ted by foreign residents
or a foreign resident beneficiary trusteeship.

CHAPTER FIVE: UNDISTRIBUTED PROFITS OF A SMALL COMP ANY

Applicability
76. (a) The provisions of this Chapter apply to eve ry company which is under
the control of at most five persons and which is no t a subsidiary or a
company in which the public has a real interest (he reafter: small

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company).
(b) For purposes of this Chapter: ” company under the control of at most
five persons ” – a company in which five or fewer persons, direc tly or
indirectly, jointly control, are able to control, o r are entitled to acquire
aforesaid control of the company’s affairs, and par ticularly, but without
derogating from the generality of the aforesaid, jo intly hold or are entitled
to acquire most of the share capital or of the voti ng power in the
company, or most of the company’s issued share capi tal or that part of it
which would, if the company’s entire income were di stributed to the
members, entitle them to receive most of the amount distributed.
(c) For the purposes of this section: ” subsidiary” – a company, in which
shares representing not less than 80% of its share capital are held or
controlled by a company or companies to which the p rovisions of this
Chapter do not apply.
(d) W hen determining whether a company is or is not under the control of
five persons, the following shall be deemed a singl e person:
(1) a person and his relative; for this purpose: ” relative” – spouse,
brother, sister, parent, parent’s parent, descendan t, the spouse’s
descendant and the spouse of any of these;
(2) a person and his representative;
(3) partners in a partnership.
(e) Nothing said in this Chapter shall prevent from appealing according to
sections 153 to 158 against a decision by the Direc tor in the exercise of
powers conferred on him by sections 77 and 78.

Undistributed profits that are deemed to have been distributed
77. (a) If the Director finds that a small company did not, by the end of twelve
months after any tax year (hereafter: the said peri od) distribute its
taxable profits for that year or some part of them to its shareholders in
the form of dividends, and that it is able to distr ibute its profits or part
thereof without detriment to the existence and deve lopment of its
business, and that the effect of non-distribution i s an avoidance or
reduction of tax, then he may – within three years after the end of the
said period, after he consulted with the committee for which provision is
made below and after he gave the company a reasonab le opportunity to
be heard – direct the Assessing Officer to treat th ose undistributed
profits as if they had been distributed as dividend s.
(b) W hen an aforesaid direction has been issued, th e shareholders
concerned shall be assessed or have their assessmen ts amended, as if
the sums treated as distributed had been received b y them as dividends
on the date or dates which the Director may find it just to determine,
having regard to the date or dates on which the com pany distributed
dividends, if any (hereafter: hypothetical dividend ).
(c) The Director shall not issue aforesaid directio ns if – before the end of
twelve months after any tax year – the company dist ributed as dividends
an amount that is not less than 75% of its taxable income in that tax
year.

Hypothetical dividends of small companies
78. A hypothetical dividend from a certain small co mpany (hereafter: the first
company) to a shareholder that is also a small comp any (hereafter: the second
company) shall not be liable to tax as income of th e second company, but shall
be treated as a dividend distributed by the second company on the date
prescribed by the Director under section 77, and th e shareholders of the

118
second company shall be assessed or have their assessments amended
accordingly; if a shareholder of the second company also is a small company,
then the provisions of this section shall apply, mu tatis mutandis as the case
may be, to the hypothetical dividend as though any reference here to the first
company were a reference to the second company, and any reference to the
second company were a reference to that shareholder , and so on until,
applying the same principle, no part of the profits to which the Director’s
directions relate and which must be treated as dist ributed to a small company
remains undistributed.
Unpaid tax to be debt of company
79. If a person was assessed to tax or had his asse ssment amended in
accordance with the provisions of sections 77 or 78 , and if he did not pay all or
part of the tax attributable to his share in a hypo thetical dividend on time, then
the unpaid amount shall become a debt due to the Go vernment from the
company, because of whose failure to distribute the profits the directions of the
Director directions under section 77 were made, and it may be recovered thw
way a debt is recovered.

Undistributed profit that was subsequently distribu ted
80. W hen undistributed profits liable to tax under sections 77 and 78 are
subsequently distributed, then they shall not be tr eated as taxable income of
their recipients.

Advisory Committee
81. A committee of five, at least three of them not State employees, shall advise
the Director on the use of the power conferred upon him by this Chapter; that
committee shall be chosen – when the need arises – by the Director from a list
drawn up by the Minister of Finance in a notice pub lished in Reshumot.

CHAPTER SIX: SPECIAL TRANSACTIONS

Interpretation
82. (a) ” Disposition”, for purposes of section 83, 84 and 86 – includes vesting,
a contract, an agreement, an arrangement or a trans fer of assets.
(b) In cases to which these sections do not apply, no provision of sections
83 and 84 shall prevent income by virtue of disposi tion from being
treated as if it were the income of the disposer.

Dispositions in favor of juveniles
83. If income is payable to a person or to his bene fit during a certain tax year by
virtue or in consequence of a disposition made duri ng the disposer’s life and
while the disposer is still living, and if that per son had not yet reached age 20
at the beginning of that tax year and was not marri ed, then that income shall,
for purposes of this Ordinance, be treated as if it were the disposer’s income in
that tax year and not the income of any other perso n; it is immaterial, for this
purpose, whether the income is paid directly or ind irectly, whether to that
person or to his benefit, whether at present or in the future, and whether it is
paid upon the fulfillment of a condition or after a n event, the occurrence of
which is in doubt, or as the result of the exercise of a power or discretion
conferred on any person, or in any other way, and w hether it is income which –
under Chapter Five – the person is deemed to have r eceived as aforesaid.

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Revocable dispositions
84. (a) If income is paid to a person in any tax ye ar by virtue or in consequence
of a revocable disposition, whether made before or after this Ordinance
came into effect, as well as said income which unde r Chapter Five is
deemed to have been received by that person, then – for purposes of
this Ordinance – it shall be treated as the dispose r’s income in that tax
year and not as any other person’s income.
(b) For the purposes of subsection (a), a dispositi on shall be deemed to be
revocable if it includes any provision for the dire ct or indirect transfer or
return of the income or of the asset from which it is derived to the
disposer or to his spouse, or if the disposer or hi s spouse has the direct
or indirect power, in any manner whatsoever, to rec eive or to recover
direct or indirect control over the income or over the asset from which it
is derived.

Valuation of trading stock in certain cases
85. (a) In calculating the earnings or profits from business for the purposes of
this Ordinance, trading stock which belongs to that business shall, in the
cases said below, be deemed as having been sold at the amount of its
value:
(1) trading stock that belonged to a business when it was
discontinued or transferred;
(2) trading stock which was removed or transferred out of the
business not for consideration or not for full cons ideration, as well
as trading stock in a business which was converted into a fixed
asset of that business.
(b) For the purposes of sections 21 and 88, the amo unt of the value of
trading stock which was converted into a fixed asse t and which is taken
to have been sold as said in subsection (a) shall b e its original cost
(c) In this section –
“trading stock ” – any movable or real asset that is sold in the o rdinary
course of the business, or which would be so sold i f it were ripe or if its
manufacture, preparation or construction had been c ompleted, and any
material used in the manufacture, preparation or co nstruction of that
asset; ” business ” – includes part of a business;
” amount of value ” – the amount which it was possible to obtain for the
trading stock upon its sale by a willing seller to a willing buyer, free of
any encumbrance intended to secure a debt, mortgage or other right to
secure a payment; however, if the Assessing Officer is satisfied that the
price of the stock was set in good faith, without b eing affected, directly or
indirectly, by the existence of special relations b etween the seller and the
buyer – and in the case of real assets also on cond ition that the sale was
made in writing – then the price set shall be the a mount of value.
(d) (1) Notwithstanding the provisions of subsectio n (a)(2), trading stock
specified below shall be deemed to have been sold a t cost:
(a) a building converted into a rental building, as defined in
section 53A of the Encouragement of Capital Investm ents
Law 5719-1959 (hereafter in this subsection: the
Encouragement Law);
(b) a plot of land included in a project approved f or the erection
of a rental building under the Encouragement Law, w ithin its
meaning in the said Law, on which a rental building , within

120
its meaning in section 53A of the said Law, was built;
(c) a building or a plot said in subparagraphs (a) or (b), which
was transferred to the ownership of a company, all members
of which are owners of the business, giving them ri ghts to
the property that are equal to their rights in the business, if
the transfer to the company was according to a dema nd by
the Board of the Investment Center, within its mean ing in the
Encouragement Law.
(2) If a building or a plot on which a building was erected is sold –
after some or all the provisions of subparagraph (1 ) were applied
to it – by whoever received it under the circumstan ces said there,
and if the Land Appreciation Tax Law 5723-1963 or s ection 4 of
the Income Tax Law (Encouragement of Dwelling Renta ls) (Ad
Hoc Provisions and Law Amendments) 5741-1981 or Cha pter
Seven “A” of the Encouragement Law applies to the s ale, then the
day of acquisition and the seller’s acquisition pri ce for purposes of
the said Laws shall be that day and that price whic h would have
been determined, if the property had been sold by w hoever
transferred it to the seller; for this purpose: ” building” – even if its
construction has not yet been completed.

Transfer prices in an international transaction
85A. (a) If, in an international transaction, there are special relationships between
the parties to the transaction, because of which th e price for the asset,
right, service or credit was determined, or other c onditions for the
transaction were set so that a smaller profit was r ealized therefrom than
would have been realized, under the circumstances o f the case, if the
price or the conditions had been set between partie s without a special
relationship (hereafter: market terms), then the tr ansaction shall be
reported in accordance with market terms and charge d tax accordingly.
(b) For purposes of this section:
“means of control ” – as defined in section 75B(a)(2);
” together with another ” – as defined in section 75B(a)(4), even if not
Israel residents; ” special relationships ” – including relations between a person and his
relative, and also control of one party to the tran saction over the other, or
control of one person over the parties to the trans action, whether direct
or indirect, alone or together with another; ” control ” – the holding, direct or indirect, of 50% or more of one of the
means of control; ” relative ” – as defined in section 76(d).
(c) (1) An assessee must deliver to the Assessing O fficer, at his demand,
all the documents and data he has and that relate t o a transaction
or to a foreign resident party to the transaction, and also about the
manner in which the price of the transaction was de termined.
(2) If the assessee delivered documents said in par agraph (1) and
documents prescribed under subsection (e) to the As sessing
Officer, then the onus of proof shall be on the Ass essing Officer, if
he prescribes anything that differs from what was a greed between
the parties.
(d) (1) A party to a transaction may apply to the D irector and request
advance certification that the price of a certain t ransaction or of a
series of similar transactions, agreed between part ies that have
special relationships, is according to market terms .

121
(2) The application shall include all the substantive facts and
particulars that relate to the transaction and also the way its price
was set, and documents, certifications, opinions, d eclarations,
valuations, the transaction agreement or a draft th ereof and every
other document or particular, all as the Director s hall prescribe in
rules, shall be attached to it.
(3) The Director may demand any additional document or particular,
which he deems necessary for his decision on the ap plication.
(4) The Director shall announce his decision and th e reasons for it
within 120 days after the application and all the d ocuments said in
subparagraphs (2) and (3) reached him, but – for re asons that
shall be recorded – he may extend the time up to 18 0 days, on
condition that he informed the applicant of the ext ension before
the end of the original period.
(5) If the Director did not reply to the applicatio n within the period set
in subparagraph (4), then that shall be deemed a pr iori certification
that the transaction was carried out on market term s.
(e) The Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe:
(1) in respect of all assessees or of categories of assessees, ways or
methods of recognizing the price or conditions of a transaction as
the market price or market terms, as the case may b e, as well as
provisions on relating income, expenses, deductions , credits and
exemptions, all in cases to which the provisions of subsection (a)
apply;
(2) a fee for the application for approval said in subsection (d) in the
amount he shall set, and he may prescribe that the fee be a
proportion of the value of the transaction;
(3) provisions on returns and documents to be submi tted to the
Assessing Officer and provisions on registration an d
documentation.

Power to disregard certain transactions
86. (a) If the Assessing Officer concludes that a c ertain transaction – which
reduces or is liable to reduce the amount of tax pa yable by a certain
person – is artificial or fictitious, or that a cer tain disposition was not in
fact carried out, or that one of the principal obje ctives of a particular
transaction is an improper avoidance or improper re duction of tax, then
he may disregard that transaction or disposition an d the person
concerned shall be assessed accordingly; an avoidan ce or a reduction
of tax may be deemed improper even if it is not con trary to Law; for this
purpose, ” transaction ” includes an act.
(b) No provision in this section shall prevent an appeal according to sections
153 to 158 against a decision by the Assessing Offi cer in the exercise of
the discretion given to him by subsection (a).

Allocations to unapproved funds and unlawful paymen ts
87. (a) The Minister of Finance may prescribe by re gulations, with approval by
the Knesset Finance Committee, rules on liability t o tax, the person liable
and the tax rates in respect of moneys specified be low:
(1) moneys paid by an employer, whose income is exe mpt of tax, to a
fund or insurance scheme intended for the payment o f savings,
pension, severance pay, sick leave, vacation pay or for any other
similar purpose, in respect of which no benefit fun d certification

122
was given under the Control of Benefit Funds Law, as well as
moneys paid to a benefit fund, the said approval of which was
canceled or which is managed by a company that does not hold a
management company permit under the said Law, provi ded that
no tax be imposed on money paid to a benefit fund b efore the date
set as the date of cancellation of its permit, or a s the date of
cancellation of the management company permit, as t he case may
be;
(2) moneys paid by a benefit fund to its members i n violation of
provisions under section 23 of the Control of Benef it Funds Law,
or when a fund is wound up when there is no justifi able reason for
the winding up in the Director’s opinion, in consul tation with the
Commissioner, as defined in the said Law; the Direc tor’s decision
under this paragraph shall, for the purpose of sect ions 153 to 158,
be treated as if it were an Order under section 152 (b).
(b) For purposes of subsection (a) and of regulatio ns made by virtue of it,
the following shall also be deemed moneys paid in v iolation of
regulations under section 23 of the Control of Bene fit Funds Law:
(1) money paid to a member not by way of a pension, including money
paid by way of the capitalization of a pension by a pension benefit
fund (hereafter in this section: pension benefit fu nd)
(2) money paid to a member not by way of a pension, including money
paid by way of the capitalization of a pension by a benefit fund,
including a pension benefit fund, that stems from d eposits that
enjoyed one of the following benefits:
(a) deposits to which the provisions of section 3(e 3) were not
applied;
(b) deposits, in respect of which he was entitled t o tax credits at
the rates set in section 45A(b);
(c) deposits, in respect of which he was entitled t o an additional
deduction under the closing passage of section 47(b )(1);
(d) deposits, to which rates of payment were applie d as
prescribed in regulations under section 22 of the C ontrol of
Benefit Funds Law, in respect of payments to pensio n
benefit funds, and the rate exceeded the rate appli cable at
that time to a benefit fund that is not a pension b enefit fund.
(c) The provisions of subsection (b) shall not appl y to the following:
(1) moneys exempt of tax under section 9A(e);
(2) moneys payable because of an employer’s obligat ion under the
Severance Pay Law 5723-1963, to which section 9(7a) applies;
(3) money on which the amount of tax under section 2(5) and under
sections 9A and 9B is greater than the amount of ta x applicable
under regulations made under subsection (a), and ta x at the rates
prescribed under the said sections shall apply to t hem;
(4) money withdrawn from a benefit fund in instance s, for which the
Minister of Finance prescribed in regulations under subsection (a)
that the aforesaid tax not apply to them.

PART FIVE: CAPITAL GAINS

Definitions
88. In this Part –

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“means of control ” in a body of persons – each of the following:
(1) the right to profits;
(2) the right to appoint a Director or General Mana ger of the company, or
holders of similar offices in other bodies of perso ns;
(3) the right to vote at the company’s General Meet ings, or in the
corresponding body of another body of persons;
(4) the right to a share of the balance of assets a fter debts have been paid
at liquidation;
(5) the right to instruct the holder of one of the rights said in paragraphs (1)
to (4) how to exercise that right;
all whether by virtue of shares, rights to shares o r other rights, or in any other
manner, including through voting or trusteeship agr eements;
” substantive shareholder ” – a person who directly or indirectly, alone or w ith
another, holds at least 10% of one or more categori es whatsoever of the
means of control in a body of persons; ” together with another ” – together with his relative, and also together w ith a
person who is not his relative, if they regularly – directly or indirectly –
cooperate by agreement on matters substantive to th e body of persons.
” asset ” – any property, real or movable, as well as any c ontingent or vested
right or benefit, all whether they are in Israel or abroad, except –
(1) movable property of an individual held by him f or his personal use or the
personal use of members of his family or of his dep endents;
(2) trading stock;
(3) a right of possession, whether in Law or in equ ity, of real estate used for
residential purposes, and not for earnings or profi t;
(4) real estate rights and association rights, with in their meaning in the Land
Appreciation Tax Law 5723-1963, the sale of which i s chargeable with
Land Appreciation Tax or would have been so chargea ble, if not for the
exemption under the said Law;
” depreciable asset ” – an asset, for which a depreciation rate is set by
regulations under section 21 or in respect of which depreciation was allowed,
and which the assessee used for the purpose of prod ucing income;
” trading stock ” – within its meaning in section 85;
” index ” – the consumer price index, as last published bef ore the relevant date
on behalf of the Central Bureau of Statistics and – in respect of the period
before 1951 – the index determined by the Minister of Finance with the
Knesset Finance Committee’s approval; however, if a person, while a foreign
resident, lawfully acquired any asset with foreign currency, then he may
request that the exchange rate of the currency for which the asset was
acquired be deemed the index; notwithstanding the a foresaid, in respect of a
security held by an individual, denominated in fore ign currency or value linked
to a foreign currency, the currency exchange rate s hall be deemed the index;
” determining date ” – January 1, 2003;
” original cost ” –
(1) for a purchased asset – the amount spent by the assessee on that
asset’s acquisition;
(2) for an asset obtained by way of exchange – the consideration at the time
of the exchange;
(3) for an asset received by way of gift – (a) before December 3, 1951 – the asset’s value whe n the assessee
received it;
(b) from December 3, 1951 until March 31, 1968 – th e balance of the
original cost of the asset when it was given as a g ift by the last
acquirer who acquired it otherwise than as a gift, and for the

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purposes of section 21, deduction of the depreciation shall be
allowed, as if the asset had not been given as a gi ft;
(c) on and after April 1, 1968 – (1) if the asset was received as a gift not from a relative – the
consideration on the day of the sale, and the said amount of
consideration shall also be the original cost for p urposes of
section 21;
(2) if the asset was received as a tax exempt gift under section
97(a)(4) or (5) – the balance of the asset’s origin al cost
when it was given as a gift by the last acquirer wh o acquired
it otherwise than as a tax exempt gift, and for the purposes
of section 21 deduction of depreciation shall be al lowed as if
the asset had not been given as a gift;
(4) for an asset received by inheritance – the asse t’s value on the day of the
testator’s death; if the asset’s value was determin ed for purposes of
inheritance tax, within its meaning in the Inherita nce Tax Law 5709-
1949, then that shall be the value for this purpose ; however, if the
testator died after March 31, 1981, then the value shall be that which
would have been determined if the testator had sold the asset; the said
value shall also be the original cost for purposes of section 21;
(5) for an asset that the assessee produced – the a mount expended by the
assessee to produce the asset;
(6) for an asset which came to the assessee in any other way – the amount
expended by the assessee on the acquisition of that asset;
all with the addition of expenses incurred by the a ssessee for the asset’s
improvement or maintenance from the day he acquired it until the day he sold
it, provided that they were not allowed to be deduc ted in the past in calculating
the assessee’s chargeable income (hereafter: improv ement or maintenance
expenses, as the case may be); ” day of acquisition ” – the day on which, in any manner whatsoever, the asset
came into the assessee’s possession or on which the assessee became
entitled to it, whichever is earlier; however –
(1) if the asset came into the assessee’s possessio n or the assessee
became entitled to it by way of a gift before April 1, 1968, or even
thereafter if the asset came into the assessee’s po ssession by way of a
tax exempt gift under section 97(a)(4) or (5) – the day on which the asset
came into the possession of the last acquirer who a cquired it not as a tax
exempt gift;
(2) if the asset came to the assessee by way of inh eritance from a testator
who died after March 31, 1981, or by way of another person’s
renunciation of his right to inherit from a said te stator – the date that
would have been set as the date of acquisition, had the testator sold the
asset;
” depreciation ” – the amounts deductible in respect of an asset u nder section
21, and also the amounts deducted from chargeable i ncome in respect of the
original cost of the asset; ” balance of original cost ” – the original cost of an asset after the amounts of
depreciation were subtracted from it; ” balance of adjusted original cost ” – the balance of the original cost, not
including the balance of improvement expenses and h alf the balance of
maintenance expenses, multiplied by the index on th e day of sale and divided
by the index on the day of acquisition, plus the ba lance of each improvement
expense multiplied by the index on the day of sale and divided by the index on
the day the improvement was finished;

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“sale ” – includes exchange, renunciation, disposition, t ransfer, grant, gift,
redemption and also any other act or occurrence in consequence of which the
asset passes out of the control of a person, all wh ether directly or indirectly, but
exclusive of inheritance; ” security ” – according to the definition of “securities” in the Securities Law,
including bonds or loans of the State of Israel or with its guaranty, bonds of
foreign states, units, oil prospecting participatio n units, motion picture
participation units, real estate association rights , securities issued abroad and
also futures; ” commercial security ” – according to the definition of “commercial secu rities”
in the Securities Law; ” future ” – an undertaking or a right to deliver or to rece ive any of the following:
differentials between foreign currency exchange rat es, index differentials,
interest differentials, an asset or the price of an asset, all in the quantity, in the
amount, at the time and on the conditions prescribe d in the undertaking or in
the right, as the case may be, and also the sale of a security not yet acquired
by the seller; ” oil prospecting participation unit ” and “motion picture participation unit ”
– within their meaning in regulations under section s 20, 31 and 93, as the case
may be; ” consideration ” – the price to be expected from the sale of an as set by a
willing seller to a willing buyer, the asset being free of any encumbrance
intended to secure a debt, of any mortgage and of a ny other right intended to
secure payment; however, if the Assessing Officer i s satisfied that the price of
the asset was set in good faith and without being d irectly or indirectly affected
by the existence of special relations between the s eller and the buyer – and in
respect of real estate, also on condition that the sale was made in writing –
then the price set shall be the consideration; all less selling expenses incurred
by the assessee in respect of that sale; when deben tures or commercial
securities are redeemed, the linkage differentials shall be deemed part of the
consideration; ” relative ” – each of the following:

(1) spouse, brother, sister, parent, parent’s paren t, offspring and spouse’s
offspring, and the spouse of any of these;
(2) offspring of a brother or sister, and brother o r sister of a parent;
(3) a body of persons controlled by a person or his relative, the person who
holds it and a body of person held by the person th at holds it; for the
purposes of this definition: ” holding” – direct or indirect, alone or with
another, of at least 25% of one or more categories whatsoever of means
of control;
(4) a trustee, as defined in section 75C, in respec t of the creator of a
trusteeship of Israel residents or of a revocable t rusteeship, as well as a
trustee for the beneficiary of a foreign resident b eneficiary trusteeship or
in a trusteeship under a will;
however, in respect of a tax exemption under sectio n 97 only those
enumerated in paragraphs (1) and (2) shall be deeme d relatives;
” capital gain ” – the amount by which the consideration exceeds t he balance of
the original cost; ” inflationary amount ” –
(1) the part of the capital gain that equals the am ount by which the adjusted
balance of the original cost exceeds the balance of the original cost;
(2) and (3) repealed ” chargeable inflationary amount ” – each of the following:

126
(1) repealed
(2) the amount that would have been deemed the inflationary amount, had
the asset been sold on December 31, 1993, the consi deration being the
adjusted balance of the original cost;
” real capital gain ” – the capital gain, less the inflationary amount;
” real capital gain up to the determining date ” – real capital gain, multiplied
by the ratio between the period from the day of acq uisition until the day before
the determining date and the period from the day of acquisition until the day of
the sale; the Minister of Finance may prescribe rul es for rounding off the said
periods; ” balance of real capital gain ” – the differential between the real capital gain
and the real capital gain up to the determining dat e;
” capital loss ” – the amount by which the balance of the original cost exceeds
the consideration; ” real estate investment fund ” – as defined in section 64A2;
” trust fund “, “unit “, “unit holder “, “fund agreement ” and “prospectus ” –
within their meaning in the Joint Investment Trusts Law;
” chargeable trust fund ” – a trust fund, in the fund agreement or in the
prospectus of which it was determined – by a determ ination that cannot be
changed– that it shall be a chargeable trust fund; ” exempt trust fund ” – a trust fund, in the fund agreement or in the p rospectus
of which it was determined – by a determination tha t cannot be change – that it
shall be an exempt trust fund.

How to deal with consideration and capital gain
89. (a) The consideration shall be treated like inc ome under section 2, and a
capital gain like chargeable income, all mutatis mu tandis as the case
may be, as long as there is no other explicit or im plicit provision in this
Part or in Part Five “A”.
(b) (1) An Israel resident is liable to tax on a ca pital gain accrued or
produced in Israel or abroad; for this purpose: ” Israel resident” –
including an Israel citizen within its meaning in p aragraphs (1), (3)
and (4) of the definition of “Israel citizen” in se ction 3A, who is a
resident of an area, as defined in the said section ;
(2) a foreign resident is liable to tax on a capita l gain accrued or
produced in Israel;
(3) in any of the following instances the place whe re a capital gain
was produced or accrued is Israel:
(a) the sold asset is in Israel;
(b) the sold asset is abroad and in essence it is a direct or
indirect right to an asset or to stock in trade, or it is an
indirect right to a real estate right or to an asse t in a real
estate association located in Israel (in this secti on: the
property), in respect of the part of the considerat ion that
stems from the property located in Israel;
(c) a share or the right to a share in an Israel re sident body of
persons;
(d) a right in a foreign resident body of persons, which in
essence is the owner of a direct or indirect right to property
located in Israel, in respect of that part of the c onsideration
that stems from the property located in Israel.
(c) If the profit from the sale of any asset may be liable to tax both under
Chapter One of Part Two and under this Part or Part Five “A”, then it
shall be deemed liable to tax only under Chapter On e of Part Two; the

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Minister of Finance may, with approval by the Knesset Finance
Committee, prescribe that certain sales of rights t o an intangible asset
for periods he designated shall be classified as in come under Chapter
One in Part Two, all on conditions that he shall pr escribe.
(d) An amount received under a life insurance polic y, the premiums for
which were not allowed as an expense under section 32(10), shall, after
the deduction of those premiums, be deemed chargeab le with tax only
under this Part.
(e) Notwithstanding the provisions of subsection (c ), linkage differentials
received upon the redemption of debentures or comme rcial securities,
from which income does not constitute income from a business or
vocation, shall be deemed liable to tax only under this Part.
90. Repealed

Tax on capital gain
91. (a) A body of persons shall be liable to compan ies tax on real capital gain at
the rate at the rate prescribed in section 126(a).
————————————————— ————————————————————–
NOTE: Under section 74(1) of Amendment No. 147, the following replaces the above
subsection (a) in tax years 2006 to 2009 – Tr. (a) A body of persons shall be liable to tax on rea l capital gain at the rate of
25%; however, the capital gain from the sale of a s ecurity, within its
meaning in section 6 of the Inflationary Adjustment s Law, as formulated
before its repeal in the Income Tax Ordinance Amend ment Law
(Amendment No. 147) 5765-2005, other than a said ca pital gain by a
body of persons to which the provisions of section 6 of the Inflationary
Adjustments Law or provisions under section 130A di d not apply before
the publication of that amendment, shall be charged tax at the rate
prescribed in section 126(a).
————————————————— —————————————————————
(b) (1) An individual shall be liable to tax on a r eal capital gain as said in
section 121, at a rate no greater than 20%, and the capital gain
shall be deemed the highest bracket of his chargeab le income.
(2) Notwithstanding the provisions of paragraph (1 ), real capital gain
as said in section 121, upon the sale of securities in a body of
persons where the seller is an individual who was a substantive
shareholder when the shares were sold or at any tim e within
twelve months before the sale, shall be charged tax at a rate of no
more than 25%.
(3) (a) Notwithstanding the provisions of paragraph s (1) and (2),
capital gains from the sale of debentures, commerci al
securities, State loans and loans that are not inde x linked,
shall be charged tax at a rate of no more than 15%, or 20%
in respect of a substantive shareholder, and all th e capital
gain shall be deemed the highest bracket of his cha rgeable
income.
(b) The Minister of Finance may, by Order, change t he tax rate
prescribed in subparagraph (a), in accordance with an index
change.
(c) For purposes of this paragraph: ” not index linked” – their
nominal value or amount is not index linked, or is partly
linked to all or part of the rate of increase of th e index, all up
to the redemption or repayment.

128
(b1) (1) Notwithstanding the provisions of subsection (b), in respect of an
asset, the day of acquisition of which was before t he determining
date, other than an asset that is good will for the acquisition of
which nothing was paid, the real capital gain shall be charged tax
at the following rates:
(a) on the real capital gain up to the determining date – as said
in section 121;
(b) on the balance of the real capital gain – at th e rate
prescribed in subsection (b)(1), (2) or (3), as the case may
be;
(1a) upon the sale of a security of which the date of acquisition was
before the determining date, for purposes of calcul ating the real
capital gain up to the determining date and of the balance of
capital gain, the real capital gain, after its redu ction by the profits
available for distribution, calculated as said in s ection 94B, shall
be the real capital gain.
————————————————— —————————————————————
NOTE: Under section 74(2) of Amendment No. 147, the following replaces the above
paragraph (1a) in tax years 2006 to 2009 – Tr. (1a) notwithstanding the provisions of subsection ( a), a body of persons
shall be liable to tax at the following rates in re spect of an asset of
which the date of acquisition was before the determ ining date,
other than an asset that is a security within its m eaning in that
subsection or an asset that is good will, for the a cquisition of which
nothing was paid:
(1) on the real capital gain up to the determining date – at the
rate prescribed in section 126(a);
(2) on the balance of the real capital gain – at th e rate of 25%;
————————————————— ————————————————————
(2) For the purposes of this subsection, the capita l gain shall be
deemed the highest bracket of the chargeable income .
(b2) Notwithstanding the provisions of subsections (a), (b) and (b1). upon the
sale of an oil prospecting participation unit or a motion picture
participation unit, part of the capital gain, in th e amount of the depletion
allowance, in the amount of prospecting and develop ment expenses or
in the amount of the motion picture production expe nses, which were
allowed under regulations under sections 20, 31 and 98, as the case
may be, shall be charged tax as said in section 121 in respect of an
individual, and at the rate prescribed in section 1 26(a) in respect of a
body of persons.
(c) The tax on the chargeable inflationary amount s hall be 10%.
(d) (1) W hen an asset has been sold, then within th irty days after the sale
the seller shall submit a return to the Assessing O fficer on a form
prescribed by the Director, specifying the calculat ion of his capital
gain or capital loss and the tax calculation in res pect of the said
sale, and he shall pay an advance in the amount of the tax that
applies to the profit under this section;
(2) If a return said in paragraph (1) was not subm itted to the
Assessing Officer, and if the Assessing Officer con cludes that a
certain person sold an asset and must pay an advanc e, then he
may demand that a return be submitted and the advan ce paid
within seven days after the demand, and if there is no response,
then he may determine the original cost of the sold asset, the
consideration received, and the amount of advance w hich the

129
seller must pay in respect of the capital gain; when the Assessing
Officer has determined as aforesaid, then the advan ce shall be
paid within seven days after the determination was served on the
seller.
(2a) If the Assessing Officer had reasonable cause to assume that the
advance which the seller must pay in respect of the capital gain is
at least 20% greater than the amount of advance spe cified in the
return submitted under the provisions of paragraphs (1) or (2),
then he may increase the amount of the advance by t he amount of
the expected differential; when the Assessing Offic er has
determined as aforesaid, then the differential shal l be paid within
thirty days after he gave his decision.
(2b) A decision said in paragraphs (2) and (2a) sh all be treated – in
respect of contestation and appeal – like an assess ment under
section 145(b), but a decision under paragraph (2) can be
contested only by submitting the return said in par agraph (1).
(2c) (a) The provisions of this subsection shall no t apply to capital
gain from the sale of a security, which is listed f or trading on
an Exchange, or from a single sale, if – at the tim e of the
sale – capital gains tax was deducted under section 164.
(b) If the tax was not deducted as said in subpara graph (1) and
if the seller must file a return under section 131, then –
notwithstanding the provisions of paragraph (1) – t he return
about the capital gain shall be submitted on July 3 1 and on
January 31 of each tax year in respect of securitie s sales
during the six months that precede the month in whi ch the
reporting date occurs; when the said return is subm itted as
aforesaid, the advance shall be paid in the amount of the tax
that applies to the capital gain under the provisio ns of this
Ordinance.
(c) The Minister of Finance may – with approval by the Knesset
Finance Committee – prescribe further instances to which
the obligation to report and to pay an advance as s aid in this
paragraph shall apply, both in respect of categorie s of
assets and in respect of categories of assessees, a ll with
prescribed adjustments, conditions and changes.
(2d) Notwithstanding the provisions of paragraph (1 ), upon the sale of a
share in a body of persons, the liquidation of whic h was begun
under section 93(a), the seller shall – within thir ty days after
liquidation was begun – give the Assessing Officer notice of the
beginning of liquidation proceedings; if the liquid ator transferred an
asset to a member of that body of persons, as said in that section,
then the member shall report his capital gain, as s aid in this
subsection, within thirty days after the asset was transferred to
him, and he shall pay tax at the rates prescribed i n this section, as
the case may be, of the value of the asset transfer red as
aforesaid; for purposes of this paragraph: ” asset” – as defined in
section 93(b6).
(2e) If there is sufficient reason for doing so, th e Assessing Officer may
extend the time for the payment of an advance, and he may also
postpone payment of the tax or reduce the amount of the advance,
if he concludes that there it is reasonable that th e capital gains tax
will not apply or that the applicable tax will be i n a different amount.
(3) If the assessee did not pay all or part of the advance said in

130
paragraphs (1) or (2) on time, or if he paid a said advance and it
subsequently is found that the tax due from him exc eeds the tax
paid, then he shall – from the end of the said 30 d ays until the date
of payment –
(a) pay linkage differentials and interest, within their meaning in
section 159A(a), on the difference between the amou nt he
paid and the amount of tax due from him;
(b) repealed
(3a) If the assessee was obligated to pay an advanc e under section
48A of the Land Appreciation Tax Law, or if a self assessment or
final assessment was made for him under that Law, a nd if it is
found that the tax he owes is greater than the tax which he was
charged under the Land Appreciation Tax Law (hereaf ter: amount
due), then he shall have to pay linkage differentia ls and interest,
within their meaning in section 159A(a), on the dif ference between
the amount payable and the amount of tax he was obl igated to
pay, from the end of the period prescribed in the L and
Appreciation Tax Law until the day of payment.
(4) If a person was obligated to pay linkage differ entials and interest
and a fine under paragraph (3), then he shall not – in respect of
the same amounts and periods – be liable to the pay ments said in
sections 187 and 190.
(5) (a) If the assessee paid an advance said in par agraphs (1) or
(2) or the amount of tax to which he is liable unde r the Land
Appreciation Tax Law in excess of the amount due un der
the return filed by him under section 131, then the balance
shall be refunded to him as provided in section 159 A(b), with
the addition of linkage differentials and interest within their
meaning in section 159A(a) for the period from the day of
payment until the day of the refund.
(b) The provisions of section 159A(c) and (d) and o f section 160
shall not apply to a refund said in subparagraph (a ).
(6) An amount deducted under sections 93(b4), 164 a nd 170 in
respect of capital gains, shall be deemed a payment on account of
the advance which the assessee must pay and he may set it off
against the advance, on condition that he holds wri tten certification
of the deduction; however, a set-off against tax, t o which a
substantive shareholder is liable, shall be carried out only after the
deducted amount was paid to the Assessing Officer, except when
the substantive shareholder holds less than 50% of a certain
category of means of control and he proved to the A ssessing
Officer’s satisfaction that he did not know that th e deducted
amount had not been paid to the Assessing Officer, or that he took
all reasonable steps to assure the payment.
(e) (1) On the assessee’s application, tax on a rea l capital gain shall be
calculated as if the profit had accrued in equal an nual installments
over a period of not more than four tax years or ov er the period in
which he owned the asset, whichever is shorter, end ing with the
year in which the profit accrued; however, in order to determine the
advances under sections 174 to 181, the income in e ach year of
the said period shall be deemed to have been increa sed by the
annual installment; the tax calculation shall take into account the
tax rate prescribed in subsection (b), and in respe ct of
Appreciation Tax – take into account the tax rate p rescribed in

131
section 48A(2) of the Real Estate Taxation Law, and also taking
into account the tax rates that apply to the assess ee’s overall
chargeable income and the balance of credit points to which the
assessee is entitled in each of the tax years durin g the said period;
for the purposes of this section, ” period of ownership of the
asset ” – the period that began at the beginning of the t ax year
after the tax year in which the asset came into the assessee’s
possession and ended at the end of the tax year in which the asset
left his possession.
(2) If an asset is sold and the day of its acquisi tion was before the
determining date or if a real estate right is sold or a real estate
association act is carried out and the acquisition date of the real
estate right or of the right in the real estate ass ociation, as the
case may be, was before the initial day, then the p rovisions of
paragraph (1) shall apply with the following change s:
(a) the real capital gain up to the determining dat e and the
balance of real capital gain, or the real appreciat ion up to the
initial date and the balance of the real appreciati on, as the
case may be, shall be calculated as they would have been
calculated, if the assessee had not submitted the a pplication
said in paragraph (1);
(b) the tax calculation shall take into account the tax rates
prescribed in subsection (b1) or in section 48A(b1) of the
Real Estate Taxation Law, as the case may be, and i t shall
also take into account the tax rates that apply to all of the
assessee =s income and the balance of credit points to
which he is entitled, as said in paragraph (1);
(c) in this subsection, Areal estate right @, Areal estate
association right @, ” initial day “, Aappreciation tax @, A real
appreciation up the initial day @ and Abalance of real
appreciation @ – as defined in the Real Estate Taxation
Law.
(f) (1) In respect of an asset acquired until tax y ear 1948, tax shall not
exceed 12% of the capital gain, and in respect of a n asset
acquired in tax years 1949 to 1960 tax shall not ex ceed 12% of the
capital gain, plus 1% for each year from tax year 1 949 until the
year of acquisition.
(2) Beginning with tax year 2005, the tax rate said in subparagraph (1)
shall be increased by 1% for every tax year or part thereof, but if
the tax rate on capital gains in the year of the sa le under the
provisions of this subsection exceeds the rates pre scribed in
subsection (a) or (b)(1) or (2), as the case may be , then the capital
gain shall be charged at the rates under the provis ions of
subsections (a) or (b)(1) or (2), as the case may b e.
(g) The tax on a capital gain upon the expropriatio n of any asset shall be
half of the tax due according to subsections (a) to (f).
(h) The Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe that – in respect of special o ccurrences or special
circumstances under which assets were transferred b etween controlling
members or linked parties – the tax rates said in s ections 121 or 126
shall apply, as the case may be, notwithstanding th e provisions of this
section.

132

Set off of capital loss
92. (a) (1) The amount of capital loss suffered by a person in a given tax
year, which – had it been a capital gain – would ha ve been
chargeable with tax, shall be set off first against the real capital
gain, and every new shekel of the balance shall be set off against
NS3.50 of the chargeable inflationary amount; for t his purpose,
appreciation and loss shall be taken within their m eaning in the
Real Estate Taxation Law 5723-1963, as if they were a capital
gain or a capital loss, as the case may be.
(2) repealed
(3) If a person incurred a capital loss from the sa le of an asset abroad
which – had it been a profit would have been liable to tax in Israel
– then the provisions of paragraph (1) shall apply to it, but the
capital loss from the said asset shall first be set off against a
capital gain from abroad.
(4) If a person incurred a capital loss from the sa le of a security during
the tax year, then the provisions of paragraphs (1) or (3) shall
apply to him, as the case may be, but the capital l oss shall also be
set off against the following:
(a) interest or dividend income paid in respect of that security;
(b) interest or dividend income in respect of othe r securities, on
condition that the tax rate applicable to the inter est or
dividends received by that person not exceed 25%;
(5) expenses in respect of securities, as the Minis ter of Finance
determined with approval by the Knesset Finance Com mittee,
which were not deducted during the tax year, shall for this purpose
be treated like capital losses from securities.
(b) An amount that wholly or partly cannot be set o ff in a certain tax year, as
said in subsection (a), shall be set off only again st capital gain, as said in
subsection (a), during the tax years that follow th e year – one after the
other – in which the loss was incurred, on conditio n that a return for the
year in which the loss occurred was submitted to th e Assessing Officer,
as said in sections 131 and 132; if the amount that could not be set off is
the loss from the sale of an asset abroad, then the loss shall first be set
off against capital gains from the sale of assets a broad.
(c) The Minister of Finance may, with approval by the Knesset Finance
Committee, prescribe provisions for the implementat ion of this section
and provisions on returns and on ways of proving af oresaid losses, and
he may also prescribe provisions to restrict the se t off of some or all
losses from the sale of securities, or prohibit sai d set-offs, prescribe the
order in which losses are set off and profits are r elated, as well as ways
of proving and provisions for the implementation of this section.

Capital gain in body of persons that was wound up
93. (a) The following provisions shall apply to a b ody of persons, winding up of
which has begun:
(1) profit from the sale of an asset by the liquida tor shall be deemed
a taxable capital gain of that body of persons;
(2) if the sale is by way of the liquidator transfe rring an asset from
the body of persons to its member, then the conside ration shall
be taken to be as it was on the day of sale;
(3) shares or other rights of a member in that body of persons shall
be deemed to have been sold, and the assets receive d by that

133
member from the liquidator shall be deemed the consideration for
the said shares or rights;
(4) capital gain in respect of a member of that bod y of persons shall
be calculated after all the assets have been distri buted; however,
if distribution is not completed within two years a fter the day on
which winding up began, then the assets shall be de emed to
have been distributed at the end of that period, bu t the Director
may extend the period if it is proved to his satisf action that
distribution was not completed for a reasonable cau se.
(b) repealed
(b1) The provisions of this section shall also appl y to the liquidation of a real
estate association.
(b2) If there was a tax exempt transfer of real est ate from the liquidator to a
member under the provisions of section 71 of the Re al Estate Taxation
Law, then the following provisions shall apply:
(1) the original cost of the shares shall be deemed the original cost,
less the original cost multiplied by the ratio of t he value of the real
estate right or of the association right, as the ca se may be, the
sale of which was exempt of tax, to the amount obta ined by
adding the consideration received as said in sectio n 93(a)(3) and
the value of the real estate right or of the associ ation right, the
sale of which was exempt of tax, as it was on the d ay on which
liquidation of the association began;
(2) for purposes of the provisions of section 94B o f the Ordinance,
the profits available for distribution – as defined in that section –
shall be reduced by an amount equal to the addition al profit, as it
would have been if the real estate right had been s old on the day
on which liquidation of the association began, on c ondition that
the said additional profit is a positive amount;
(b3) in respect of subsections (b1) and (b2), every term shall have the
meaning it has in the Real Estate Taxation Law, inc luding section 71A
there, unless a different meaning is explicitly pro vided;

(b4) a liquidator who transferred an asset of a bod y of persons, liquidation of
which began, to a member thereof shall deduct from it – at the time of
the transfer – tax at the following percentage of t he asset’s value:
(1) if the asset was transferred to a member that is a body of
persons – at the rate said in section 91(a);
(2) if the asset was transferred to a member who wa s an individual
substantive shareholder in the body of persons when the
liquidation began or at any time within twelve mont hs before that
date – at the rate of 25%;
(3) if the asset was transferred to a member who is an individual for
whom the conditions said in paragraph (2) do not ho ld true – at
the rate of 20%;
unless the Assessing Officer certified in writing t hat no tax be deducted,
or tax at a lower rate than the aforesaid rates.
(b5) The tax said in subsection (b4) shall be paid to the Assessing Officer
within seven days after the asset was transferred t o the member; a
return about the transferred asset and about the de ducted tax shall be
attached to the payment; within the said period the liquidator shall
transmit to the member certification of the deducti on on a form

134
prescribed by the Director.
(b6) For the purposes of subsections (a)(2) to (4), (b4) and (b5): “asset” –
any property, real or movable, as well as any veste d or prospective right
or benefit, all whether in Israel or abroad, other than a real estate right
or a real estate association right transferred to t he member exempt of
tax under section 71(a) of the Real Estate Taxation Law.
(c) The Minister of Finance may – with approval by the Knesset Finance
Committee – prescribe special provisions on the def inition of “asset”
and “consideration”, and he may also determine that this section apply
to the winding up of real estate associations, as d efined in the Real
Estate Taxation Law, and the adjustments made neces sary by
aforesaid determinations.

Special provisions on liquidations in tax year 2003
93A. (a) The provisions of section 93 shall not app ly to the voluntary liquidation
of a company, which began and was concluded in tax year 2003, and
the sale of assets or activities shall not be charg ed tax under this
Ordinance or under the Inflationary Adjustments Law , as the case may
be, if all the following hold true:
(1) the company was formed during a period from tax year 2002 until
June 1, 2003, or it was formed before the said peri od, but had no
assets, activity, income, expenses or losses before that period;
(2) the company was formed by an individual who has income from
an vocation as said in section 2(1) or from employm ent as said in
section 2(2) (in this section: service provider) an d who is the
controlling member of that company;
(3) the activity of the service provider was transf erred to the
company, and if assets or real estate rights, as de fined in the
Real Estate Taxation Law, were also transferred, th en their
purpose was not changed in the course of the transf er;
(4) the sale of the assets or activities is a sale without consideration
to those shareholders, from whom the assets or acti vities were
transferred to the company in accordance with their proportional
share in the rights in the company, and their purpo se was not
changed in course of the sale;
(5) the company and the shareholders requested that the provisions
of this section apply to the liquidation proceeding s;
(6) in the course of the liquidation proceedings al l profits available for
distribution, all surpluses and all amounts of mone y left in the
company (in this section: surpluses) were paid to t he
shareholders, all as the Minister of Finance prescr ibed with
approval by the Knesset Finance Committee and they were
charged tax for the shareholders under sections 2(1 ) or 2(2);
(7) other conditions, restrictions and adjustments prescribed by the
Minister of Finance with approval by the Knesset Fi nance
Committee.
(b) Notwithstanding the provisions of Chapter Three in Part Five “B”, a
liquidation to which the provisions of this section apply shall not be
deemed a violation of the conditions set there.
(c) The Director may approve application of provisi ons under this section to
the voluntary liquidation of a company, even if it was concluded after
tax year 2003, on condition that the conditions in subsection (a) and the
following two conditions were met:
(1) the company did not have any income after tax y ear 2003;

135
(2) all assets and activities of the company were sold to the
shareholders, as said in subsection (a)(4), by the end of tax year
2003, and all the surpluses said in subsection (a)( 6) were paid to
them.
(d) The Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe provisions for the implementat ion of this section,
as well as conditions and adjustments, inter alia i n respect of original
cost, the day of acquisition, setting off losses, c alculation of the
surpluses and calculation of capital gains, and he may also prescribe
that – against the tax on the surpluses – credit sh all be allowed on the
tax paid by the company, if it had a loss that stem s from the surpluses
and can be carried forward to tax year 2004, all on conditions set by the
Minister of Finance and on condition that no credit be allowed that is
greater than the applicable amount of tax.

Bonus shares and option certificates
94. (a) W hen a person sells bonus shares allotted t o him or the shares on
which the bonus shares were allotted (hereafter: pr incipal shares), then
the following provisions shall apply:
(1) a bonus share shall be treated as if it had bee n acquired on the
day on which the principal share was acquired;
(2) the original cost of a single bonus share or a single principal
share shall be an amount proportional to the origin al cost of the
total of bonus shares and principal shares, in the ratio of the
nominal value of that individual share to the nomin al value of the
total of those shares.
The provisions of this subsection shall apply, muta tis mutandis, to units
of a joint investment trust fund, within its meanin g in the Joint
Investment Trusts Law.
(b) repealed
(c) If a person sold an option certificate in a com pany, the securities of
which are not listed for trading on an Exchange, or if he sold the shares
which he obtained by way of realizing the option ce rtificate, then the
Minister of Finance shall determine, by regulations with approval by the
Knesset Finance Committee, the original cost and th e acquisition date
of the securities by virtue of which the option cer tificate was allotted, of
the option certificate and of the securities obtain ed by realizing the
option certificate.
(d) In this section –
“option certificate ” – a security that entitles its owner to acquire s hares
issued by a company against a realization supplemen t, at a price or on
terms prescribed in the option certificate; ” bonus shares ” – including the bonus component in rights allocat ions or
in shares that stem from aforesaid rights.
(e) The Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe rules for calculating the amou nt of the bonus
component.

Sale of loan together with shares
94A. If an unlinked interest free loan is sold at l east three years after a shareholder
extended it to the company, together with shares or other rights which he has
in that company, then the consideration for the loa n shall be taken to be that
part of the total consideration for shares and loan , as is equal to the adjusted
balance of the original cost of the loan; a capital loss from the sale of shares,

136
due to the aforesaid calculation, shall be set off, shekel for shekel, against the
capital gain from the loan.

Profits available for distribution
94B. (a) W hen the share of a company, the shares of which are not listed for
trading on an Exchange, is sold by an individual an d the day of
acquisition of the shares was before the determinin g date, or by a body
of persons, then the following provisions shall app ly:
(1) the tax rate on the part of the real capital ga in that equals part of
the profits available for distribution, in the prop ortion of the
seller’s part of the right to profits in the compan y to all rights to
profits in the company, shall be the tax rate that would have
applied to them under sections 125B or 126(b), as t he case may
be, if they had been received as dividends immediat ely before the
sale.
(2) Notwithstanding the provisions of paragraph (1) , the tax rate on
the real capital gain that equals the part of the p rofits available for
distribution – as said in paragraph (1) – until the determining date
shall be 10%; for purposes of this section: ” the profits available
for distribution until the determining date ” – the amount that
would have been deemed profits available for distri bution, if the
share had been sold on the determining date.
(a1) The provisions of subsection (a) shall apply, mutatis mutandis, to the
sale of a share in a company, the shares of which a re listed for trading
on an Exchange, on condition that – on the date of the sale or on any
date within the preceding twelve months – the selle r of the share was a
substantive shareholder in the company the shares o f which are being
sold.
(b) For purposes of subsection (a):
(1) ” profits available for distribution ” – aforesaid profits
accumulated by the company from the end of the tax year before
the year in which the share was acquired, until the end of the tax
year before the year in which it was sold, and in t he case of
winding up – until the day on which winding up proc edures are
concluded, on condition that aforesaid profits avai lable for
distribution, which accrued before January 1, 1996, not be taken
into account, all according to the company’s balanc e sheet at the
end of the tax year before the year of sale or befo re the day on
which winding up began, as the case may be, includi ng profits
that were capitalized; however, amounts accumulated in a capital
stabilization fund, within its meaning in section 5 3K of the
Encouragement of Capital Investments Law 5719-1959, or
amounts that were deductible under section 53Q of t he said Law,
or aforesaid profits in a cooperative society in th ose years, in
which sections 56, 57, 61 and 62 applied to the cal culation of its
income and those profits were included in the balan ce of the
original cost, shall not be deemed profits availabl e for distribution,
and the amount of profits available for distributio n shall not
exceed the amount of profits that were chargeable w ith tax –
including Land Appreciation Tax – during the said p eriod, less the
tax on them and less dividends distributed out of t hem and with
the deduction of any loss created and not set off i n the company
the shares of which are being sold, and with the ad dition of profits
that would have been chargeable with tax as aforesa id, had they

137
not been exempted;
(2) an increase – within the two years that precede d the sale – of the
part of the seller of the share in rights to the co mpany’s profits
shall not be taken into account.
(c) The provisions of subsection (a) shall apply, i f the seller submitted to
the Assessing Officer a calculation that shows the profits available for
distribution, as said in subsection (b).

Deduction of dividends
94C W hen a share is sold by a body of persons, then the amount of capital loss
due to the sale of the share shall be reduced by th e amount of dividends,
which the body of person received in respect of the share during the 24
months before the sale, but not by more than the am ount of the loss; for this
purpose: ” dividend ” – other than a dividend on which tax was paid at a rate of 15% or
more; ” tax ” – other than tax paid abroad.

Redemption of share in a cooperative society
94D. (a) W hen the share of a member in a cooperati ve society is redeemed by
the society at the society member’s retirement afte r 25 years of work or
membership in the society, or when the member retir es because of his
loss of working ability or at his death, and if the day of its acquisition
was before the determining date, then the following provisions shall
apply:
(1) the redemption amount, multiplied by the ratio of the number of
months from the acquisition of the share until the determining
date to the number of months from the acquisition o f the share
until the redemption day (in this section: the exem ption period
ratio) shall be tax exempt up to an amount of NS317 ,000 (in 2003
to 2008 – Tr.) , and the balance of the redemption amount shall
be chargeable to tax;
(2) the original cost of the balance of the redempt ion amount, less
the original cost multiplied by the exemption perio d ratio, shall be
the original cost;
(3) the day on which the share was acquired shall b e the day of
acquisition of the balance of the redemption amount ; however, if
the amount exempt under subparagraph (1), less the adjusted
original cost of the share, is less than NS 317,000 (in 2003 to
2008 – Tr.) , then the day of acquisition or the first day of t ax year
1961, whichever was later, shall be the day of acqu isition.
(b) For the purposes of this section: ” cooperative society” – a society
registered under the Cooperative Societies Ordinanc e, which in
accordance with its objectives operates in one of t he following spheres:
transportation, haulage, production or services.

Capital gain from the sale for shares in a company
95. (a) If one or more persons derive a capital gai n from the sale of an asset to
a company only against shares in that company, then that profit shall
not be charged with tax if, immediately after the s ale, the seller or
sellers hold at least 90% of the voting power in th at company.
(b) W hen the asset acquired by a company as said in subsection (a) is
sold, and also when the shares received by the sell er for the said asset
are sold, then the balance of the original cost of that asset for the seller

138
said in subsection (a) shall be their original cost, and the date on which
it was acquired by the person who sold it to the co mpany shall be the
date of the asset’s acquisition.
(c) This section shall apply to a capital gain obta ined by one or several
persons from an asset sold up to January 1, 1994.

Capital gain from asset for which a depreciation ra te was set
96. If a capital gain accrued to an assessee from t he sale of a depreciable asset
and if – within twelve months after or four months before the day of its sale –
he acquired another asset to replace the sold asset at a price that exceeds
the balance of the original cost of the sold asset, then the assessee may
claim that only the amount by which the considerati on received for the sold
asset exceeds the price of the acquired asset be de emed a capital gain and
he may do so in respect of the entire capital gain or only in respect of the real
capital gain; when he has done so, the original cos t – for purposes of
calculating the capital gain on the acquired asset when that is sold, and of the
amount of depreciation allowed on it under section 21 – shall be reduced by
any amount of capital gain which accrued to him upo n the previous sale and
which was not charged with tax because of the asses see’s claim; the tax
rates prescribed in sections 121 or 126, as the cas e may be, shall apply to
the amount reduced as aforesaid, which equals the c apital gain partly
accrued before the determining date; for the purpos es of this section: “part of
the capital gain accrued before the determining dat e” – part of the capital
gain, the ratio of which to the total capital gain is as is the ratio of the period
between the day of acquisition and the determining date to the period
between the day of acquisition and the day of the s ale.

Tax exemption
97. (a) A capital gain shall be exempt of tax if it arises out of one of the
following –
(1) the sale of a debenture that is not convertible into a share and is
traded on an Exchange in Israel, on condition that the debenture
was issued before May 8, 2000, and was listed for t rading on an
Exchange in Israel before the determining date;
(2) the sale of a debenture or of a loan certificat e issued or
guaranteed by the State, on condition that it was i ssued before
May 8, 2000;
(3) repealed
(4) a gift to the State, to a local authority, to t he Keren Kayemet Le-
Yisrael, to the Keren Hayessod – United Jewish Appe al for Israel,
or to a public institution, within its meaning in s ection 9(2);
(5) a gift to a relative, as well as a gift to anot her individual, if the
Assessing Officer is satisfied that the gift was ma de in good faith
and on condition that the recipient of the gift is not a foreign
resident;
(6) repealed
(7) an individual’s capital gain from the sale or r edemption of a unit in
a chargeable trust fund.
(b) (1) An individual became an Israel resident for the first time and a
veteran returning resident, as said in section 14(a ), shall be
exempt of tax on the capital gain from the sale of any asset he
had abroad, if he sells it within ten years after t he day on which
he became an Israel resident; for this purpose: ” asset” – other
than an asset received by the individual fully exem pt of tax under
subsection (a)(5) on or after January 1, 2007.

139
(2) A returning resident, as defined in section 14(c)is exempt of tax
on capital gains from the sale of assets he acquire d abroad while
he was a foreign resident, if the asset – including the right or the
right in a foreign resident body of persons – is no t a direct or
indirect right to an asset located in Israel, all i f he sold it within ten
years after the day on which he became a returning resident; for
this purpose, ” asset” – including assets abroad that are benefited
securities, as defined in section 14(c).
(3) If the asset said in paragraphs (1) and (2) was sold after ten
years had passed since the day on which the individ ual became
an Israel resident as said in those paragraphs, the n the part of
the real capital gain until the end of the exemptio n period is tax
exempt, and the balance of the capital gain is liab le to tax at the
rate prescribed in section 91(b); for this purpose: “part of the
real capital gain until the end of the exemption pe riod” – the
real capital gain, multiplied by the ratio between the period from
the day of acquisition until ten years after he bec ame an Israel
resident and the period between the day of acquisit ion until the
day of sale.
(b1) repealed
(b2) A foreign resident is exempt of tax on capital gains from the sale of
securities traded on an Exchange in Israel, if the capital gain is not in
his permanent enterprise in Israel; if the day of a cquisition of the
security was before the day on which it was listed for trading on an
Exchange, and if – had it been sold before the sai d listing – the foreign
resident would not have been entitled to an exempti on under
subsection (b3), then the part of the capital gain that would have
accrued if the security had been sold on the day be fore it was listed for
trading on the Exchange and not more than the amoun t of the capital
gain on the day on which the security was sold shal l be charged tax at
the rate prescribed in section 91, on condition tha t its value on the day
of its listing is greater than its value on the day of its acquisition and
that the consideration on the day of its sale is gr eater than its value on
the day of its acquisition; the provision of this s ection shall not apply to
the capital gain from the sale of a share in a real estate investment
fund.
(b3) (1) A foreign resident is exempt of tax on the capital gain he earned
upon the sale of the security of an Israel resident company, or
upon the sale of a right in a foreign resident body of persons, the
main assets of which are rights, direct or indirect , in assets
located in Israel, if all the following hold true:
(a) the capital gain is not in his permanent enterp rise in Israel;
(b) repealed
(c) the security was not acquired from a relative a nd the
provisions of Part Five “B”, or the provisions of s ection 70
of the Real Estate Taxation Law did not apply to it ;
(d) repealed
(e) repealed
(f) at the time of the sale the security is not tra ded on an
Exchange in Israel
(2) The provisions of paragraph (1) shall not apply to the capital gain
from the sale of the security of a company, if – on the day of its
acquisition and during two years before its sale – most of the
assets it directly or indirectly held were real est ate rights or real

140
estate association rights.
(3) The provisions of this subsection shall also ap ply, mutatis
mutandis, to an individual who became an Israel res ident for the
first time or who is a returning veteran resident, as said in section
14(a), provided that he was a foreign resident when on the date
of acquisition of the security, and the provisions of subsection (b)
shall apply to the matter of capital gain, as if th e security were an
asset he had abroad before he became an aforesaid I srael
resident.
(4) The Minister of Finance may – with approval by the Knesset
Finance Committee – prescribe conditions, restricti ons and
provisions for purposes of this section.
(c) Repealed
(c1) The Minister of Finance may, by Order with app roval by the Knesset
Finance Committee, exempt of the payment of tax, in whole or in part, a
capital gain that is one of the following:
(1) a capital gain derived from certain types of tr ansactions, on
condition that they are not with assets traded or l isted for trading
on an Exchange or on an organized market, or in res pect of
assets traded or listed for trading as aforesaid;
(2) a capital gain from the sale of a debenture con vertible into a
share that is traded or listed for trading on an Ex change or on an
organized market in Israel or abroad, either in gen eral or for
categories of assessees, all on conditions he shall prescribe.

Method of calculating capital gain
98. Notwithstanding the provisions of this Part, th e Minister of Finance may, by
regulations, prescribe the method of calculating ca pital gains, both in general
and for the purpose of deduction at the source, pro vided that such a general
prescription requires approval by the Knesset Finan ce Committee.

98A. Repealed

Demand for information
99. The Director may require of a banking instituti on, within its meaning in the
Bank of Israel Law 5714-1954, of a person whose bus iness or part of whose
business is trading in securities on behalf of othe r persons, or of a person
who holds securities in his own name for others, th at they deliver to him full
particulars on the aforesaid trade in or the said h olding of securities.

Transfer of an asset to trading stock
100. W hen the Assessing Officer is satisfied that a person transferred an asset
that he owns to his business as trading stock, or t hat he converted a fixed
asset in his business into trading stock in his bus iness (hereafter in this
section: transfer), then the following provisions s hall apply:
(1) if four years passed between the day on which t he assessee acquired
the asset and the day of the transfer, then the tra nsfer shall be deemed
a sale, but the assessee shall not be required to p ay tax on it until the
sale of all or part of the said trading stock; if h e sold part thereof, he
shall not have to pay tax to an amount exceeding th e consideration
received by him for that sale;
(2) if four years have not passed as aforesaid, the transfer shall not be
deemed a sale, and the price at which the asset was acquired by the
assessee shall be the balance of the original cost.

141
Person who ceased being an Israel resident
100A. (a) The asset of a person who was an Israel r esident and ceased being an
Israel resident shall be deemed to have been sold o ne day before he
ceased being an Israel resident.
(b) If a person said in subsection (a) did not pay the tax on the day he
ceased being an Israel resident, then he shall be d eemed to have
applied to postpone payment of the tax until the as set is realized, and
at the time of the realization he shall pay the tax that was due for the
sale of the asset when he ceased being an Israel re sident, in an
amount equal to the amount of tax on the part of th e chargeable profit;
however, linkage differentials and interest, as def ined in section 159A,
shall be added only from the date of the realizatio n until the actual
payment of the tax.
(c) Notwithstanding the provisions of subsection (b ), if the sale of the asset
was liable to payment of tax in Israel when it was realized, then the tax
due on the capital gain at the time of the realizat ion shall be paid
instead of the tax under the provisions of subsecti on (b).
(d) For purposes of this section:
“part of the chargeable profit ” – the real capital gain at the time of the
realization, multiplied by the period of ownership from the day on which
he acquired the asset until the day he ceased being an Israel resident,
and divided by the entire period from the day of th e asset’s acquisition
until the day of its realization; ” realization ” – the actual sale of the asset;
” asset ” – including shares and rights granted as said in sections 3(i)
and 102.
(e) The Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe provisions for the implementat ion of this section,
including provisions for the prevention of double t axation and on the
submission of returns.

Conversion of private shares into shares traded on an Exchange
101. (a) (1) The listing of a company’s shares on an Exchange in Israel or the
listing of the shares of a company resident in Isra el on an
Exchange abroad before tax year 2006 shall be treat ed like a
sale of the shares on the date of the listing, unle ss the
shareholder applied – when he first submitted a ret urn under
section 131 after the listing– that it not be so tr eated.
(2) If a shareholder requested that listing the sha res not be treated
like their sale, as said in paragraph (1), then he shall be charged
the tax when the shares are first sold after they h ad been listed
and the provisions of section 97(b2) shall not appl y.
(3) Notwithstanding the provisions of paragraph (2) , the shareholder
may rescind his application when he first sells the shares as
aforesaid and pay the tax that would have been due from him
because of the listing, plus linkage differentials and interest –
within their meaning in section 159A(a) – from the day on which
he would have had to pay the tax as said in paragra ph (1), had
he not applied as aforesaid, plus the tax from the day of listing on
the Exchange up to the day of the sale, as prescrib ed in sections
91(a) or (b), or 97(b2), as the case may be; if a s hareholder was
charged tax as said in paragraphs (1) and (3), then the day on
which the shares were listed for trading on the Exc hange shall be
deemed the day of acquisition of the shares, and th e

142
consideration set for the purpose of those paragraphs shall be
deemed their original cost.
(b) For the purposes of subsection (a):
(1) ” shares ” – including rights to shares and exclusive of afo resaid
shares and rights that were acquired after they wer e offered to
the public for sale under a prospectus, in which it was stated that
the Exchange’s agreed to list them for trading;
(2) if the shares were sold to a person (hereafter: the recipient) while
an exemption applied to the sale or when no tax was imposed on
the sale, then that shall not be deemed a sale; whe n the recipient
sells them – that shall be deemed the first sale.
(c) (1) The provisions of subsection (a) shall not apply to shares listed
for trading after December 31, 1991, to which secti on 6(g)(1) of
the Inflationary Adjustments Law applies at the tim e of their sale,
and to shares listed for trading after December 31, 1999, the
rules under section 130A applying to their owners a t the time of
their sale;
(2) the provisions of paragraph (1) shall not apply to the sale of
shares said in the said paragraph, if Chapter Two o f the
Inflationary Adjustments Law or the rules under sec tion 130A did
not apply to their owners at the time of their list ing, provided that
– at the time of their sale – their owners elected to withdraw the
application said in subsection (a).
(d) If – after the shares were listed for trading o n the Exchange – bonus
shares, as defined in section 94, were issued in re spect of shares that
were listed for trading as said in this section, th en the bonus shares or
the bonus component, as said in section 94, shall f or all intents and
purposes be deemed part of the shares that were lis ted.
(e) Notwithstanding the provisions of section 94B, when a share is sold
under this section, then the provisions of that sec tion shall apply to the
profits available for distribution, which the compa ny accumulated from
the end of the tax year before the year in which th e shares were
acquired until the end of the tax year before the d ate on which they
were listed for trading on the Exchange; however, i f the shareholder
requested that listing the shares not be deemed the ir sale and if he did
not rescind that request when he sold the shares, t hen the provisions of
the section shall apply to the profits available fo r distribution until the
end of the tax year before the date on which the sh ares were actually
sold; for the purposes of this section: ” profits available for
distribution ” – as defined in section 94B.
(f) The Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe rules on the original cost and on the day of
acquisition in respect of shares that were listed f or trading on an
Exchange without any issue to the public.
(g) The Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe the adjustments required for s hares acquired
before the determining date or listed for trading o n an Exchange before
the determining date.

Powers of the Minister of Finance
101A. (a) The Minister of Finance may, with approva l by the Knesset Finance
Committee, prescribe provisions on the following ma tters in respect of
capital gain from the sale of securities:
(1) the way and method of calculating capital gain and real capital
gain, setting its timing and tax calculation, in ge neral or for

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purposes of tax deduction, including the matter of setting off
losses when tax is deducted;
(2) allowing expenses and how they are to be relate d;
(3) in respect of an asset acquired before the dete rmining date, or
acquired before it was listed for trading on an Exc hange, or in
respect of which provisions of the Inflationary Adj ustments Law or
provisions under section 130A apply – adjustments a nd
transitional provisions, including provisions on th e tax rate,
calculation of the capital gain and the set-off of losses.
(4) circumstances and conditions, under which incom e from the sale
of a security will be deemed income under section 2 (1), either
generally or according to the length of time in whi ch the security
was held;
(5) the method for calculating the discount, includ ing the
determination of instances in which the discount wi ll be added to
the consideration;
(6) categories of cases in which a future will be d eemed a hedging
operation, and circumstances under which a said tra nsaction will
be deemed a transaction from which the income const itutes
income under section 2(1), or in which its result w ill be added to
the hedged asset or obligation, on prescribed condi tions; for
purposes of this paragraph: ” hedging transaction” – a future
carried out in order to protect the value of the as set or of the
obligation, whether present or prospective, on cond ition that it
was reported in accordance with prescribed rules;
(7) in respect of futures, and in respect a transac tion of borrowing or
lending a security, selling a security short, and a lso said
transactions between linked parties – circumstances under which
the transaction shall be deemed a sale and the way of calculating
the income and its timing;
(8) tax exemptions or reduced tax rates on a foreig n resident’s
income from a security traded on an Exchange or in a banking
corporation, from the sale of a unit or its redempt ion or on profits
received in respect of a unit;
(9) provisions and conditions for the allowance of deductions of real
interest expenses and linkage differentials, the me thod for their
calculation, restrictions on real interest rates de ductible when
special relationships exist between lender and borr ower, and also
ways of proving the connection of the loan, of real interest
expenses and of linkage differentials to a security ;
(10) provisions and conditions on the matter of sal es and transactions
between relatives or between parties to a sale or t ransaction,
between whom there are special relationships, inclu ding
provisions on determining the consideration, the or iginal cost and
the day of acquisition;
(11) conditions and circumstances, under which a sh areholder shall
be deemed a substantive shareholder, in addition to the
provisions of section 88, if the provisions of Part Five “B” apply to
the company;
(12) instances in which a unit in an exempt trust f und shall be deemed
to have been sold and repurchased, in respect of ce rtain unit
holders or in respect of all unit holders, all on c onditions and with
adjustments he ordered;
(13) conditions and circumstances, under which a re sale of securities

144
or a transfer for the restriction of exposure, as defined in the
Agreements on Financial Assets Law 5766-2006, shall be deemed
a loan and not a sale of securities, notwithstandin g the provisions
of section 4 of the said Law.
(b) If an assessee claimed the deduction of real in terest expenses and
linkage differentials before the provisions said in subsection (a)(9) were
prescribed, then his capital gain from the sale of securities shall be
charged tax at the rate of 25%.

Powers of the Director
101B. In respect of capital gains from the sale of securities the Director may
prescribe rules on returns to be submitted to the A ssessing Officer by the
assessee and by an Exchange member, banking corpora tion, investment
portfolio manager and real estate investment fund, and also on the
certifications they must give the assessee; in this section: “investment
portfolio manager ” – as defined in the Regulation of Investment Coun seling
and Portfolio Management Law 5755-1995.
PART FIVE “A”: SHARE ALLOCATIONS TO EMPLOYEES

Share allocations to employees
102. (a) In this section –
“choice ” – an employer company’s choice of one of two cour ses of
taxation for share allocations to employees through a trustee – the work
income course or the capital gains course; ” controlling member ” – as defined in section 32(9);
” share allocation through a trustee ” – the allocation of an employer
company’s shares to an employee, on condition that the employee is
not a controlling member of it at the time of the a llocation and
thereafter, and that all the following conditions a re complied with:
(1) the shares, including any right vested by virtu e of them, were
deposited with a trustee at the time of their alloc ation, at least
until the end of the period;
(2) the company informed the Assessing Officer of i ts choice as part
of its application for the plan’s approval, which w as submitted at
least 30 days before the date of the allocation;
(3) the allocation plan and the trustee were approv ed by the
Assessing Officer, but if the Assessing Officer did not reply within
90 days after he received the notification, then th e allocation plan
or the trustee, as the case may be, shall be deemed to have
been approved;
” employer company ” – any of the following:
(1) an employer that is an Israel resident company or a foreign
resident company with a permanent enterprise or a r esearch and
development center in Israel, if the Director so ap proved (for this
purpose: the employer);
(2) a company that is a controlling member of the e mployer or of
which the employer is a controlling member;
(3) a company, if the same person controls it and t he employer;
” date of realization ” –
(1) in respect of a share allocation through a trus tee – the date on

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which the shares are transferred from the trustee to the
employees or the date on which the shares are sold by the
trustee, whichever is earlier;
(2) in respect of a share allocation not through a trustee – the date
on which the shares are sold, including the sale of a share that
stems from the right to acquire it;
” share ” – including the right to acquire a share;
” share listed for trading on an Exchange ” – including a share in a
company, all or some of the shares of which are lis ted for trading on an
Exchange in Israel or abroad; ” trustee ” – a person approved by the Assessing Officer as t rustee for
purposes of this section, including an employee; ” employee ” – including an officer of the company, but exclus ive of a
controlling member; ” value of benefit ” – the consideration or the value at the time of t he
realization, less expenses incurred by the employee in acquiring the
share, adjusted from the day of issue until the dat e of the realization,
and also expenses incurred by the employee in respe ct of the sale;
” end of the period ” – each of the following:
(1) if the company chose the work income course – a period of 12
months after the day on which the shares were issue d and
deposited with the trustee;
(2) if the company chose the capital gains course – a period of 24
months after the day on which the shares were issue d and
deposited with the trustee;
(3) in the case of an involuntary sale, as defined in section 103 – the
date of the said sale.
(b) An employee’s income from an allocation of shar es in the employer
company through a trustee shall not be charged tax at the time of the
allocation, and the following shall apply on the da te of realization:
(1) if the employer company chose the work income c ourse, then the
employee’s income shall be deemed income under sect ion 2(1)
or (2), as the case may be, in the amount of the va lue of the
benefit;
(2) if the company chose the capital gains course, and if the trustee
held the shares at least until the end of the perio d, then the
employee’s income shall be deemed a capital gain in the amount
of the value of the benefit, and on it he shall be charged tax at the
rate of 25%;
(3) notwithstanding the provisions of paragraph (2) , if the allocated
share is a share that is listed for trading on an E xchange or a
share in a company, the shares of which were listed for trading
on an Exchange within 90 days after the allocation, then the part
of the value of the benefit in the amount of the av erage value of
the company’s shares on the Exchange at the end of the 30
trading days before the allocation or at the end of the 30 trading
days after the said listing for trading, as the cas e may be, less
expenses, shall be deemed income under section 2(1) or (2), as
the case may be, and the balance of the value of th e benefit shall
be deemed a capital gain that is liable to tax at t he rate of 25%,
on condition that the amount determined to be incom e under
section 2(1) or (2), as aforesaid, does not exceed the value of the
benefit at the time of realization; for the adjustm ent of expenses

146
incurred by an employee in acquiring the allocated share, said
expenses shall be multiplied by the index on the da y of the
allocation or on the day of listing for trading, as the case may be,
and divided by the index on the day of the expendit ure, and all
shall be adjusted from the day of the allocation or of the listing
until the date of the realization.
(4) Notwithstanding the provisions of this section, if the company
chose the capital gains course and the date of the realization
comes before the end of the period, then the employ ee’s income
shall be deemed to be income under section 2(1) or (2), as the
case may be.
(c) (1) An employee’s income from an allocation of shares that is not an
allocation through a trustee shall be charged tax a t the time of the
allocation as income under section 2(1) or (2), as the case may
be, and at the time of the realization as income sa id in Part Five
or in Part Five “C”, as the case may be.
(2) Notwithstanding the provisions of paragraph (1) , an employee’s
income from the allocation of a right – not listed for trading on an
Exchange – to acquire a share not through a trustee shall not be
charged tax at the time of the allocation, and at t he time of the
realization it will be charged tax as income under section 2(1) or
(2), as the case may be,.
(d) (1) W hen shares are allocated as said in subsec tions (b)(1) and (3)
and (c)(1), then the company that employs that empl oyee will be
allowed to deduct the said allocation as a wage exp ense, in the
amount of the employee’s income under section 2(1) or (2), or in
the amount of its participation, which it was charg ed because of
its obligation to the allocating employer company, whichever is
lower, and all that in the tax year in which tax wa s deducted in
respect of the employee’s income and transmitted to the
Assessing Officer.
(2) The company shall not be allowed any expense in respect of the
sale of a share, in respect of which the employer c ompany chose
the capital gains course, even if the share was sol d before the
end of the period said in subsection (b)(4).
(e) The provisions of section 3(i) shall not apply to share allocations to
employees in an employer company, including underta kings to allocate
as aforesaid.
(f) Notwithstanding the provisions of section 100A, the rate of tax that shall
apply to the chargeable part of the profit of an em ployee who ceased
being an Israel resident, as defined in that sectio n, shall be at the tax
rate prescribed in section 121, in each of the foll owing instances:
(1) in the case of a share allocation through a tru stee, in respect of
which the company chose the work income course;
(2) in the case of a share allocation through a tru stee, in respect of
which the company chose the capital gains course, b ut the share
was realized before the end of the period;
(3) in the case of a share allocation not through a trustee, to which
the provision of subsection (c)(2) applies .
(g) The choice under this section shall apply to ev ery employee to whom
shares were allocated, and to every share allocatio n in the year after
the end of the year of the first allocation, and th ereafter as long as the
company did not make a different choice; a company shall be entitled to
choose differently only if a year has passed since the end of the year in

147
which the first allocation was made after the previous choice.
(h) The Director may prescribe any of the following :
(1) conditions in respect of the allocation;
(2) provisions on charging with tax an employee, in respect of whom
all or some of the conditions prescribed in and und er this section
were not complied with because the shares were real ized by
involuntary sale;
(3) repealed;
(4) rules on the allocation of shares to a foreign resident employee in
respect of the period of his work in Israel;
(5) rules for the deduction of tax at the source an d the submission of
reports by the employer company and the trustee, an d setting
times for their submission.

PART FIVE “B”: STRUCTURAL CHANGE AND MERGER

CHAPTER ONE: INTERPRETATION AND APPLICABILITY

Definitions
103. In this Part each term shall have the meaning it has in Part Five or in the Land
Appreciation Tax Law, as the case may be, unless th ere is an explicitly
different provision in this Part; ” merger ” –
(1) the transfer of all assets and obligations of o ne or several companies
(hereafter: transferor company) to another company (hereafter: merged
company) and the transferor company’s liquidation w ithout winding up,
in accordance with a merger Order or in accordance with Chapter One
of Part Eight of the Companies Law;
(2) for the purposes of section 103T, a transfer of at least 80% of the rights
in a company or in each of the companies (hereafter : transferee
company) to another company in consideration of sha res that will be
allocated in the other company, on condition that t he holders of rights
and the parties affiliated with them who transferre d their rights in the
transferee company transferred all their rights in the said transfer to the
other company (hereafter the other company shall al so be called a
merged company);
(3) the performance of a succession of mergers; ” asset ” – any property, whether real or movable, and ever y right or benefit,
contingent or vested, whether in Israel or abroad; ” merger Order ” – an Order made under section 351 of the Companie s Law;
” date of merger ” –
(1) for purposes of a merger under a merger Order – the end of the tax
year in which the merger Order was made, or the end of the preceding
tax year, on condition that that was not before the date on which the
petition for the merger Order was submitted;
(2) for purposes of a merger under Chapter One of P art Eight of the
Companies Law – the end of the tax year in which th e merger took
place, on condition that that was not earlier than the decision by the
General Meeting of each of the merging companies un der section
320(a) of the Companies Law;
(3) for purposes of a merger under section 103T – t he date of the

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exchange of shares;
” approved merger ” – a merger approved by the Court under section 32 1 of
the Companies Law or a merger which – by a decision of the Court under
section 319 of the Companies Law – must not be dela yed and the
implementation of which on the date set by the Cour t must not be prevented;
” the required period ” –
(1) in respect of a merger under paragraph (1) of t he definition of “merger”
– the longer of the following two periods: a period of two years that
begins on the merger date, or a period that began o n the merger date
and ended one year after the end of the tax year in which the merger
Order was issued or the merger was approved, as the case may be;
(2) in respect of a merger under paragraph (2) of t he definition of “merger”
– the period that began on the merger date and ende d two years after
the end of the tax year in which the merger date oc curred;
” succession of mergers ” – one or more additional mergers (hereafter:
additional merger), in which a company that partici pated in a previous merger
participates and which is carried out during the re quired period of the
previous merger, on condition that the following tw o conditions apply:
(1) the conditions for entitlement under section 10 3C are met by each of
the merging companies;
(2) the conditions prescribed under section 103C(6) would also have been
met, if the first merger in the succession of merge rs and each additional
merger had been carried out as a single merger on t he date of the
additional merger; for that purpose the market valu e of each of the
companies that participated in the merger on the da te of the first
merger and on each of the additional merger dates s hall be taken into
account, adjusted at the rate of the index increase from the date of the
merger in which each of the companies participated until the date of the
last additional merger;
” associated party “, of a body of persons (in this definition: body c orporate) or
of an individual – a person for whom one of the fol lowing holds true:
(1) a relative, as defined in section 76;
(2) a controlling member of the body corporate;
(3) a body of persons, of which the body corporate or the individual is a
controlling member;
(4) the body corporate and the body of persons have the same controlling
member;
” right in a body of persons ” – a right in a body of persons, which gives one
of the rights enumerated below, whether assigned in or under the charter and
by-laws of the body of persons, or by agreement wit h a member of the body
of persons:
(1) membership in a body of persons or a right to i ts assets upon winding
up, or a right to its profits, or the right to mana ge it or the right to vote in
it, as well as any other right in the body;
(2) a right of choice or a right to claim in respec t of any of the rights
specified in paragraph (1), from the body or from t he owner of any of
the said rights;
(3) the right to order – directly or indirectly – t he holder of any right
specified in paragraphs (1) and (2) how to exercise his right;
” split ” – the transfer of assets and obligations of one c ompany (hereafter:
split company) to one or more other companies (here after: new company);
” capital reduction Order ” – the Order of a competent Court under the
Companies Ordinance, which allows a company to redu ce its capital;
” market value ” – the amount which could have been obtained by a sale by a

149
willing seller to a willing buyer, between whom there are no special
relationships; ” involuntary sale ” – a sale which is one of the following:
(1) an inheritance;
(2) a sale as part of involuntary winding up procee dings under the
Companies Ordinance;
(3) a sale under bankruptcy proceedings;
(4) some other kind of sale prescribed by the Minis ter of Finance in
regulations;
” controlling member ” – as defined in section 3(i)(1)(c);
” structural change ” – a merger, a split or a transfer of assets again st shares,
all according to this Part.

Applicability to cooperative societies, trust funds , nonprofit societies,
Government companies, Government subsidiaries and r esearch and
development intensive companies
103A. (a) The provisions of this Part shall also ap ply to structural change in
cooperative societies and nonprofit societies, or t o a structural change
in which one party is a cooperative society or a n onprofit society, and
also to trust funds of the same type, all mutatis m utandis and with
additional changes that the Director will prescribe .
(a1) The Director may, in consultation with the Dir ector of the Government
Companies Authority, certify that the provisions of this Part apply to
Government companies and Government subsidiaries wi th changes he
prescribed, including the non-applicability of part of the provisions of
this Part, on condition that the proportion of the direct or indirect holding
of the Government or of the Development Authority, within its meaning
in the Development Authority (Transfer of Assets) L aw 5710-1950, of
rights to profits or of rights to assets upon liqui dation of the said
companies is not less than 90% on the date of the s tructural change; in
this subsection: ” Director of the Companies Authority “,
” Government company ” and “Government subsidiary ” – as defined
in the Government Companies Law 5735-1975.
(b) It is also permissible to prescribe, in regulat ions with approval by the
Knesset Finance Committee, that provisions of this Part apply to
structural change in research and development inten sive companies,
as shall be defined in the regulations, with the ch anges specified there.

Power to change conditions
103A1.(a) The Minister of Finance may, in regulatio ns with approval by the
Knesset Finance Committee, increase every ratio set in section 103C,
change the proportions of holdings required in the same section, or
shorten the required period, all in respect of the conditions that qualify
for entitlement to the tax benefits under this Part ; regulations under this
section may be made for certain categories of struc tural change or for
certain categories of structural change in certain companies, taking the
said companies’ unique position in the economy into consideration.
(b) Notwithstanding the provisions of the definitio n of “date of merger” in
section 103, and notwithstanding the provision of s ection 105C(9), the
Director may designate a different merger date or a different date of a
split, on conditions that he prescribed.

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CHAPTER TWO: MERGER OF COMPANIES AND COOPERATIVE SOCIETIES

Tax exemption
103B. (a) A sale of rights in a transferor company in connection with a merger,
and the transfer of a transferor company’s assets o r obligations to a
merged company in connection with a merger shall no t be charged tax
under this Ordinance, under the Inflationary Adjust ments Law or under
the Land Appreciation Tax Law.
(b) In every instance, in which a sale is not charg ed Land Appreciation Tax
by virtue of the provisions of subsection (a), that sale shall be charged
acquisition tax at the rate of 0.5% of its value.

Conditions for entitlement
103C. The benefits under this Chapter shall apply t o a merger, if all the following
conditions are met: (1) (a) The companies propose to merge for a busine ss and economic
purpose, the main objective of their merger being t o make the
joint management and operation of their businesses possible;
(b) improper tax avoidance or tax reduction are not among the major
purposes of the merger;
(2) most of the assets transferred in the merger to the merged company
from each of the transferor companies and most of t he assets in its
possession just before the merger were not sold dur ing the required
period and during the said period they were used in a manner that
under the circumstances is customary in the conduct of the company’s
business; for this purpose:
(a) ” asset” – an asset defined in section 104, except for sec urities
that are traded on an Exchange and are not held by a controlling
member;
(b) ” most of the assets ” – assets, the market value of which on the
date of the merger was more than 50% of all the com pany’s
assets on that date;
(c) for purposes of subparagraph (b), on applicatio n by the merging
companies all assets shall not include assets, the sale of which
the Director approved, or categories of assets desi gnated by the
Director, all on conditions he prescribed, includin g the setting of a
higher percentage than the percentage stated in sub paragraph
(b);
(d) for purposes of subparagraph (b), a replacement of assets to
which sections 96 or 27 have been applied, shall no t be deemed
a sale of assets, on condition that in the determin ation of all
assets the new assets shall be treated like the rep laced assets;
(e) ” sale” – exclusive of involuntary sale;
(3) the main economic activity of each of the mergi ng companies, as it was
just before the merger, is continued in the merged company during the
required period;
(4) in the course of the merger the merged company allotted shares with
equal rights to all shareholders in the transferor company according to
their proportional holdings of all rights in the tr ansferor company, and
no additional consideration whatsoever was given in the course of the
merger – directly or indirectly – by the merged com pany or by any other
person;
(5) the rights held in the merged company after the merger by all the
holders of rights in each merging transferor compan y are in accordance

151
with the ratio of the market value – at the time of the merger – of the
company in which they were shareholders immediately before the
merger to the total market value – at the time of t he merger – of all the
companies that participate in the merger; the Direc tor shall prescribe
the necessary adjustments, if the merged company ho lds shares in a
transferor company;
(6) (a) the total of rights of all holders of right s in each of the merging
companies shall – during the required period – be a t least 10% of
the market value of the rights in the merged compan y on the
merger date;
(b) the market value of every company that particip ates in the merger
shall not exceed four times the market value of any other merging
company, all on the date of merger;
(c) the Minister of Finance may, with approval by t he Knesset
Finance Committee, designate categories of mergers, in which
restrictions different from those said in subparagr aphs (a) and (b)
shall apply;
(7) the merged company is one of the following: (a) an Israel resident incorporated in Israel under the Companies
Ordinance, the Companies Law or a cooperative socie ty
incorporated in Israel under the Cooperative Societ ies Ordinance;
(b) a company approved by the Director for this pur pose, which is a
foreign resident company or an Israel resident fore ign company,
as defined in the Companies Ordinance or in the Com panies
Law; an aforesaid approval may be conditional on th e provision
of collateral and on other conditions, as the Direc tor may
prescribe;
(8) (a) each of the holders of rights in the compan ies that participate in
the merger continues to hold – during the required period – all the
rights which he had in the merged company immediate ly after the
merger;
(b) holders of rights that are traded on an Exchang e shall not be
included among holders of rights for the purposes o f
subparagraph (a), unless they were controlling memb ers on the
date of the merger; for this purpose: ” controlling member” –
other than a benefit fund or a trust fund;
(9) notwithstanding the provisions of paragraph (8) , if one of the events
specified in subparagraphs (a) to (c) occurs, that shall not be deemed a
change in rights after the date of the merger, on c ondition that the rights
of the persons who held rights in the merging compa nies do not
decrease – at any time during required period – to less than 51% of
each of the rights in the merged company;
(a) during the required period one or more holders of rights in the
merging companies voluntarily sold less than 10% of the rights
he held in the merged company immediately after the date of
merger or – if the other holders of rights agreed – a higher
percentage, on condition that the total of rights s old by all holders
of rights does not exceed 10% of the total of right s in the
company, before any allocation to persons who were not holders
of rights before the merger;
(b) new shares were allocated to persons who were n ot holders of
rights in the company before the allocation, to an extent of not
more than 25% of the share capital before the alloc ation;
(c) shares as defined in section 102 were offered t o the public on a

152
Stock Exchange, on the basis of a prospectus in which it is stated
that the Exchange agreed to list the shares for tra ding;
(9a) notwithstanding the provisions of paragraph (8 ) and in addition to the
provisions of paragraph (9), it shall not be deemed a change in rights
after the merger, if one or more holders of rights in the companies that
participate in the merger –
(1) sells his rights involuntarily;
(2) sells all the rights he had in the merged compa ny, including rights
held by persons that were his associated party, dur ing the period
that begins one year after the merger date only aga inst cash; the
conditions said in this section shall apply to the purchaser of the
rights, as if at the time of the merger he had been the holder of
rights in the company that participated in the merg er; the Minister
of Finance may, with approval by the Knesset Financ e
Committee, set additional conditions for this matte r;
(10) repealed
(11) notwithstanding the provisions of this section , the Director may
prescribe rules, according to which the split of a merged company or
the transfer of assets by a merged company shall no t be deemed a
violation of any of the conditions specified in thi s section.

Restriction on receipt of consideration in cash
103D.(a) Notwithstanding the provisions of section 103C(4), if a merger Order
prescribes that minority shareholders in a transfer or company, who
opposed the merger Order in Court, be paid cash for their shares in the
transferor company and receive no rights in the mer ged company, that
shall not negate any of the benefits prescribed in this Chapter, provided
that the said benefits not apply to the minority sh areholders who
received aforesaid payment and they shall be charge d the taxes that
apply under any statute; for the purposes of this s ubsection:
” minority shareholders ” – shareholders who together hold no more
than 25% of any right in the company, none of them being relatives of a
person who holds shares in the merged company after the merger;
” relative ” – each of the following:
(1) a relative, as defined in section 88;
(2) a person who is a controlling member of a body of persons that
holds shares in the merged company;
(3) any person controlled by a shareholder in the m erged company.
(b) The Director shall, in rules, prescribe adjustm ents that shall be made
for the purposes of section 103C(4) and (5), in res pect of a merger in
which consideration was paid in cash, as said in th is section.

Asset transferred in a merger
103E. (a) The original cost of an asset transferred to a merged company in a
merger, the balance of its original cost, the cost of its acquisition and
the date of its acquisition, each as the case may b e, shall be – for
purposes of this Ordinance, of the Inflationary Adj ustments Law and of
the Land Appreciation Tax Law – as they would have been in the
transferor company, if the asset had not been trans ferred; in respect of
an aforesaid asset that is stock, the amount set as final stock for
purposes of the transferor company’s assessment for the tax year that
ends on the date of merger shall be deemed the cost of the stock.
(b) The transfer of an asset in a merger shall be d eemed a sale for
purposes of the number of periods under section 21A of the Industry

153
Encouragement Law.

Capital gain from sale of shares
103F. If rights in the merged company and in the t ransferor company were not listed
for trading on an Exchange on the day of the merger , then the following
provisions shall apply to the shares of the merged company, which were
allocated in the merger (hereafter: the new share):
(1) the original cost of the rights which the trans feror had in the transferor
company (hereafter: the old share), adjusted at the rate of index
increase from the day of its acquisition to the dat e of the merger, less
any real loss if the share had been sold on the dat e of the merger, shall
be the original cost of the new share, on condition that it is not less than
the original cost of the old share (hereafter: the adjusted cost); the
differential between the original cost of the old s hare and the adjusted
cost is hereafter called the ” adjustment differential”; for this purpose:
” real loss ” – the amount by which the share’s market value is lower
than its adjusted original cost;
(2) the adjustment differential, which is part of t he original cost of sold
shares, shall be added to the consideration from th e sale of the shares,
and it shall be deemed an additional inflationary a mount;
(3) the date of merger shall be deemed the date of acquisition of the new
share; however, when a new share that was received against an old
share acquired before the determining date is sold, the day of
acquisition of the old share shall be taken to be t he day of acquisition of
the new share for purposes of calculating the real capital gain until the
determining date;
(4) if the shareholder is a foreign resident on the date of merger, and if at
the sale of the share he requests that the exchange rate at which he
acquired the old share be deemed the index for calc ulating the adjusted
price, then the adjustment differential shall be ex empt of tax;
(5) the Director shall make rules on the determinat ion of profits available
for distribution, within their meaning in section 9 4B, which accrued in
the merged company or accrued in the transferor com pany up to the
date of the merger and which are to be taken into a ccount in the
merged company.

Adjustments for shares traded on an Exchange and fo r associated companies
103G. (a) The Minister of Finance shall prescribe, by regulations with approval by
the Knesset Finance Committee, adjustments required for the merger
of one or more companies, the shares of which are t raded on an
Exchange on the date of the merger, or the shares o f which were listed
for trading on an Exchange after the date of the me rger, or the shares
of which were removed from the list of securities t raded on an
Exchange on or after the date of merger.
(b) The Minister of Finance shall prescribe, by reg ulations with approval by
the Knesset Finance Committee, adjustments required for the merger
of companies, one of which holds rights in the othe r.
(c) Notwithstanding the provisions of section 101(b )(1), the provisions of
section 101 shall also apply to shares allocated by a merged company
by prospectus, as said in section 103C(4).

Setting off losses of transferor company and merged company
103H. (a) A loss said in section 28, which a transf eror company or a merged
company suffered up to the date of merger and which can be carried

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forward to subsequent years, may be set off against the merged
company’s income, beginning with the tax year after the merger, but in
each aforesaid tax year it shall be allowed set off an amount no greater
than 20% of all losses of transferor companies and of the merged
company, or no greater than 50% of the merged compa ny’s chargeable
income in that tax year before the set off of losse s from preceding
years, whichever is the smaller amount.
(b) A loss said in section 92, which a transferor c ompany or a merged
company suffered up to the date of the merger and w hich can be
carried forward to subsequent years, may be set off against the merged
company’s capital gain beginning with the date of m erger, but in each
tax year it shall be allowed to set off an amount n o greater than 20% of
all the capital losses of the transferor companies and of the merged
company, or no greater than 50% of the merged compa ny’s capital
gain, whichever is the smaller amount; a period of five years after the
day of merger shall not be taken into account for t he restriction set in
section 92 for the set off of an aforesaid loss.
(c) (1) Notwithstanding the provisions of subsectio n (a), a loss said
there, which cannot be set off in that year because of the
limitation of 50% of the chargeable income, shall b e set off in the
following years, one after the other, on condition that no loss said
in this paragraph is set off which, together with t he loss said in
subsection (a), exceeds 50% of the company’s income before the
set off of losses from preceding years.
(2) Notwithstanding the provisions of subsection (b ), a loss said
there, which cannot be set off in that year because of the
limitation of 50% of capital gain, shall be set off in the following
years, one after the other, on condition that no lo ss said in this
paragraph be set off which, together with the loss said in
subsection (b), exceeds 50% of the company’s capita l gain
before the set off of losses from preceding years.
(d) A loss or capital loss said in subsections (a) to (c), which could not be
set off until the end of the fifth year after the m erger date, may be set
off beginning with the sixth year, subject to the p rovisions of sections 28
and 92, as the case may be.
(e) Notwithstanding the provisions of subsection (b ), a capital loss incurred
by one of the merging companies before the merger m ay be set off in
full against a capital gain or land appreciation of the merged company,
which stems from the sale of an asset that belonged to the said
company just before the merger, or which the merged company owned
before the date of merger, as the case may be; the provisions of
subsections (c) and (d) shall apply to a balance of loss which cannot be
set off under this subsection.
(f) Notwithstanding the provisions of subsection (a ), a loss incurred by one
of the merging companies from the rental of a build ing before the
merger may be set off under section 28(h).
(g) The Director may prescribe, during the four yea r period said under
section 103J(b), that a loss or a capital loss to w hich the provisions of
this section apply cannot be set off in the merged company, or that only
part of it may be set off, if he is satisfied that the merger will result in an
improper reduction of tax because of the set off of the said loss; the
Director’s decision may be appealed, and for this p urpose it shall be
treated as if benefits had been denied, as said in section 103J(g);
however, if the merging companies requested the Dir ector’s advance

155
certification under section 103I, then the Director must inform them of
his decision under this paragraph together with the notification under
section 103I(e).
(h) In this section :
“capital gain ” – includes land appreciation;
” chargeable income ” – before the set off of losses, but without incom e
against which a loss has been set off under section 92.

Advance certification of a merger plan by the Direc tor
103I. (a) If a merger proposal was submitted to the Companies Registrar in
accordance with Chapter One of Part Eight of the Co mpanies Law, or if
an application was submitted to the Court for a mer ger Order or for
Court approval of a merger, then application may be made to the
Director for certification that the plan complies w ith the conditions
specified in section 103C, on condition that the ap plication to the
Director is submitted before the merger date.
(b) An applicant for certification under this secti on shall pay an application
fee in an amount to be set by the Minister of Finan ce in regulations, and
the Minister may prescribe that the fee be proporti onal to the assets of
the merging companies or to their inflation adjuste d capital, or
according to some other calculation.
(c) The application shall include all the substanti ve particulars and facts on
the expected merger, and attached to it shall be do cuments,
certifications, opinions, affidavits, valuations, t he merger contract or its
final draft, the merger application submitted to th e Court, and every
other substantive particular, all as the Director s hall prescribe in rules;
the Director may require any additional particular, which he deems
necessary for his decision on the application.
(d) The Director may certify that particulars of a merger plan meet the
conditions specified in section 103C, or that they will meet them if
certain conditions are met or certain steps to be p rescribed by the
Director are taken, and he may also make the said c ertification subject
to conditions that he will prescribe.
(e) The Director shall inform the companies of his decision and of his
reasons within 90 days after the day on which he re ceived the
application and all the documents said in subregula tion (c), but he may
extend the said period – for reasons that shall be recorded – to up to
180 days, and – with the Finance Minister’s approva l – for an additional
period, on condition that he informed the companies of the extension
before the end of the original period.
(f) The Director’s decision under subsection (e) is not subject to appeal.
(g) If the Director did not respond to the applicat ion within the period set
under subsection (e), that shall be deemed prima fa cie certification that
the merger meets the conditions specified in sectio n 103C.
(h) (1) If the Director certified that the particul ars of a merger plan meet
the conditions specified in section 103C, then he c annot withdraw
that certification, unless it is shown that particu lars delivered to
him are substantively incorrect or incomplete, or i f it is shown that
substantive particulars specified as aforesaid were not
implemented or that substantive conditions set by t he Director, as
said in subsection (d), were not complied with.
(2) The Director’s decision to withdraw his certifi cation may be
appealed,, as if it were an Order under section 152 (b).
(i) W hen the Director has given certification, as s aid in subsection (d),

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then the benefits specified in this Chapter shall apply, beginning with
the day of merger and as long as the particulars of the merger plan, as
submitted to the Director, and the conditions set i n section 103C are
complied with.

Benefits – their grant and withdrawal
103J. (a) If benefits under this Chapter were given in a certain year, and if
thereafter it is shown that one of the conditions s pecified in section
103C was not met on time, then the Assessing Office r shall so inform
the parties to the merger; when that notification h as been made, the
benefits shall be canceled retroactively from the d ay on which they
were given, and the parties to the merger and their shareholders shall
be charged the taxes and obligatory payments, from which they had
been exempted, with the addition of linkage differe ntials and interest
from the day of the merger until the day of payment ; the Director shall
make rules for purposes of this subsection, in orde r to prevent double
taxation.
(b) (1) A notification said in subsection (a), as w ell as demands for
reports from the parties to the merger or their sha reholders
(hereafter: merger reports), shall be issued within four years after
the end of the tax year in which the Assessing Offi cer received a
report under section 131, the subject of which is t he tax year in
respect of which the Assessing Officer argues that an aforesaid
condition was not complied with; when a said notice has been
given, the Assessing Officer shall draw up – not la ter than two
years after the tax year in which the merger report was submitted,
or within one additional year, if the Director conc urred – amended
assessments for the parties to the merger and their shareholders.
(2) For the purposes of contestation and appeal, an assessment
under this subsection shall be treated like an asse ssment under
section 145.
(c) Taxes, fees and other obligatory payments, whic h a transferor company
owes under a tax law, within its meaning in the Tax es Set-Off Law
5740-1980 (hereafter in this section: tax law) in r espect of tax years
before the merger, and – if benefits were withdrawn under subsection
(a) – also aforesaid payments in respect of tax yea rs after the date of
merger, may be collected from any of the following:
(1) the merged company;
(2) a person who was a controlling member in the tr ansferor
company immediately before the merger and received shares in
the merged company as part of the merger; however, it shall not
be permissible to collect from him an amount that e xceeds the
proportional part of those payments according to hi s share in the
transferor company immediately before the merger, a s it was
determined for purposes of section 103C(4).
(d) If any amount could have been charged against a person or could have
been collected from him under a tax law, if not for the merger, then the
person responsible for the implementation of that L aw may charge that
person or collect from him even after the merger.
(e) Notwithstanding the provisions of subsection (b ), if benefits under this
Part were granted in any tax year, and if one of th e conditions set in
section 103C is not complied with in a later tax ye ar in which the date
for compliance with that condition occurs, then the Director may
determine that benefits not be denied in respect of all or some of the

157
merging companies or in respect of a certain shareholder, if he is
satisfied that noncompliance was caused by the unil ateral action of a
minority of shareholders, without the knowledge and beyond the control
of the majority of shareholders, or that the noncom pliance was caused
without the knowledge or beyond the control of the shareholders.
(f) The Minister of Finance may determine, in regul ations with approval by
the Knesset Finance Committee, that there shall be different results for
different shareholders, in line with the degree of their responsibility for
noncompliance with a condition, because of which be nefits were
canceled.
(g) A decision under this section to cancel benefit s may be appealed as
part of an appeal against an assessment for a tax y ear, and if no
assessment was made for that tax year within a year after delivery of
the notification said in subsection (b) (hereafter: day of notification),
then it may be appealed separately within 30 days a fter the day of
notification, as if it had been an Order under sect ion 152(b).

Application of the Inflationary Adjustments Law
103K. (a) Those terms in this section, which are no t explicitly defined in this
Ordinance, shall be interpreted within their meanin g in the Inflationary
Adjustments Law and in the Taxation under Inflation ary Conditions
Law, as the case may be.
(b) If an asset was a protected asset or a fixed as set, as the case may be,
and if it was transferred to the merged company in the merger, then it
shall be deemed to be such since the day which woul d have applied for
that purpose, had the asset remained with the trans feror company and
not been transferred to the merged company.
(c) Repealed
(d) For purposes of calculating capital adjustments – as said in section 3 of
Schedule One of the Inflationary Adjustments Law – in a merged
company, entries in the books of a transferor compa ny or in returns
submitted by it for the period up to the date of me rger shall be treated
like entries in the books of the merged company or returns submitted by
it.
(e) The provisions of section 103H shall apply to t he balance of inflationary
deduction of a merged company or of transferor comp anies, which
stems from the period up to the date of merger; how ever, the
restrictions said in section 103H shall not apply t o the balance of an
aforesaid deduction, which was not allowed to be de ducted because of
the ceiling set in section 7(b) of the Inflationary Adjustments Law, or
because of the provisions of section 7(e) of the In flationary Adjustments
Law; for purposes of this subsection: ” chargeable income” – as
defined in section 7 of the Inflationary Adjustment s Law.
(f) The Minister of Finance may, in regulations wit h approval by the
Knesset Finance Committee, prescribe additional adj ustments that are
necessary for purposes of the Inflationary Adjustme nts Law, of Chapter
Seven “C” of the Investment Encouragement Law, and in respect of
persons who keep their books in foreign currency.

Change of an asset’s purpose
103L. (a) If the purpose of an asset was changed wh en it was transferred from a
transferor company to a merged company, then the ex emption said in
section 103B shall not apply to the transfer of tha t asset, and the
provisions of sections 85 or 100 of this Ordinance or of section 5(b) of

158
the Land Appreciation Tax Law shall apply, as the case may be, as if
the asset had originally been bought by the merged company.
(b) If the purpose of an asset transferred in a mer ger is changed within two
years after the merger, and if the amount of tax pa yable because of the
sale of the said asset is smaller than the total am ount of tax, which
would have had to be paid at the time of the merger and at the time of
its sale if the purpose had been changed at the tim e of the merger, then
the purpose shall be deemed to have been changed at the time of the
merger, and the tax due therefor shall be paid with the addition of
linkage differentials and interest from the day of the merger until the
date of actual payment.

Real estate association
103M. The benefits prescribed by this Part shall no t apply to a merger, to which a
real estate association is party; however, the Dire ctor may approve the
application of this Part to a merger between compan ies all or some of which
are real estate associations, and all that with the adjustments and on the
conditions he may prescribe; for this purpose: ” parent company ” – a company that holds all the rights in another company;
” subsidiary ” – a company all the rights in which are held by a nother
company; ” sister company ” – a company, in which the holders of rights are i dentical
with the holders of rights in another company, the share of each holder of
rights being identical with his share in the other company.

Tax advances of merged company
103N. (a) The tax advances, which a merged company must pay for the tax year
that begins on the date of the merger, shall be cal culated on the basis
of the advances – with adjustments as the Director shall prescribe –
which the transferor company and the merged company would have
had to pay for that year, if not for the merger.
(b) If the date of the merger is the end of the tax year before the year in
which the merger Order was issued, or if the merger date was at the
end of the tax year before the date on which the me rger became an
approved merger, then the advances shall be calcula ted in accordance
with the provisions of subsection (a), beginning wi th the day on which
the merger Order was made or on the day on which th e merger became
an approved merger, as the case may be, and until t he end of the tax
year after that year.

Assets transferred in a merger
103O. The Director shall make rules about assets tr ansferred in a merger, and he
may prescribe that the statute which applied just b efore the merger in respect
of depreciation, amortization and deduction and the provisions of the
Inflationary Adjustments Law continue to apply to t hem also after the date of
the merger, or that they apply with adjustments and changes as he shall
prescribe.

Employee transferred to merged company
103P. (a) The exemption set in section 9(7a) shall not apply to an employee of a
transferor company, who in consequence of the compa nies’ merger is
transferred to be an employee of the merged company , and his transfer
shall not be deemed retirement for purposes of the said section;
however, the period of the employee’s employment in the transferor

159
company shall be taken into account in the calculation of his exemption
under the said section when he retires from the mer ged company.
(b) The Director shall, by rules, prescribe adjustm ents for purposes of
section 102 in connection with the merged company, the transferor
company and the employees, and he may prescribe afo resaid
adjustments for any other matter said in section 10 2.

Power to deny benefits under certain circumstances
103Q. The Minister of Finance may, in regulations w ith approval by the Knesset
Finance Committee, prescribe circumstances under wh ich the benefits
prescribed in this Chapter shall not be allowed, pr ovided that determination
does not deny benefits in respect of a merger, for which the merger Order or
the Director’s certification under section 103I wer e given before the said
regulations were published.

Regulations on certain particulars
103R The Minister of Finance may, in regulations wi th the consent of the Minister of
Justice, prescribe particulars that must be include d in the merger contract and
in the memorandum and by-laws of the merged company , as a condition for
the receipt of the benefits prescribed in this Chap ter.

Returns
103S. (a) The merging companies and the holders of rights in them shall deliver
to the Assessing Officer – within 30 days after the merger Order was
given after the date on which the merger became an approved merger
or after the merger date, as the case may be, which ever was the latest,
or within 60 days if the Assessing Officer so agree d in advance – a
return that includes all the particulars and facts that directly or indirectly
relate to the merger, and also the merger Order or the Court’s decision
on the merger approved by it, the merger contract, certifications,
opinions, declarations, financial reports, a report on the purpose of
assets transferred in the merger, particulars of th e valuations prepared
in preparation for and during the merger, and every other report or
particular prescribed by the Minister of Finance in regulations.
(b) W hoever is under obligation to submit a report under this section, but
failed to do so, shall be treated like a person who failed to submit a
return under section 131.
(c) For purposes of this section: ” holders of rights” – other than holders of
rights that are listed for trading on an Exchange, who are not controlling
members.

Merger by means of an exchange of shares
103T. (a) For the purposes of this section, ” merger by means of an exchange
of shares ” – a merger as defined in paragraph (2) of the def inition of
“merger” in section 103.
(b) A merger by means of an exchange of shares shal l not be charged tax
under this Ordinance, under the Real Estate Taxatio n Law or under the
Inflationary Adjustments Law, if it complies with a ll the conditions
specified in section 103C, mutatis mutandis, and wi th the conditions
specified below:
(1) immediately after the merger and during the req uired period the
merged company holds all the rights in the transfer ee company,
which it held on the merger date;
(2) an application was submitted to the Director fo r certification that

160
the plan meets the conditions specified in this section – on
condition that the application was submitted at lea st 60 days
before the merger date – and the Director so certif ied; if the
Director decided that the merger does not meet the conditions
specified in this section, then his decision may be appealed, as if
it had been an Order under section 152(b).
(c) If any of the events specified in paragraphs (a ) to (c) of section 103C(9)
occurred, then that shall not be deemed a change of rights after the
merger, provided that the rights of the persons who immediately before
the merger held rights in the companies that partic ipated in the merger
did not – at any time during the required period – drop to less than 51%
of each of the rights in the merged company, and th e rights of the
merged company also did not drop to less than 51% o f each of the
rights in the transferee company.
(d) The Minister of Finance may make rules, with ap proval by the Knesset
Finance Committee, in respect of losses that may be set off in a
merged company and in a transferee company;
(e) The provisions under sections 103B(b), 103E, 10 3F, 103G, 103I, 103J,
103Q, 103R and 103S shall apply to a merger by mean s of an
exchange of shares, mutatis mutandis as the case ma y be, as long as
in this section does not prescribed differently, an d provided that – for
the purposes of section 103E – the rights in the tr ansferee company
shall be treated as the transferred assets.

CHAPTER THREE: TRANSFER OF ASSETS AGAINST SHARES

Definitions
104. In this Chapter –
“asset ” – an asset other than –
(1) movables of an individual that he keeps for his personal use or for the
personal use of his relatives or of his dependents;
(2) business stock;
(3) a right, whether by Law or in equity, to occupy real estate used for
residential purposes and not for earnings or profit .
” company ” –
(1) an Israel resident company incorporated in Isra el under the Companies
Ordinance or the Companies Law or a cooperative soc iety incorporated
in Israel under the Cooperative Societies Ordinance ;
(2) a company approved by the Director for this pur pose, which is a foreign
resident, or which is an Israel resident foreign co mpany, as defined in
the Companies Ordinance or in the Companies Law; af oresaid
approval may be conditional on the provisions of co llateral, or on other
conditions that the Director will prescribe;
” capital gain ” – including land appreciation.

Transfer of all rights to an asset
104A.(a) If a person transfers all his rights in an asset to a company in
consideration of rights that exist in that company, then he shall not be
charged tax under this Ordinance, under the Land Ap preciation Tax
Law or under the Inflationary Adjustments Law, as t he case may be, if
all the following conditions have been met:
(1) during at least two years after the day of the transfer the
transferor holds at least 90% of each of the rights in the

161
company;
(2) the company holds the asset transferred to it d uring at least two
years after the day of the transfer;
(3) the ratio between the market value of the right s allocated to the
transferor and the market value of all the rights i n the company
immediately after the transfer equals the ratio bet ween the
market value of the transferred asset and the marke t value of the
company immediately after the transfer;
(4) repealed
(b) The provisions of subsection (a) shall not appl y to an asset owned by a
partnership or jointly owned by several owners.
(b1) If an asset was transferred to a company that is a real estate
association or became a real estate association aft er the transfer of the
asset, then the provisions of subsection (a) shall apply, on condition
that all the transferor’s rights in the asset were transferred, and that – if
the transferred asset is land – construction of a b uilding on that land
was completed within four years after the transfer, according to
conditions set by the Director.
(c) Repealed
Transfer of an asset by several persons
104B.(a) If partners in a partnership or joint owne rs cause all their rights in an
asset owned by the partnership to be transferred or if they transfer all
rights to an asset jointly owned by them, as the ca se may be, to a
company set up especially for that purpose and if t hat company owned
no other asset and engaged in no other activity at that time or
previously, and all that only against the allocatio n of shares in that
company, then they shall not be charged tax under t his Ordinance,
under the Inflationary Adjustments Law or under the Land Appreciation
Tax Law, as the case may be, if all the following c onditions have been
met:
(1) during at least two years after the day of the transfer, the share of
each partner or of each joint owner in each of the rights in the
company is equal to the share each had in the asset s transferred
as aforesaid, or to his share in the partnership, a s the case may
be;
(2) the company holds the assets transferred to it for at least two
years after the day of the transfer;
(3) the ratio between the market value of the right s allocated to each
of the partners or owners and the total market valu e of the
company immediately after the allocation is equal t o the ratio
between the market value of that partner’s or owner ‘s share in the
asset and the market value of the company immediate ly after the
date of transfer;
(4) if land was transferred to the company as said in this subsection,
and if thereafter the company became a real estate association,
then the exemption prescribed in this section shall be granted
only if construction of a building on the land was completed within
four years after the transfer, in accordance with c onditions to be
set by the Director.
(b) If several jointly owned assets were transferre d, or if a jointly owned
asset and an asset owned by a partnership were tran sferred, then the
provisions of subsection (a) shall apply only if th e share of each of the
joint owners of each transferred asset is equal to his share in all the

162
other assets, and in the case of a partnership also to his share in the
partnership.
(c) (1) For the purposes of subsections (a) and (b) , rights in a single
company shall be deemed a single asset, and the hol ders of
those rights shall be deemed partners to that asset .
(2) A company, to which an asset was transferred un der this section
in the past shall also be deemed a company said in subsection
(a), as long as all the following holds true from t he date of the
company’s establishment until two years after the d ay on which
an additional asset was transferred under this sect ion:
(a) the holders of rights in the company have not c hanged;
(b) the ratio between the market value of the right s allocated to
each transferor for the transfer of an additional a sset and
the value of the additional asset on the day of its transfer, is
the same as the ratio between the market value of t he
transferor’s share of all the assets which he trans ferred to
the company and the market value of the company
immediately after the transfer.
(d) If each of several individuals transfers on the same date a depreciable
asset to a company set up especially for that purpo se only against the
allocation of shares, and if that company owned no other asset and
engaged in no other activity at that time or previo usly, then they shall
not be charged tax under this Ordinance at the time of the transfer, if all
the following conditions have been met:
(1) the purpose of the transfer is the unified mana gement and
operation of the transferred assets;
(2) a proportion of all the shares in the company w as allocated to
each of the individuals against the transfer of the asset or assets,
in the ratio between the market value of the asset which he
transferred, and the market value of all the assets transferred
under this subsection;
(3) during at least two years after the day of the transfer no change is
made in the rights of the shareholders in the compa ny that was
set up;
(4) the transferred assets will be used by the comp any in the course
of the company’s business, in a manner that is cust omary under
the circumstances, and they will remain in its poss ession for at
least two years after the day of the transfer;
(5) not more than ten individuals will form a compa ny under this
subsection; however, the Director may permit a larg er number of
individuals to join in the formation of a cooperati ve society;
(6) the market value of any asset transferred by an y one of the
individuals shall not exceed the market value of an y asset
transferred by another individual more than four-fo ld, all at the
date of the transfer; the Director may change the s aid ratio, for
reasons which shall be recorded;
(7) no asset that is a real estate right shall be t ransferred under the
terms of this subsection.
(e) The provisions of subsection (d) shall not appl y to an asset owned by a
partnership or owned jointly by several owners.
(f) If a company transfers an asset to another comp any, in which the
holders of rights are identical with the holders of rights in the transferor
company, and if the share of each in the rights of the company is
identical to the share of his rights in the transfe ror company (hereafter:

163
sister company), then at the time of the transfer it shall not be charged
tax under this Ordinance, under the Inflationary Ad justments Law or
under the Land Appreciation Tax Law, as the case ma y be, if all the
conditions prescribed by the Minister of Finance in regulations have
been met.
————————————————— —————————————————————
Note: Under section 75 of Amendment No. 147 the fol lowing subsection (g) is
in effect only in respect of tax years 2005 to 2007 – Tr.

(g) (1) If a foreign resident company transfers all its assets and activities
to an Israel resident company, in which the holders of rights are
identical to the holders of rights in the transfero r company, and
the part of each holder of rights is identical with his right in the
transferor company, then the transfer shall not be charged tax
under this Ordinance, if the Director certified tha t the conditions
and restrictions prescribed by the Minister of Fina nce under
paragraph (2) have been complied with.
(2) The Minister of Finance may, with approval by t he Knesset
Finance Committee, prescribe conditions and restric tions for
purposes of the tax exemption prescribed in paragra ph (1),
including the matter of tax postponement, the origi nal cost, the
tax rate that will apply to capital gains or profit s and dividends
that stem from the transferor company, and the peri od during
which shares shall be held in order to get the exem ption under
this section; he also may prescribe provisions and reports for the
implementation of this section.
————————————————— —————————————————————

Transfer of shares to parent company
104C. (a) If a company transfers to the holder of i ts shares all the shares it holds
in another company (hereafter: the transferred shar es), then it shall not
be charged tax under this Ordinance or under the In flationary
Adjustments Law in respect of the sale of the trans ferred shares, if all
the following conditions have been met and on condi tion that the
Director’s approval was obtained before the transfe r:
(1) the shareholder (hereafter: the parent company) is a company
that holds all the rights in the transferor company ;
(2) no consideration is given for the transferred s hares, either directly
or indirectly, in cash nor in kind;
(3) the transferred shares will remain in the paren t company during
at least two years after the day of transfer;
(4) during at least two years after the day of tran sfer no change
occurs in the parent company’s rights in the transf eror company;
(5) the Court gave approval under section 303 of th e Companies
Law, if that was required;
(6) the asset is transferred for a business and eco nomic purpose,
improper tax avoidance or tax reduction not being a mong the
main purposes of the transfer.
(b) If the transferor company had an approved enter prise, within its
meaning in the Investment Encouragement Law, which – on the date of
the transfer – is able to distribute dividends unde r section 47(b)(2) or
51(c) of that Law, then the said share transfer sha ll be treated like an
aforesaid dividend distribution.
(c) The Director shall make rules on the adjustment s necessary for

164
purposes of this section and for purposes of the Inflationary
Adjustments Law in consequence of the implementatio n of this section,
in respect of the transferor company and of the par ent company, in
respect of the determination of the original cost o r of the consideration,
or in respect of any other matter.
(d) Repealed
(e) (1) The provisions of subsections (a) to (c) sh all apply – with
changes to be prescribed by the Director, also on t he non-
applicability of part of the said provisions – to b anking
corporations within their meaning in the Banking (L icensing) Law
5741-1981, and to companies under their control, wh ich – in tax
years 1996 and 1997 – transfer rights that they hol d in real
bodies corporate, within their meaning in the said Law, on
condition that – if the transferor is the banking c orporation – the
company to which the shares were transferred will n ot have any
income as said in section 2(1) in the course of two years after the
date of the transfer;
(2) the conditions said in subsection (a)(3) and (4 ) shall also apply to
a transfer said in paragraph (1), other than in a s ale of rights in a
real body corporate that was transferred to a paren t company that
is the banking corporation, or in a sale of rights in the transferor
real body corporate, when such sales are performed in order to
comply with provisions of the Banking (Licensing) L aw 5741-
1981;
(3) without derogating from the provisions of any s tatute, decisions to
transfer shares said in this subsection require app roval by the
General Meeting of the transferor body corporate an d they shall
be treated like extraordinary resolutions within th eir meaning in
section 115(a)(3) of the Companies Ordinance.
(e1) If the Director did not approve the transfer o f shares under the
provisions of subsection (a), then appeal may be lo dged against his
decision, as if it were an Order under section 152( b).
(f) The Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe provisions on the application of all or part of this
section to foreign companies, with the restrictions and on the conditions
he shall prescribe.

Sale of rights and assets
104D. For the purposes of sections 104A to 104C: (1) if one of the things specified in subparagraphs (a) to (d) below occurs,
that shall not be deemed to affect the continued ho lding of rights in the
company, provided that the rights of the persons wh o held the rights
immediately after the transfer do not – at any time during two years
after the transfer – drop to less than 51% of each of the rights in the
company;
(a) shares as defined in section 102 were offered t o the public on an
Exchange by prospectus, which states that the Excha nge agreed
to list the shares for trading on it;
(b) during two years after the date of the transfer one or more of the
holders of rights in the company to which the asset was
transferred voluntarily sold less than 10% of each of the rights
held by him, or he sold a greater percentage with t he consent of
the other shareholders, on condition that the follo wing holds true:
(1) all the rights sold by all holders of rights do not exceed 10%

165
of the rights in the company;
(2) all the holders of rights in an asset before it s transfer to the
company shall not sell a percentage of their rights in the
company that exceeds the difference between the
percentage of their rights immediately after the tr ansfer and
90% of the rights in the company;
(c) new shares were allocated to a person who did n ot hold rights in
the company before the allocation, in an amount tha t does not
exceed 25% of the share capital before the allocati on;
(d) repealed
(1a) an involuntary sale of rights shall not be dee med an infringement of the
continued possession of rights in the company;
(2) holders of rights who hold rights traded on an Exchange shall not – for
purposes of paragraph (1) – be included among the h olders of rights,
unless they were controlling members on the date of the merger; for
this purpose, “controlling member ” – other than a benefit fund and a
trust fund;
(3) the replacement of assets to which section 96 o r section 27 was made
applicable or their involuntary sale shall not be d eemed the sale of an
asset;
(4) the sale of any asset, which is not liable to L and Appreciation Tax
because of the provisions of this Chapter, shall be liable to acquisition
tax at the rate of 0.5% of its value;
(5) Notwithstanding the provisions of this Chapter, the Director may
prescribe rules, according to which the split or me rger of a company, to
which an asset said in this Chapter was transferred , will not be deemed
a violation of the conditions specified in this Cha pter.

Calculation upon sale of asset
104E.(a) If an asset was transferred as said in sec tions 104A and 104B, then its
original cost, the balance of its original cost, th e day of its acquisition
and its acquisition price shall be – for purposes o f this Ordinance, of the
Inflationary Adjustments Law and of the Land Apprec iation Tax Law –
as they would have been for the transferor, and the seller shall also be
allowed to deduct those deductions, which the trans feror would have
been allowed to deduct at the sale of the asset, bu t the original cost of
a transferred asset that is a security or a future traded on an Exchange
shall be determined according to the provisions of section 104F, as if
the security or future were a share, as said in tha t section; for the
purposes of this section: ” future” – as defined in section 88.
(b) The transfer of an asset under sections 104A to 104C shall be deemed
a sale, for calculation of the periods under sectio n 21A of the Industry
Encouragement Law.
(c) A capital gain or a capital loss created in con sequence of the sale of an
asset that was transferred as said in sections 104A to 104C, must not –
during the period of two years after the transfer d ate – be set off against
profit or loss under sections 28 or 92, as the case may be; those two
years shall not be taken into account for purposes of the restriction
prescribed in section 92 in respect of the period o f the set off.

Sale of shares
104F. The following provisions shall apply to the s ale of shares that were received
for an asset, as said in sections 104A and 104B:
(1) the balance of the original cost of the transfe rred asset, adjusted from

166
the day of acquisition of the asset by the transferor until the day of
transfer, less any real loss if the asset had been sold on the day of
transfer, but not less than the original cost of t he transferred asset
(hereafter: adjusted cost) shall be the original co st of the shares; the
differential between the balance of the original co st of the transferred
asset and the adjusted cost shall hereafter be call ed the “adjustment
differential “; for this purpose: ” real loss” – the amount by which the
market value of the asset is less than its adjusted original cost;
(2) an adjustment differential, which constitutes p art of the original cost of
the sold shares, shall be added to the consideratio n from the sale of the
shares and shall be deemed an additional inflationa ry amount;
(3) the date of transfer of the asset shall be deem ed the date of the shares’
acquisition; however, upon the sale of shares obtai ned for an asset that
was acquired up to the determining date, the date o n which the
transferred asset was acquired shall be deemed the day of acquisition
of the shares for purposes of the calculation of th e real capital gain up
to the determining date.

Miscellaneous provisions
104G. (a) The provisions of sections 104A to 104C s hall apply only if the
transferor of the asset informed the Assessing Offi cer of the transfer of
the asset within 30 days of its transfer, and if he attached to his
notification returns, affidavits and particulars, a ll as the Minister of
Finance prescribed in regulations.
(b) (1) The provisions of section 103J, subject to the provisions of
paragraph (2), and of sections 103L and 103O shall apply to the
transferor of an asset, as if he were a transferor company or a
shareholder in it, as the case may be, and as if th e company to
which the asset was transferred were a merged compa ny, all
mutatis mutandis as the case may be.
(2) If it turns out that one of the conditions for the grant of benefits
prescribed in section 104A, 104B or 104C was not co mplied with
on time (hereafter: violation), then the transfer o f the asset that
was not charged tax at the time of the transfer sha ll be liable to
tax as said in paragraph (1), or liable to tax acco rding to the
transferred asset’s market value on the day of the violation,
whichever is greater, unless the Assessing Officer is satisfied that
the violated obligation was violated because of spe cial
circumstances beyond the transferor’s control; the value set as
aforesaid in this paragraph shall be the original p rice of the asset
for the company and the day in respect of which the said value
was set shall be the day of acquisition.
(c) If a company transferred an asset, then – durin g two years after the
date of the transfer – the provisions of the Inflat ionary Adjustments Law
and of section 130A, which would have applied to th e company that
transferred the asset, shall apply to the asset and to the company to
which it was transferred, all with adjustments to b e prescribed by the
Director.
(d) The applicant for certification under this Chap ter shall pay an
application fee in an amount to be set by the Minis ter of Finance, and
the Minister may set different fees for different c ategories of transfers,
also taking into consideration the value of the tra nsferred assets and
the manner of their transfer.

167
Exchange of shares
104H (a) In this section –
“exchange of shares ” – the transfer of shares of a company (in this
section: transferee company), including rights to a cquire shares (in this
section: the transferred shares) as consideration f or the allocation of
shares of another company that are listed for tradi ng on an Exchange,
either with or without additional consideration (in this section: the
merged company and the allocated shares); ” transferor ” – whoever transferred the shares to the merged co mpany;
” blocked share ” – a share, the sale of which is absolutely restri cted by
a statutory provision or by orders from the authori ty that is statutorily
competent to make rules for trading in securities, during the designated
period (in this section: the blocked period); ” day of sale ” – the earlier of the following:
(a) the date on which the allocated share was sold;
(b) the end of the postponement period; for this pu rpose: “the
postponement period ” –
(1) in respect of allocated shares that are not blo cked shares –

(a) in respect of one half of them – 24 months afte r the
day of exchange; allocated shares, including blocke d
shares, sold until the end of the said 24 months sh all
be taken into account in calculating the half;
(b) in respect of their balance – forty-eight month s after
the day of the exchange;
(2) in respect of blocked shares – (a) in respect of one half of them – 24 months afte r the
day of exchange or six months after the end of the
blocked period, whichever is later, on condition th at
blocked shares with shorter blocked periods than
other blocked periods set for the balance of the
blocked shares be first taken into account; shares
sold as said in subparagraph (1)(a) until that date
shall be taken into account in calculating the half ;
(b) in respect of their balance – forty-eight month s after
the day of the exchange, or six months after the en d
of the blocked period, whichever is later;
” trustee ” – a person approved by the Director as trustee fo r the
purposes of this section; ” value at the end of the postponement period ” – the amount
obtained by adding up the amounts of the share’s va lue on the
Exchange at the end of trading on each of the thirt y trading days before
the end of the postponement period, divided by 30; ” additional consideration ” – a cash amount given for the transferred
shares, in addition to the allocated shares;
(b) (1) An exchange of shares shall not – at the ti me of their exchange –
be deemed their sale for purposes of Part Five, of the Real
Estate Taxation Law or of the Inflationary Adjustme nts Law, if all
the following hold true:
(a) the ratio between the market value of the trans ferred
shares and the market value of the merged company
immediately after the exchange of shares is like th e ratio
between the market value of the allocated shares, i ncluding
the additional consideration, and the market value of all

168
rights in the merged company immediately after the
exchange of shares;
(b) the merged company allocated shares with equal rights to
all persons who transferred from the same company;
(c) the transferor paid an advance in respect of th e additional
consideration at the tax rate that applies under se ction
91(a), (b) or (b1), as the case may be; the provisi ons of
section 91(d) or the provisions that apply to a rea l estate
association act under the Real Estate Taxation Law, as the
case may be, shall apply to the advance, mutatis mu tandis;
(d) all the shares and also all the rights of the t ransferor and of
parties associated with him to acquire shares in th e
transferee company were transferred as part of the
exchange of shares, unless the Director approved
otherwise and on the conditions he set;
(e) an application was submitted to the Director th at he certify
that the share exchange meets the conditions specif ied in
this section, on condition that the application was submitted
at least 30 days before the date of the exchange of shares,
and the Director so certified; certification under this
paragraph may be conditional on the provision of
guaranties to the Director’s satisfaction and on ot her
conditions, as the Director will prescribe;
(f) the allocated shares shall be deposited with a trustee, to
secure payment of the tax and compliance with the
provisions of this section;
(2) if the Director determined that the exchange of shares did not
meet the conditions prescribed in this section, the n his decision
may be appealed as if it had been an Order under se ction 152(b);
(3) notwithstanding the provisions of this subsecti on, when shares of
a transferee company that is a real estate associat ion are
exchanged, then the provisions of section 104D(4) s hall apply,
mutatis mutandis.
(c) If the conditions said in subsection (b) have b een complied with, then
the following provisions shall apply:
(1) the allocated shares shall be deemed to have be en sold on the
day of sale;
(2) the consideration shall be calculated according to the following
provisions:
(a) if the allocated share was sold before the end of the
postponement period – the consideration for the sal e;
(b) if the allocated share was not sold before the end of the
postponement period – its value at the end of the
postponement period;
all with the addition of the adjusted additional co nsideration and
the amounts of dividends distributed in respect of the allocated
shares during the period between the date of the ex change and
the day of sale, divided by the number of allocated shares; for
this purpose: ” the adjusted additional consideration ” – the
additional consideration, adjusted from the date of the exchange
of shares until the day of the sale;
(3) the provisions of section 104F shall apply, mut atis mutandis, and
for this purpose the transferred shares shall be de emed an asset;
(4) repealed

169
(5) the following provisions shall apply to the sale of the allocated
shares:
(a) the part of the capital gain up to the date of the share
exchange shall be charged tax at the tax rate that would
have applied, if the provisions of section 104H did not apply
on the date on which the shares were exchanged;
(b) the part of the capital gain from the date of t he share
exchange up to the day of sale shall be charged tax in
accordance with the provisions of section 91(a) or (b), as
the case may be;
(c) when the allocated share is sold by a foreign r esident, then
the tax exemption said in section 97(b2) shall appl y only if –
on the date of the share exchange – the transferor would
have been entitled to the said tax exemption, had h e sold
the transferred shares on the day of their exchange ;
(d) for purposes of this paragraph: ” part of the capital gain
up to the date of the share exchange ” – the capital gain,
multiplied by the ratio of the period between the a cquisition
of the transferred shares and the date of the share
exchange, to the period between the said acquisitio n and
the day of the sale of the allocated shares;
(6) if the transferor sold the allocated shares aft er the end of the
postponement period, then the allocated shares shal l be deemed
to have been newly acquired, the end of the postpon ement
period shall be deemed the day of acquisition, and the value at
the end of the postponement period shall be deemed the original
cost;
(7) notwithstanding the provision of any statute, a merger or split of
the merged company after the exchange of shares sha ll not be
deemed a sale of the allocated shares, and the Dire ctor may
make provisions on this matter in special rules;
(8) (a) for purposes of section 94B, profits availa ble for
distribution, as defined in that section, which acc rued in the
transferee company from the end of the tax year bef ore the
year in which the transferred shares were acquired by the
transferor until the end of the tax year before the year in
which the exchange of shares was carried out (herea fter:
year of exchange) shall be deemed profits available for
distribution when the allocated shares are sold; ho wever,
profits available for distribution which accrued be fore
January 1, 1996, shall not be taken into account;
(b) the Director shall prescribe rules for the det ermination of
profits available for distribution in an exchange o f shares,
when the allocated shares are shares of an Israel r esident
company;
(9) an amount of tax which the transferor paid to t he Assessing
Officer in respect of dividend income on allocated shares, which
was distributed during the period between the date of the
exchange and the day of sale shall be adjusted from the day of
the tax payment until the day of sale, and shall be divided by the
number of allocated shares in respect of which the dividend was
distributed, and credit in its respect shall be giv en against the tax
due on the capital gain when the allocated shares a re sold;
(10) if bonus shares were allocated to the transfer or during the period

170
between the date of the exchange and the day of sale, then they
shall be treated like allocated shares;
(11) (a) if the transferor was an Israel resident o n the day of the
exchange of shares, then he shall be deemed to be a n
Israel resident also on the day of the sale;
(b) if the transferor was a foreign resident and se ction 89(b)
would have applied, if he had sold the shares on th e day of
the exchange of shares, then the allocated shares s hall be
deemed an asset located in Israel.
(d) If the conditions said in subsection (b) have b een complied with, then
the following provisions shall apply to the transfe rred shares held by the
merged company:
(1) a profit or loss created by the sale of the tra nsferred shares shall
not be allowed to be set off, in the tax year in wh ich the shares
were exchanged and during the following two years, against a
loss or profit in the merged company, all in accord ance with
sections 28 or 92, as the case may be, and during t he following
three years any profit or loss created by the sale of the
transferred shares shall not be allowed to be set o ff as aforesaid
against any profit or loss created by the sale of a ssets, the day of
acquisition of which was before the day of the exch ange of
shares; the periods said in this paragraph shall no t be included in
the restriction prescribed in section 92(b) in resp ect of the set-off
period;
(2) (a) the day of the exchange of shares shall be deemed the day
of acquisition of the transferred shares, and the m arket
value of the allocated shares at the time of the ex change of
shares, plus the additional consideration, if any, divided by
the number of shares transferred, shall be deemed t he
original cost of the transferred shares;
(b) Notwithstanding the provisions of subparagraph (a), if the
transferor and the merged company were associated
parties immediately before the exchange of shares, then
the Assessing Officer may prescribe –
(1) that the consideration, as said in subsection ( c)(2),
be the original cost of the transferred shares, and
that the day of sale of the allocated shares to the
transferor, as determined, be deemed the day of the ir
acquisition, even if the merged company sold the
transferred shares before the day of the sale;
(2) that – if the allocated shares were sold on sev eral
dates – the total consideration for the sale of all the
allocated shares shall be the original cost of the
transferred shares, and the last day of sale
determined for any of the allocated shares shall be
the day of acquisition of the transferred shares, e ven
if the merged company sold the transferred shares
before the said last day of sale.
(e) For the purposes of section 102(c), an exchange of shares shall not be
deemed a sale of the transferred shares; the Direct or may, in rules,
prescribe special provisions on the applicability o f some or all of the
provisions of this section, mutatis mutandis.
(f) The advance said in subsection (b)(1)(c) shall be adjusted from the
date of payment to the day of sale, and a tax credi t shall be allowed for

171
it in proportion to the number of allocated shares, which were sold by
the transferor.
(g) (1) The trustee shall give the Assessing Office r written notice when
the postponement period ends;
(2) at the time of the sale the trustee shall deduc t tax at the rate said
in section 91(a), (b) or (b1), as the case may be, from the
consideration, or at a lower rate, as the Assessing Officer shall
prescribe, and he shall transmit it to the Assessin g Officer within
seven days.
(h) If it turns out that particulars delivered to t he Assessing Officer were not
correct or are substantively incomplete, or if it t urns out that substantive
particulars specified in the application to the Dir ector do not comply with
the conditions prescribed in subsection (b)(1), the n the Assessing
Officer may – at his discretion – determine that th e consideration
calculated under this section or the market value o f the transferred
shares on the day of the exchange of shares – which ever is greater –
constitutes the consideration received by the trans feror for the
transferred shares; the Assessing Officer shall mak e the necessary
adjustments in respect of the original cost and the day of acquisition of
the transferred shares that are held by the merged company.

CHAPTER FOUR: SPLITS OF COMPANIES,
COOPERATIVE SOCIETIES AND NONPROFIT SOCIETIES

Definitions
105. In this Chapter –
“company ” – including a trust fund or a nonprofit society ( amuta)
incorporated in Israel under the Amutot (Nonprofit Societies) Law;
” adjusted reports ” – financial reports drawn up and adjusted in acco rdance
with statements by the Israel Institute of Certifie d Public Accountants and
audited by a certified public accountant or by an a udit union official, within its
meaning in section 131; ” holding company ” – a company, all assets of which are rights in
companies, or assets which under a statute cannot b e transferred, and which
has no income except income derived from the divide nd distributions or from
assets which under an statute cannot be transferred ;
” continuing split company ” – a split company which is not a holding
company, and from which not all its assets and obli gations were transferred.

Procedure of split
105A. A split may be carried out in one of the foll owing ways:
(1) the transfer of assets and obligations from the split company to a new
company, which was established for purposes of the split, and in which
the rights are held by the same owners as the right s in the split
company, each holding a part of the new company tha t is identical with
his part of the split company;
(2) the transfer of assets and obligations from the split company to a new
company, which was established for purposes of the split, and which is
wholly owned by the split company.

Tax exemption
105B. (a) The cancellation of shares in a split com pany or a reduction of its

172
capital in a split under section 105A(1), and the transfer of the split
company’s assets to the new company shall not be ch arged tax under
this Ordinance, under the Inflationary Adjustments Law or under the
Land Appreciation Tax Law, all if the requirements of this Chapter were
met.
(b) The sale of any asset, which is not charged Lan d Appreciation Tax
because of the provisions of subsection (a), shall be charged
acquisition tax at the rate of 0.5% of its value.

Conditions of entitlement
105C.(a) The benefits under this Chapter shall appl y to a split, if all the following
hold true:
(1) the company proposes to split for a business an d economic
purpose, improper tax avoidance or a reduction of t ax not being
among the main objectives of the split;
(2) most of the assets that remain in the split com pany and most of
the assets transferred to the new company as part o f the split are
not sold by either of them during two years after t he date of the
split, and during the said period use of them is ma de in the
course of the company’s business, in a manner custo mary under
the circumstances; for this purpose: ” assets” and “most of the
assets ” – within their meaning in section 103C(2), but it s rights in
the new company shall not be included in the calcul ation of the
split company’s assets in a split under section 105 A(2);
(3) the main economic activity, which the split com pany carried on
during the two years before the date of the split, is continued
during two years after the date of the split in the new company or
in the continuing split company;
(4) the new company and the continuing split compan y have
independent economic activities, the income from wh ich is liable
to tax under section 2(1), and which stems from the activity of the
split company, and if the split company is a nonpro fit or
cooperative society, then the activity of the nonpr ofit or
cooperative society is continued in it or in the ne w company, as
the case may be;
(5) the split company and the new company are one o f the following:
(a) an Israel resident incorporated in Israel under the
Companies Ordinance, the Companies Law, the
Cooperative Societies Ordinance or the Amutot Law;
(b) a company approved by the Director for this pur pose, which
is a foreign resident company or an Israel resident foreign
company, as defined in the Companies Ordinance or t he
Companies Law; aforesaid approval may be conditiona l on
the provision of guaranties and on other conditions , as the
Director may prescribe;
(6) (a) the value of the assets transferred from th e split company
to each of the new companies in the course of the s plit, or
those left in the continuing split company, shall n ot be less
than 10% of the value of the split company’s assets , all
according to the value specified in the returns adj usted as
of the date of the split; for this purpose – the ri ghts of the
split company in the new company shall not be inclu ded in
the calculation of the split company’s assets in a split under
section105A(2);

173
(b) immediately after a split under section 105A(1), the market
value of one new company shall not exceed the marke t
value of another new company more than four-fold, a nd if
the split company is a continuing split company, th en the
market value of each new company shall not exceed t he
market value of the split company more than four-fo ld and it
shall not be less than one fourth of the market val ue of the
split company;
(c) the Director may, on the company’s application and for
reasons that shall be recorded, prescribe that the split
company divide its assets otherwise than said in
subparagraphs (a) or (b), if it was proven to his s atisfaction
that their provisions are liable to have an adverse effect on
the objectives of the split, all on conditions that he may
prescribe;
(7) (a) In a split under section 105A(1) and in the case of a
continuing split company, the shareholders in each of the
new companies shall – immediately after the split a nd
during two years after its date – have the same rig hts that
they had in the split company and the same part of each of
the rights, all immediately after the date of the s plit;
(b) in a split under section 105A(2), the split com pany shall
hold – immediately after the split and during two y ears after
the date of the split – all the rights in the new c ompany;
(c) holders of rights that are traded on an exchang e shall not –
for purposes of subparagraph (a) – be included in t he count
of holders of rights, unless they were controlling members
on the date of the split; for this purpose: ” controlling
member ” – other than a benefit fund and a trust fund;
(8) notwithstanding the provisions of paragraph (7) , if one of the
following occurs it shall not be deemed a change in rights after
the split, on condition that – at no time during th e two years after
the date of the split – the rights of the persons w ho held the rights
immediately after the split drop to less than 50% o f each of the
rights in each of the new companies and in the spli t company, as
the case may be:
(a) one or more of the holders of rights sells vol untarily less
than 10% of any of the rights he holds, or he sells a greater
percentage with the agreement of the other sharehol ders,
on condition that all the rights sold by all holder s of rights
do not exceed 10% of all the rights in the company before
allocations to persons who did not hold rights in t he
company before the split;
(b) new rights are allocated to persons who did not hold rights
in the company before the allocation;
(c) shares defined in section 102 are offered to th e general
public on an Exchange by prospectus, which states t hat the
Exchange agreed to list the shares for trading on i t;
(d) repealed
(8a) notwithstanding the provisions of paragraph (7 ) and in addition to
the provisions of paragraph (8), an involuntary sal e of rights shall
not be deemed a change in the rights after the spli t;
(9) the date of the split shall be at the end of th e tax year;
(10) no cash payments or additional consideration o f any other kind

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passed between the holders of rights in the split company as part
of the split;
(11) during two years after the date of the split t here are no transfers
of cash or of assets, no provision of guaranties or other activity
between the new companies or between them and the s plit
company, as the case may be, except in the ordinary course of
business;
(12) after the split the value of assets exceeds th e value of obligations
in each of the new companies and in the split compa ny, as the
case may be, in accordance with adjusted reports as of the date
of the split;
(13) the plan for the split was approved by the Dir ector before the
split, as said in section 105H(b);
(14) if the new company or the split company is a r eal estate
association and if land was transferred to a new co mpany – if
construction of a building was completed on that tr ansferred land
within four years after the split according to cond itions to be set
by the Director;
(15) if the split company is a trust fund, then it may split only into trust
funds of the same category as the split company.
(b) The Minister of Finance may, with approval by t he Knesset Finance
Committee, prescribe additional conditions and rule s for implementation
of the split, and he may designate categories of sp lits that do not
require the Director’s approval, as said in subsect ion (a)(13).

Division of obligations and profits
105D. (a) The obligations of the split company shal l be divided among the new
companies, or between the continuing split company and a continuing
new company, as the case may be, according to the f ollowing rules:
(1) obligations that do not constitute equity under section 1A of
Schedule One to the Inflationary Adjustments Law, a nd which
can be related to a specific asset or a specific ac tivity, shall be
allocated to the company that holds that asset, but no obligation
shall be related to an asset if it exceeds of the v alue of that asset,
all according to adjusted reports as of the date of the split;
(2) the balance of obligations, which was not alloc ated as said in
paragraph (1), shall be allocated according to the ratio between
the value of assets in that company to the total va lue of assets in
the split company before the split, according to ad justed reports
as of the date of the split; for this purpose: ” value of assets” –
the value of assets, less obligations related as sa id in paragraph
(1), and less the value of rights which a split com pany holds in a
new company.
(b) The losses of a continuing split company under sections 28 and 92, as
the case may be, shall be divided among the new com panies or
between the continuing split company and the new co mpany in
proportion to the ratio of their equities (hereafte r: equity ratio), on
condition that losses under section 28(h) be in the company that holds
the asset from which the loss stems; for the purpos e of this section:
” equity ” – the amount by which the value of a company’s as sets, less
the value of rights which a split company holds in a new company,
exceeds the value of obligations allocated to the c ompany as said in
subsection (a), all according to reports adjusted a s of the date of the
split.

175
(c) Profits available for distribution, within their meaning in section 94B –
(1) shall be divided – in a split under section 1 05A(1) – between the
continuing split company and the new company or bet ween the
new companies, as the case may be, according to the equity
ratio;
(2) shall remain in the split company, in a split u nder section
105A(2);
(3) the Director shall make rules on their calculat ion.
(d) Repealed
(e) A deduction because of inflation, within the me aning of section 7 of the
Inflationary Adjustments Law, shall be divided acco rding to the equity
ratio, but an aforesaid deduction, which under sect ion 7(e) of the said
Law relates to a work unit, as defined in section 1 8(d), shall be in the
same company as the work unit.
(f) Notwithstanding the provisions of this Ordinanc e, if a split company
under section 105A(1) owns an approved enterprise, within its meaning
in the Investment Encouragement Law, and if at the time of the split the
company is able to distribute a dividend under sect ions 47(b)(2) or
51(c) of that Law, then that part of the dividend s hall be charged to tax,
which does not exceed the excess of assets transfer red to the new
company at the time of the split as said in the afo resaid sections, as the
case may be, as if it had been distributed.
(g) Obligations, contingent obligations, income, ex penses, deductions and
so forth, which did not appear in the reports of th e split company at the
time of the split and which stem from its activity before the split shall be
divided between the split company and the new compa ny or between
the new companies, as the case may be, according to the Director’s
instructions.

Setting off losses of a split company
105E.(a) A loss said in section 28, which a split c ompany suffered up to the date
of the split, which was transferred to each of the companies as said in
section 105D(b), and which may be carried forward t o future years, may
be set off against the income of the new company or of the split
company, as the case may be, beginning with the tax year after the
split, but in each tax year each company shall be a llowed to set off an
amount no greater than 20% of the total of the said loss, or 50% of
chargeable income of the company where it is, befor e the set off of that
loss, whichever is the smaller amount; in respect o f this subsection and
of subsection (c)(1): ” chargeable income” – before the deduction of
losses, but without income against which a loss was set off under
section 92.
(b) A loss said in section 92, incurred by a split company up to the date of
the split and transferred to one of the companies a s said in section
105D(b), and which can be carried forward to subseq uent years, may
be set off against a capital gain of the new compan y or of the split
company, as the case may be, beginning with the tax year after the
split, but in each tax year each company shall be a llowed to set off an
amount no greater than 20% of the total of the said loss, or 50% of
capital gain in that company before the set off of that loss, whichever is
the smaller amount; a period of five years after th e day of the split shall
not be taken into account for the time limit set in section 92 for setting
off an aforesaid loss.
(c) (1) If a loss or capital loss said in subsectio ns (a) or (b) cannot be set

176
off in that year because of the limitation of 50% of chargeable
income, then it may be set off successively in the following years,
on condition that no loss said in this paragraph be set off which,
together with the loss said in subsection (a), exce eds 50% of the
company’s income before the set off of losses from preceding
years.
(2) If a loss said in subsection (b) could not be s et off in that year
because of the limitation of 50% of capital gain, t hen it may be
set off successively in the following years, one af ter the other, on
condition that no loss said in this paragraph be se t off which,
together with the loss said in subsection (b), exce eds 50% of the
company’s capital gain before the set off of losses from
preceding years.
(d) A loss or capital loss, which could not be set off as said in subsections
(a) to (c) until the end of the fifth year after th e date of the split, may be
set off beginning with the sixth year, subject to t he provisions of
sections 28 and 92, as the case may be.
(e) Notwithstanding the provisions of subsection (a ), a loss sustained by a
split company before the split from renting a build ing may be set off
under the provisions of section 28(h).
(f) The Director may prescribe restrictions on the set off of a loss or of a
capital loss, if he is satisfied that the split wil l result in an improper
reduction of tax because of the set off; however, i f the split company
requested the Director’s advance certification, the n the Director must
inform it of his decision under this paragraph toge ther with his
notification of that certification; a decision unde r this paragraph may be
appealed, as if the Director had withdrawn a certif ication said in section
103J(g).
(g) If, at the time of the split, a split company a nd a new company assumed
a written obligation before the Director that their ownership will not
change within two years after the day of the split, then they shall not be
restricted under this section in setting off losses ; an undertaking said in
this subsection shall constitute a condition for th e split, and its violation
shall be deemed a violation of one of the condition s specified in section
105C.
(h) In this section, ” capital gain” – including land appreciation.

Asset transferred in a split
105F. (a) W hen an asset has been transferred in a s plit, then its original cost, the
balance of its original cost, its cost of acquisiti on and its date of
acquisition, each as the case may be, shall be for purposes of this
Ordinance, of the Inflationary Adjustments Law and of the Land
Appreciation Tax Law, as they would have been in th e split company if
the asset had not been transferred, and the new com pany shall be
allowed, at its sale, the deductions that would hav e been allowed the
split company if it had sold the asset; in respect of an aforesaid asset,
which constitutes stock, its cost shall be the amou nt set as final stock
for purposes of the split company’s assessment on t he date of the split.
(b) The transfer of an asset in a split shall be de emed a sale for purposes
of the number of periods under section 21A of the I ndustry
Encouragement Law.

Profit from the sale of shares
105G W hen a person sells a share in a new company w hich was allocated to him at

177
the split (hereafter: the new share) or in a split company, and if rights in the
split company and in the new company were not liste d on an Exchange for
trading on the day of the split, then the following provisions shall apply:
(1) in a split under section 105A(1), the original cost of the shares of the
new company shall be the proportional part of the o riginal cost of the
shares of the split company, according to the equit y ratio said in section
105D(b), adjusted at the rate of index increase fro m the day of
acquisition of the shares in the split company unti l the date of the split,
less any real loss that would have been incurred, i f the proportional part
of the shares had been sold on the date of the spli t, on condition that it
is not less than the proportional part of the origi nal cost of the shares in
the split company (hereafter: the adjusted cost); t he differential between
the original cost of the proportional part of the s hares in the split
company and the aforesaid adjusted cost is hereafte r called the
“adjustment differential”; the original cost of the shares of the split
company shall be reduced in accordance with the equ ity ratio said in
section 105D(b); for this purpose: ” real loss” – the amount by which a
share’s market value is lower than its adjusted ori ginal cost;
(2) in a split under section 105A(2), the original cost of the shares in the
new company shall be set according to the excess of assets transferred
to it, less any real loss that would have been incu rred, if the assets and
obligations had been sold together on the date of t he split (hereafter:
the adjusted cost); for this purpose: ” adjustment differential ” – the differential between the balance of the
original cost of the transferred assets and the adj usted balance of their
original cost; ” excess of assets ” – the excess of the balance of the adjusted origi nal
cost of assets over obligations, according to the a djusted reports as of
the day of the split; ” real loss ” – the amount by which the market value of assets and
obligations, which are transferred together, is sma ller than their
adjusted original cost, less the obligations;
(3) an adjustment differential said in paragraphs ( 1) and (2), which
constitutes part of the original cost of the sold s hares, shall be added to
the consideration from the sale of the shares, as t he case may be, and
it shall be deemed an additional inflationary amoun t;
(4) the date of the split shall be deemed the date of acquisition of the
shares in the new company, but for the calculation of the real capital
gain until the determining date, the day on which t he shares of the split
company were acquired shall be deemed the day of ac quisition of the
shares of the new company;
(5) in a split under section 105A(1), if the shareh older was a foreign
resident at the time of the split, and if at the sa le of the shares of the
new company he requests that the exchange rate at w hich he acquired
the shares of the split company be deemed the index for calculation of
the adjusted price, then the adjustment differentia l shall be exempt of
tax.

Miscellaneous provisions
105H.(a) The provisions of sections 103G, 103I to 1 03L and 103N to 103S shall
apply, mutatis mutandis, as the case may be, to a s plit and for this
purpose, wherever there it says –
(1) “merger”, read “split”;
(2) “date of merger”, read “date of split”;

178
(3) “transferor company”, read “split company”;
(4) “merged company”, read “new company”;
(b) Notwithstanding the provisions of section 103I , the benefits said in
section 105B shall not be given if the Director’s a pproval was not
obtained before the split; if the Director determin ed that a split does not
comply with the conditions in this Chapter, then hi s decision may be
appealed as if it were an Order under section 152.
(c) W hen a company has split, then – if it is not a holding company – the
provisions of section 130A shall apply to it and to the new companies
after the split, if that section applied to the spl it company before the
split.

Split to an existing company
105I. The Director may make rules, according to wh ich the transfer of assets,
obligations and capital from a split company to a c ompany that is not a new
company set up for that purpose, or the merger of a split company or of a new
company after the split, shall be exempt of tax as said in this Part, on
condition that the conditions specified in Chapter Two and in Chapter Four of
this Part apply, mutatis mutandis.
Authorization on structural changes in real estate associations
105J. The Minister of Finance may, with approval by the Knesset Finance
Committee, make regulations on the matters of secti ons 103M, 104A(b) and
(b1), 104B(a)(4), 104H and 105C(a)(14), and he may make the exemption
under them subject to conditions, including the cha nge of periods and
conditions prescribed in the said sections, and he may also prescribe
circumstances under which the provisions of the sai d sections shall not apply.

PART FIVE “C” (Sections 105K to 105S2): Repealed
PART SIX: CHARGEABILITY TO TAX
THROUGH A REPRESENTATIVE

Trustees, etc., of legal incompetents
106. A liquidator or a receiver appointed by the Co urt or under any statute that is in
effect in Israel, as well as a trustee, guardian of a person or property, or a
committee that has the direction, control or manage ment of any property or
enterprise on behalf of a legal incompetent shall b e chargeable to tax in the
manner and amount, in which that person would be ch argeable, were he not
a legal incompetent.

107. Repealed
Foreign resident with an agent in Israel
108. A foreign resident, whether an Israel citizen or not, shall be assessable and
chargeable through his trustee, guardian or committ ee, or in the name of his
attorney, factor, agent, receiver, branch or manage r, whether they receive the
income or not, all in the manner and in the amount in which that foreign
resident would be assessed and charged, if he were an Israel resident and if
that income were received by him.

Income of foreign resident from power of attorney, etc.

179
109. A foreign resident shall be assessable and chargeable in respect of any
income that arises, directly or indirectly, from an y power of attorney, agency,
authorization, receivership, branch or management, or through any of those,
and he shall be assessable and chargeable through t he attorney, factor,
agent, receiver, branch or manager, all as the case may be.

Ship’s master
110. The master of any ship owned or chartered by a foreign resident chargeable
under the provisions of sections 71 to 74, shall be deemed the agent of that
foreign resident for purposes of this Ordinance, wi thout excluding any other
agent of that foreign resident.

Business with a foreign resident
111. If a foreign resident carries on business with a resident, and it appears to the
Assessing Officer that, because of the close connec tion between them and
because of the substantial control exercised by the foreign resident over the
resident, the course of business between those pers ons may be arranged –
and that it is arranged – so that the business done by the resident in pursuit
of his connection with the foreign resident produce s no profit for him or less
than the ordinary profit that is to be expected fro m that business, then the
foreign resident shall be assessable and chargeable to tax through the
resident, as if the resident were his agent.

Procedure when the amount of a foreign resident’s i ncome cannot
be ascertained
112. (a) If the Assessing Officer finds that the tr ue amount of earnings or profits
of any foreign resident, which are chargeable throu gh a resident,
cannot be readily ascertained, then he may assess a nd charge the
foreign resident a fair and reasonable percentage o f the turnover of the
business done by the foreign resident through or wi th the said resident;
when the Assessing Officer has done so, the provisi ons of this
Ordinance on the delivery of returns or particulars by persons who act
on behalf of others shall apply to this case, oblig ating the resident to
deliver returns or particulars of the said business in the manner in
which persons who act on behalf of legal incompeten ts or foreign
residents must deliver returns or particulars about chargeable income.
(b) The said percentage shall in each case be deter mined by the
Assessing Officer while taking the nature of the bu siness into account,
and when it has been determined, it may be appealed , as provided in
sections 153 to 158.

Transactions between foreign residents
113. If a foreign resident executes sales or carrie s out transactions with other
foreign residents in circumstances which would make him chargeable through
a resident in pursuance of sections 110 and 111, th at fact alone shall not
make him chargeable in respect of gains or profits arising from the said sales
or transactions.

Assessment of a foreign resident’s income from the sale of foreign products
114. If a foreign resident is charged to tax throug h any attorney, agent, licensee,
receiver, branch or manager, in respect of earnings or profits derived from the
sale of goods or products manufactured or produced abroad by that foreign
resident, then the person through whom the foreign resident was so charged
may apply to the Assessing Officer to have the tax assessment in respect of

180
those earnings or profits made or amended on the basis of the profits which
might reasonably be expected to have been earned by a merchant or retailer
who buys directly, as aforesaid, from the manufactu rer or producer, if the
goods or products were sold or retailed by them or on their behalf, and after
he proves, to the Assessing Officer’s satisfaction, the amount of those profits,
the assessment shall be made or amended accordingly .

Foreign resident not to be assessed through an agen t who is not
his authorized agent
115. None of the provisions of sections 108 to 114 shall render a foreign resident
chargeable through a broker or general commission a gent or other agent, in
respect of earnings or profits that arise from a sa le or transaction carried out
by them, if those are not authorized agents who reg ularly carry on the foreign
resident’s agency, or if they are not authorized ag ents in accordance with
sections 110 to 112.

Acts that must be performed by trustees, etc.
116. If a person is assessable and chargeable in re spect of a legal incompetent, or
if a foreign resident is chargeable in his name, th en he shall be responsible
for all matters required to be done under this Ordi nance for the assessment
of the income of the person for whom he acts, and f or the payment of the tax
payable on it.

Manager of a body of persons
117. The manager or other principal officer of an i ncorporated body of persons
shall be responsible for the performance of all act s and things, performance
of which is required under this Ordinance for the a ssessment of that body of
persons and for payment of the tax.

Records that must be prepared by a representative o r agent
118. If a person in whatever capacity receives anyt hing in cash or in kind, which is
income derived from any of the sources enumerated i n this Ordinance and
which belongs to a person chargeable in respect of that income, or who
would be so chargeable if he were an Israel residen t and not a legal
incompetent, then he shall, whenever the Assessing Officer requires him to
do so by a notice and within the time stated in tha t notice, prepare and deliver
a record signed by him, containing a true and corre ct statement of all
aforesaid income and the name and address of every person to whom the
income belongs; the provisions of this Ordinance, w hich concern the failure to
deliver records or particulars in accordance with a notice from the Assessing
Officer, shall apply to the said record.

Indemnification of representative
119. A person responsible under this Ordinance for the payment of tax for another
person may retain, out of the money that comes into his possession for that
person, an amount sufficient to pay the said tax, a nd he is thereby
indemnified against any person whatsoever for all p ayments made by him in
pursuance and by virtue of this Ordinance.

Tax collection under special circumstances
119A. (a) (1) If a body of persons had a tax debt a nd is wound up or transfers
its assets for no consideration or for partial cons ideration without
being left with the means in Israel to pay the said debt, then the
body’s tax debt may be collected from whoever recei ved the

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assets under the said circumstances.
(2) If a body of persons has a final tax debt and i t transfers its activity
to another body of persons, which directly or indir ectly has the
same controlling members or their relatives (in thi s paragraph:
the other body) for no consideration or for partial consideration,
without being left means in Israel to pay the said debt, then the
body’s tax debt may be collected from the other bod y.
(3) W ithout derogating from the provisions of parag raphs (1) and (2),
if a body of persons had a final tax debt and was l iquidated or
terminated its activity without paying the said tax debt, then the
assets which the body had are deemed to have been t ransferred
to its controlling members for no consideration and the tax debt
may be collected from them, unless different facts are proven to
the Assessing Officer’s satisfaction.
(b) If an individual had a final tax debt for any t ax year, and if he transferred
his assets without consideration or for partial con sideration to a relative
or to a company in which he is a controlling member , without being left
with means in Israel to pay the said debt, then the debt he owes may be
collected from whoever received the assets under th e said
circumstances, as long as three years have not pass ed since the end
of the tax year in which the tax debt became final or in which the assets
were transferred, whichever was later.
(c) No more shall be collected from whoever receive d the assets or
activities under subsections (a) or (b), than the v alue of the assets or
activities he received for no consideration, or no more than the
difference between the partial consideration he pai d and the value of
the assets or activities, and if he paid tax in con nection with the transfer
of the said assets or activities, then no less than the said value or
difference, less the amount of tax paid.
(c1) If the manager of a body of persons, who is a controlling member of
that body, was convicted of not transmitting tax de ducted under
sections 219 or 224A, and if it is no longer possib le to appeal against
his conviction, or if he paid monetary composition because of offenses
under those sections, then the tax deducted as afor esaid and not
transmitted to the Assessing Officer may be collect ed from him.
(c2) If a body of persons was assessed because of o ne of the acts specified
in section 220 and the body’s appeal against the as sessment was
rejected by the Court in a judgment that no longer is subject to appeal
or against which no appeal was lodged with the Cour t, then the tax debt
not paid by the body may also be collected from a p erson who held a
position in that body when the said act was committ ed, if the Assessing
Officer has a priori evidence that the act was comm itted with the
knowledge of the holder of that position, unless th e holder of that
position proves that he took all reasonable steps t o ascertain that the
act be prevented.
(d) In this section –
“tax debt ” – within its meaning in section 195A, other than a debt of
advances; ” final tax debt ” – a debt in respect of which there no longer is a ny right
of objection, contestation or appeal; ” relative ” – as defined in section 88;
” controlling member ” – any person who, alone or together with his
relative, holds at least 25% of one of the rights e numerated in the
definition of “controlling member” in section 32(9) (a);

182
“holder of a position ” – an active manager, partner or controlling
member.
(e) The Taxes (Collection) Ordinance applies to the collection of amounts
under this section.
(f) A decision to collect a tax debt under this sec tion may be contested
before the Director within 21 days after the day on which notification
thereof was served; a decision by the Director unde r this subsection
may be appealed before the District Court within th irty days after the
decision was served.

Assessing the income of a deceased person
120. (a) If a person died during the tax year and i f that person, had he not died,
would have been chargeable to tax for that tax year , or if a person died
within three years after the end of a tax year and no assessment had
been made for him for that year, then his legal per sonal representative
shall be liable for the tax with which that person would have been
chargeable if he were alive, and he shall pay it an d shall also be
responsible for the performance of all those acts a nd things for which
that person would have been responsible under this Ordinance, if he
were alive.
(b) From the day of a person’s death, the chargeabl e income of his estate
shall be deemed income of the heirs, in accordance with their shares in
the income of the estate.
(c) If all or some of the heirs or their parts in t he income of the estate are
not known, then the personal legal representative o f the deceased shall
pay, out of the estate, tax at the rate of 40% on a ccount of the tax due
from the heirs on the income of the estate.
(d) The provisions of sections 174 to 181 shall app ly, mutatis mutandis, to
payments on account of tax under subsection (c).
(e) After the income of the estate has been distrib uted and included in the
income of each heir, the tax paid as aforesaid by t he personal legal
representative shall be set off against the tax on the income of the
heirs, according to the respective part of each in the income of the
estate.
(f) For purposes of this section: ” personal legal representative” includes
an heir, estate manager, executor of the deceased p erson’s will and
every person who may – under a statute or under a C ourt decision –
deal with the assets of the estate.

PART SIX “A”: LINKAGE OF INCOME CEILINGS, CREDIT
POINTS, PENSION POINTS AND SOCIAL CONCESSIONS

Definitions
120A. In this Part –
“social concessions ” – the amount specified in section 9(5), the amoun ts of
exemption of a retirement grant or death grant unde r section 9(7a), the
amount stated in section 9(16a), (16b) and (18a), t he amount exempt under
section 9(20), an entitling pension within its mean ing in section 9A(a), the
amount exempt under section 9A(b), the amount state d in section 9A(c), the
amount stated in section 17(5a), the amount stated in section 32(9), the
amount stated in section 44(a)(1) as the ceiling of the amounts in respect of

183
which credit is to be allowed, the amounts stated in section 45A, the amounts
stated in section 47, the amount stated in section 57(b)(1), the amount stated
in section 58A(c), the amount stated in section 66( e)(2) and the amounts
stated in section 125D; ” income ceilings ” – the amounts of income for the purpose of determ ining
tax rates under section 121, and for the purpose of the rates of credits under
section 121A.

Linkage
120B. (a) On January 1 of every tax year income cei lings, the amounts of credit
points and of pension points, as well as social con cessions (all these
hereafter in this section: “the amounts”), as they were on January 1 of
the preceding tax year, shall be adjusted at the ra te of the index
increase during the preceding tax year. (Amendment No. 136 provides
that – as long as the index does not rise by more t han 5% over the
index known on January 1, 2004 – the words : “the amounts of credit
points and of” in this section should not be read in tax years 200 5 to
2008 – Tr.).
(b) If an agreement between the Coordination Office of the Economic
Organizations and the General Federation of Labor i n Israel determined
that a cost of living bonus be paid to wage earners in the economy, in
respect of work performed in a certain month and th ereafter, then the
amounts of pension points as of January 1 of that t ax year shall be
adjusted in that month at the rate of the index inc rease from the
beginning of the tax year until the end of the said month.
(c) Repealed
(d) The Minister of Finance may make rules for roun ding off amounts
adjusted under this section.

PART SEVEN: TAX RATES

Tax rates for individuals
121. (a) The tax on the chargeable income of an ind ividual in the tax year shall
be as follows:
(1) on each new shekel of the first NS 192,000 – 30 %;
(2) on each new shekel from NS 192,001 to NS 413,40 0 – 32%;
(3) on each additional new shekel – 44%.
(b) (1) Notwithstanding the provisions of subsectio n (a)(1) and subject to
the provisions of paragraph (2), the following rate s shall apply in
the tax year to chargeable income from personal exe rtion or to
the chargeable income of an individual who has reac hed age 60:
(a) on each new shekel of the first NS 50,040 – 10% ;
(b) on each new shekel from NS 50,041 to NS 89,040 – 14%;
(c) on each new shekel from NS 89,041 to NS 133,680 – 21%;
(d) on each new shekel from NS 133,681 to NS 192,00 0 –
28%.
(2) The reduced rates prescribed in paragraph (1) s hall not apply to
income, in respect of which account books must be k ept, if in its
respect acceptable books were not kept.
————————————————— ————————————————————–
NOTE: The tax brackets stated in section 121 above will a pply in tax year 2010 and

184
thereafter. Until then different tax brackets are in effect, as provided by Section 76 of
Amendment No. 147, which was again amended in Amend ment No. 160
Below we state the amounts, as they originally appe ared in Amendment No. 147 and
as changed in Amendment No. 160. In respect of tax years 2006 and 2007, those
amounts are also shown in parentheses, after they w ere adjusted for changes in the
index, as shown in Karan A. In respect of tax years 2008 and 2009 those index
driven changes are, of course, not yet known. – Tr.

Income Tax Ordinance – Ad Hoc Provisions for tax ye ars 2006 to 2009
in respect of section 121
76. (a) In respect of tax year 2006, section 121 of the Ordinance shall be read
as follows:

“Tax rates for individuals for tax year 2006
121. (a) In tax year 2006, the tax on the chargeabl e income of an individual
shall be as follows:
(1) on each new shekel of the first NS 133,680 (NS 137,280) – 30%;

(2) on each new shekel from NS 133,681 (NS 137,281) to NS
238,680 (NS 245,040) – 36%;
(3) on each new shekel from NS 238,681 (NS 245,041) to NS
413,400 (NS 424,440) – 37%;
(4) on each additional new shekel – 49%.
(b) (1) Notwithstanding the provisions of subsectio n (a)(1) and subject to
the provisions of paragraph (2), the following rate s shall apply in
the tax year to chargeable income from personal exe rtion or in
respect of the chargeable income of an individual w ho has
reached age 60:
(a) on each new shekel of the first NS 50,040 (NS 5 1,360) –
10%;
(b) on each new shekel from NS 50,041 (NS 51,362) t o NS
89,040 (NS 91,440) – 22%;
(c) on each new shekel from NS 89,041 (NS 91,441) t o NS
133,680 (NS 137,280) – 29%.
(2) The reduced rates prescribed in paragraph (1) shall not apply to
income, in respect of which account books must be k ept and in
its respect acceptable books were not kept. ”

(b) In respect of tax year 2007, section 121 of th e Ordinance shall be read
as follows:

“Tax rates for individuals
121. (a) In tax year 2007 the tax on the chargeable income of an individual shall
be as follows: (1) on each new shekel of the first NS 133,680 (NS 136,920) –
30%;
(2) on each new shekel from NS 133,681 (NS 136,921) to NS
192,000 (NS 196,560) – 35%;
(3) on each new shekel from NS 192,001 (NS 196,561) to NS
413,400 (NS 423,240) – 36%;
(4) on each additional new shekel – 48%.
(b) (1) Notwithstanding the provisions of subsectio n (a)(1), the following
rates shall apply in the tax year to chargeable inc ome from
personal exertion or in respect of the chargeable i ncome of an

185
individual who has reached age 60:
(a) on each new shekel of the first NS 50,040 (NS 5 1,240) –
10%;
(b) on each new shekel from NS 50,041 (NS 51,241) t o NS
89,040 (NS 91,200) – 21%;
(c) on each new shekel from NS 89,041 (NS 91,201) t o NS
133,680 (NS 136,920)– 29%;
(2) The reduced rates prescribed in paragraph (1) shall not apply to
income, in respect of which account books must be k ept and in
its respect acceptable books were not kept. ”

(c) In respect of tax year 2008, section 121 shall be read as . . . follows:

“Tax rates for individuals
121. (a) In tax year 2008 the tax on the chargeable income of an individual shall
be as follows: (1) on each new shekel of the first NS 140,640 – 30 %;

(2) on each new shekel from NS 140’641 to NS 202,08 0 –
33%;
(3) on each new shekel from NS 202,081 to NS 435,12 0 –
35%;
(4) on each additional new shekel – 47%.
(b) (1) Notwithstanding the provisions of subsectio n (a)(1), the following
rates shall apply in the tax year to chargeable inc ome from
personal exertion or in respect of the chargeable i ncome of an
individual who has reached age 60:
(a) on each new shekel of the first NS 52,680 – 10% ;
(b) on each new shekel from NS 52,681 to NS 93,720 – 16%;
(c) on each new shekel from NS 93,721 to NS 140,640 – 26%;
(2) The reduced rates prescribed in paragraph (1) shall not apply to
income, in respect of which account books must be k ept and in
its respect acceptable books were not kept. ”

(d) In respect of tax year 2009, section 121 shall be read . . . .as follows:
“Tax rates for individuals
121. (a) In tax year 2009 the tax on the chargeable income of an individual shall
be as follows: (1) on each new shekel of the first NS 133,680 – 30 %;
(2) on each new shekel from NS 133,681 to NS 192,00 0 –
32%;
(3) on each new shekel from NS 192,001 to NS 413,40 0 –
34%;
(4) on each additional new shekel – 46%.
(b) (1) Notwithstanding the provisions of subsectio n (a)(1), the following
rates shall apply in the tax year to chargeable inc ome from
personal exertion or in respect of the chargeable i ncome of an
individual who has reached age 60:
(a) on each new shekel of the first NS 50,040 – 10% ;
(b) on each new shekel from NS 50,041 to NS 89,040 – 15%;
(c) on each new shekel from NS 89,041 to NS 133,680 – 23%;
(d) on each new shekel from NS 133,681 to NS 192,00 0 –
30%.
(2) The reduced rates prescribed in paragraph (1) shall not apply to

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income, in respect of which account books must be kept and in
its respect acceptable books were not kept.
————————————————— —————————————————————

121A. Repealed
Rental of dwelling unit
122. (a) If, during the tax year, an individual had income from the rental of a unit
used for residential purposes in Israel (hereafter in this section: rental
income), he may pay on it tax at the rate of 10% th ereof, instead of the
tax on it to which he is liable under section 121, if the rental income is
not income from business as said in section 2(1).
(a1) Tax said in subsection (a) shall be paid with in 30days after the end of
the tax year in which the individual had rental inc ome, unless the
individual paid advances under section 175 in that tax year.
(b) repealed
(c) Notwithstanding the provisions of any statute, an individual who elected
to pay tax as said in subsection (a) shall not be e ntitled to deduct
depreciation or any other deduction in respect of t he dwelling, or
expenses incurred in the creation of the rental inc ome, and he shall not
be entitled to any set off, credit or exemption on rental income or from
the tax on it; however, for the purpose of calculat ing Land Appreciation
Tax on the sale of the dwelling the maximum amount of depreciation or
deduction which could have been deducted under any statute for the
period in which the individual paid tax as said in subsection (a), if not
for this section, shall be added to the sale price.
(d) Repealed
(e) Repealed

Rental income from abroad
122A. (a) If an individual had rental income in the tax year from the rental of real
estate abroad, then he may pay on it tax at the rat e of 15%, instead of
the tax to which he is liable under section 121, if the income is not
income from business as said in section 2(1).
(b) If an individual elected to pay tax as said in subsection (a), then he is
not entitled to subtract from the rental income exp enses incurred in
producing the income, except for depreciation, and he also is not
entitled to any set off, credit or exemption from t he rental income or
from the tax due on it, including a credit said in Part Ten, Chapter
Three.
(c) For the purposes of this section, ” real estate” includes a part thereof.

123. Repealed
Rate of tax on key money and premiums
124. Notwithstanding the provisions of sections 12 1, 126 and 127, the tax on
income from key money or premiums derived from hous e property shall not
exceed 35%, if the assessee paid tax on that income at the said rate to the
Assessing Officer within 30 days after its receipt, or – if the assessee reports
his income on an accrual basis – within the period prescribed in section 132
for filing the return or within 30 days after its r eceipt, whichever is earlier.

Tax rate on the sale of rights to which the Tenant Protection Law applies
124A. (a) in this section –

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“determining day ” – November 7, 2001;
” determining period ” – the period from the determining day to the end
of tax year 2003.
(b) Notwithstanding the provisions of section 121, if on the determining day
a tenant holds an asset to which the Tenant Protect ion Law applies,
and if during the determining period he sells all h is rights in the asset to
the holder of rights in that asset, then he shall b e liable to tax on the
real capital gain at rates that shall not exceed th e following:
(1) if the sale took place between the determining date and the end
of tax year 2002 – 15%;
(2) if the sale took place in tax year 2003 – 20%;
on condition that – after the sale – the Tenant Pro tection Law ceased to
apply to that asset.

Tax rate on income from gambling, lotteries or priz es
124B. Notwithstanding the provisions of section 121 , the tax rate on income from
gambling, lotteries or prize winning activity under section 2A shall be 25%,
with no entitlement to any exemption, reduction, de duction, credit or set off
whatsoever, except for an exemption under section 9 (28) or a deduction
under section 17(11).

Tax rate on sale of patent, etc.
125. Notwithstanding the provisions of section 121, the taxes on income received
by an inventor from the sale of a patent or design, or by an author from the
sale of a copyright, the invention or work not bein g within the scope of his
regular occupation, shall not exceed 40%.

Tax on income after death
125A. Notwithstanding the provisions of section 121 , the tax rate on a person’s
income to which section 3(f) applies, or on a perso n’s work income received
after his death, shall not exceed 40%; for this pur pose: “work income ” –
including part of a grant received in consequence o f death, which is not
exempt under section 9(7a).

Tax rate on dividends
125B. Notwithstanding the provisions of section 121 and 126, the tax rate on income
from dividends shall be as follows:
(1) dividends received by an individual – 20%;
(2) notwithstanding the provisions of paragraph (1) , dividends received by
an individual who – at the time he received the div idend or at any time
during the preceding twelve months – was a substant ive shareholder,
as defined in section 88, in the body of person tha t paid the dividend –
25%;
(3) dividends received by a family company – 20%; h owever, if the
assessee, within its meaning in section 64A, is dir ectly or indirectly a
substantive shareholder in the body of persons that paid the dividend –
25%;
(4) dividends that are not tax exempt and were rece ived by a public
institution or a benefit fund, as defined section 9 (2) – 20%;
(5) dividends received by a foreign resident body o f persons – 20%; but if–
at the time it received the dividend or at any time during the preceding
twelve months – the body of persons was a substanti ve shareholder, as
defined in section 88 – 25%.

188
Tax rate and tax exemption on an individual’s profits from a trust fund
125B1. (a) Profits distributed by the manager of a chargeable trust fund to an
individual unit holder, for whom the income does no t constitute income
from business or vocation, are exempt of tax.
(b) Profits distributed by the manager of an exemp t trust fund to an
individual unit holder, for whom the income does no t constitute income
from business or vocation, are liable to tax at the rate of 20%.
(c) Every term in this section shall have the mean ing it has in Part Five.

Tax rate on income from interest and discount
125C. (a) In this section –
” substantive shareholder ” – as defined in section 88;
” index ” – the Consumer Price Index, as last published on behalf of the
Central Bureau of Statistics before the day in case , and in respect of an
asset, the value of which is linked to a foreign cu rrency or that is
denominated in a foreign currency – the currency ex change rate;
” interest” includes discount.
(b) An individual is chargeable to tax on income fr om interest at a rate that
shall not exceed 20%, and this income shall be deem ed the highest
bracket of his chargeable income.
(c) (1) Notwithstanding the provisions of subsectio n (b), if the interest
was paid on an asset that is not index linked, or i f it is partly
linked to the increase of all or part of the index, or is not index
linked up to the redemption or repayment, then the individual’s
income from interest shall be charged tax at the ra te of 15%.
(2) The Minister of Finance may, by Order, change t he interest rate
stated in paragraph (1) in accordance with changes in the index.
(d) Notwithstanding the provisions of subsections ( b) and (c), an individual
is liable to tax on income from interest at the rat es prescribed in section
121, if one of the following holds true for him:
(1) the interest is income under section 2(1) or is entered in his
account books or should be entered as aforesaid;
(2) the individual claimed interest and linkage dif ferential expenses in
respect of the asset, on which the interest is paid ;
(3) the individual is a substantive shareholder in the body of persons
that paid the interest;
(4) the individual is employed by the body of perso ns that paid the
interest, or provides services to it or sells produ cts to it, or he has
some other special relationship with it, unless it was proved to the
Assessing Officer’s satisfaction that the interest rate was set in
good faith and without being affected by the said s pecial
relationship between the individual and the body of persons;
(5) the interest was paid by a training fund before the periods said in
section 9(16a) or (16b) passed, or it was paid by a savings
benefit fund and the provisions of section 3(d) app lied to it;
(6) some other condition prevails, which the Minist er of Finance
prescribed with approval by the Knesset Finance Com mittee.
(e) The provisions of this section shall not apply to money paid by a benefit
fund that is not a savings benefit fund or is not a training fund, and they
shall also not apply to money paid by a savings ben efit fund that is
charged tax under the provisions of section 87.

189

Deduction from interest
125D. (a) In this section –
“determining date ” – January 1, 2003;
” benefit ceiling ” – the amount of NS 53,280 per year (in 2008; in 2007:
NS 51,840; in 2006: NS 52,08; in 2005: 50,640 – Tr. );
” interest ” – interest payable on a deposit with a banking co rporation or
on a savings program;
(b) If the income of an individual and the income o f his spouse in a tax year
did not exceed the benefit ceiling, then he is enti tled to a deduction of
NS 8,280 (in 2008; in 2006 and 2007: NS 8,160; in 2005: NS 7 ,920 –
Tr.) ; (in this section: the permitted deduction) from h is chargeable
interest income, but not more than his total intere st income; however, if
his and his spouse’s income in the tax year exceede d the benefit
ceiling, then he shall be entitled to an adjusted d eduction; for this
purpose: ” adjusted deduction ” – the permitted deduction, after it was
reduced by the amount by which the income of the in dividual and of his
spouse exceeded the benefit ceiling.
(c) (1) If in a tax year an individual or his spous e had reached the
mandatory retirement age, within its meaning in the Retirement
Age Law 5764-2004 (in this subsection: mandatory re tirement
age) and if one of them had reached age 55 by the d etermining
date, then he is entitled to a deduction of NS 8,16 0 (in 2008; in
2006 and 2007: NS 8,040; in 2005: NS 7,800 – Tr.) f rom his
interest income, but not more than his total intere st income;
(2) if in a tax year an individual and his spouse h ad reached the
mandatory retirement age and if they had reached ag e 55 by the
determining date, then – instead of the deduction s aid in
paragraph (1) – he is entitled to a deduction of NS 12,360 (in
2008; in 2006 and 2007: NS 12,000; in 2005: NS 11,7 00 – Tr.)
from his interest income, but not more than his tot al interest
income;

Benefited interest
125E. (a) In this section –
“entitling interest ” – the lesser of the following amounts:
(1) the interest income of an individual and his sp ouse, as defined in
section 125D(a) (in this section: interest);
(2) interest income in the amount of the differenti al between the
amount stated in the definition of “entitling pensi on” in section 9A
multiplied by twelve, and the chargeable income of the individual
or of his spouse, whichever is greater; for this pu rpose:
” chargeable income ” – including income exempt under sections
9A and 9B, and exclusive of income from interest, i ncome from
the tax exempt rental of a dwelling unit, capital g ains and land
appreciation, as defined in the Real Estate Taxatio n Law.
(b) 35% of the entitling interest is tax exempt for the following:
(1) an individual who has reached the retirement ag e;
(2) an individual, if he or his spouse has reached the retirement age;
and all if they have reached age 55 by the determin ing date.

Restriction
125F. Deductions under section 125D and tax exempti ons under section 125E shall
be allowed for only one of the spouses.

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Companies tax
126. (a) The chargeable income of a body of person s shall be charged with a
tax called “companies tax”, at the rate of 25%.
————————————————— —————————————————————
Note: Section 77(a) of Amendment 147 provides as follows:
77. (a) In respect of tax years 2006 to 2009 sectio n 126(a) of the Ordinance . .
. . shall be read as if, instead of “25%”, the foll owing rates were
prescribed:
(1) for tax year 2006 – 31%;
(2) for tax year 2007 – 29%;
(3) for tax year 2008 – 27%;
(4) for tax year 2009 – 26%.
(b) The Minister of Finance may, with approval by the Government and the
Knesset Finance Committee, prescribe that in a tax year said in
subsection (a) the tax rate prescribed in section 1 26(a) apply to one of
the following years, on conditions and with adjustm ents that he shall
prescribe. – Tr.
————————————————— —————————————————————
(b) In calculating the chargeable income under sub section (a), income from
a distribution of profits or from dividends that st em from income
produced or accrued in Israel, received directly or indirectly from
another body of persons that is liable to companies tax, shall not be
included, and income for which a special tax rate h as been set also
shall not be included.
(c) Notwithstanding the provisions of subsection (a ), companies tax at the
rate of 25% shall be imposed on the chargeable inco me of a body of
persons from dividends that stem from income produc ed or accrued
abroad and also from dividends that originated abro ad; however, if at
the assessee company’s request or on the basis of a n agreement for
the prevention of double taxation the foreign taxes imposed on those
dividends and on the income out of which the divide nds were
distributed are to be taken into account, then the income from the
dividend shall be taken in the amount of the grosse d up dividend and
on it companies tax shall be imposed at the rate pr escribed in
subsection (a); in this section –
” grossed up dividend ” – the amount of dividend income, with the
addition of tax paid on the income, out of which th e dividend was
distributed; ” assessee company ” – a company that received dividends from
another company in which it holds 25% or more of th e means of control
(hereafter in this section: the other company); ” income out of which the dividend was distributed ” – including
income that stems from a company that is at least 5 0% held directly by
the other company; ” means of control ” – as defined in section 88.
(d) In calculating the tax that applies under subse ction (c), credit shall be
given in the amount of companies tax which the body of persons that
distributes the dividend was charged on the income out of which the
profits or the dividends said in subsection (a) wer e paid, and the total
tax rate that applies under subsection (c) shall no t exceed the rate
determined in subsection (a).
(e) The amount of credit said in subsection (d) and in Part Ten, Chapter
Three shall not be greater than the tax that applie s under subsection (c)

191
and the provisions of section 205A shall not apply.
(f) If a body of persons received a dividend and a loss was set off against
the income from it, and if the body of persons ther eafter distributed the
dividend to its share holders, then – for the purpo ses of subsection (c)
– it shall be deemed that companies tax at the rate of 25% was paid in
respect of the dividend.

Tax alleviation on dividend income that stems from abroad
126A. (a) In this section –
” controlling member ” – as defined in section 3(i);
” dividend income ” – of a company – the company’s liable income from
dividends the origin of which is abroad, which a fo reign resident body of
persons paid to it and which it received in Israel in tax year 2009, other
than said income from dividends derived from income that – had it not
been distributed to the company or to another body of persons in the
same chain of companies, as defined in section 75B( a)(14), would be
profits that were not paid as defined in section 75 B(a)(12), and on
condition that – if the company is a controlling me mber of the body of
persons that pays the dividend – the following amou nts be subtracted
from the income:
(1) the amount of loans extended by the company to the body of
persons that pays the dividend or to its relative d uring the period
from December 1, 2008, until December 31, 2010 (in this
definition: the determining period) and that had no t been repaid in
the determining period;
(2) the amount of guaranty provided by the company for the body
of persons that pays the dividend or for its relati ve in respect of a
loan taken by the body of persons during the determ ining period,
on condition that the guaranty was exercised during the
determining period;
(3) the amount paid by the company during the deter mining
period for the acquisition of securities of the bod y of persons that
pays the dividend or of its relative;
” relative ” – as defined in paragraph (3) of the definition o f “relative” in
section 88; ” use in Israel ” – a use that is one of the following, other than a direct or
indirect payment to an individual who is a controll ing member of the
company that receives the dividend:
(1) payment to Israel residents for services provid ed in Israel or
for work performed in Israel;
(2) payment for the acquisition or rental of assets that will be
used in Israel, and also payments to Israel residen ts for the
acquisition or rental of assets; for this purpose, “asset ” – other
than securities, as defined in section 88;
(3) payment for the improvement or maintenance of assets in
Israel;
(4) investment in research and development in Israe l;
(5) repayment of debts to Israel residents, and if the repayment is
to a relative body of persons – on condition that t hat body of
persons use the repaid money in Israel;
(6) payment of interest, discount or linkage differ entials on

192
debentures traded on an Exchange in Israel, and also acquisition
by the company that receives the dividend of said d ebentures
that had been issued by it;
(7) making a deposit in Israel, with an Israel resi dent body of
persons, for a period of at least one year (in this definition: the
” deposit period “) or acquisition of securities traded on an
Exchange in Israel and holding them at least for a year (in this
definition: the ” holding period “); for this purpose –
(a) a security shall be treated as if it had been h eld during the
entire holding period even if it was sold before th e end of
the said period, if another security traded on an E xchange
in Israel was acquired with the full consideration for its sale
and was held for the remainder of the holding perio d;
(b) if a certain amount was deposited as aforesaid in this
paragraph for a period shorter than the deposit per iod and
if securities in the same amount were acquired and held as
aforesaid in this paragraph for a period shorter th an the
holding period, then it shall be deemed that the sa id
amount was used in Israel in accordance with this
paragraph, if the aggregate of the periods of the d eposit
and of holding is at least one year;
(8) payment of a dividend to an Israel resident com pany, on
condition that that company make use of it in Israe l.
(b) Notwithstanding the provisions under this Ordin ance, at the
company’s request companies tax at the rate of 5% s hall be imposed
on a company’s dividend income that was used in Isr ael during the year
2009 or within one year after the actual receipt of the dividend, on
condition that the company that received the divide nd is not a
subsidiary, within its meaning in section 64, a fam ily company within its
meaning in section 64A or a transparent company, as defined in
section 64A1.
(c) The provisions of section 126 shall apply to th e part of the dividend
received by the company as said in subsection (b) a nd used in Israel.
(d) Notwithstanding the provisions under this Ordin ance, if the company
requested that companies tax on its dividend income be imposed on it
under this section, then a credit shall be granted against the said tax for
the deduction of tax from the said income at the so urce, and no credit
shall be given for foreign taxes that are not impos ed directly, as defined
in section 203(c).
(e) The provisions of section 205A shall not apply to foreign taxes, as
defined in section 199, that were paid on the divid end income that was
charged companies tax under this section.
(f) If a company, which requested that companies ta x be imposed on it
under this section, proved that it made use of any amount whatsoever
in Israel during any of the periods said in subsect ion (b), then it is
assumed that the use of that amount in Israel was o ut of the dividend
income, even if the company received that income af ter it had made the
said use.
(g) For the purposes of subparagraph (b) in the def inition of a “controlled
foreign company” in section 74B(a)(1), income recei ved by a foreign
resident body of persons in tax year 2009 and distr ibuted to an Israel

193
resident company as dividend in that same tax year shall not be taken
into account, if the dividend income was charged co mpanies tax under
this section. ”
127. and 128. – Repealed
Exemption of certain cooperative societies from com panies tax
129. (a) If a cooperative society does business o nly with its members or if its
business with nonmembers is inconsiderable or of an incidental nature,
and if most of its said business is the marketing o r processing of its
members’ agricultural produce, then it shall be lia ble to tax at the rate of
20% on that part of its chargeable income which is derived from one of
the following:
(1) the marketing or processing of its members’ ag ricultural produce;
(2) the supply of agricultural inputs and equipmen t to its members;
(3) its income from agriculture, on condition that more than 90% of
its members’ income from agriculture is derived fro m the
marketing of farm products through it;
the amount, to which the said reduced tax rate appl ies, shall not exceed
3% of its turnover in that year, but the Minister o f Finance may, with
approval by the Knesset Finance Committee, increase the said rate by
Order.
(b) If a cooperative society distributed or repaid to its members, directly or
indirectly, profits on which it paid reduced tax un der the provisions of
subsection (a), then it shall be liable to pay the amount of tax at the
aforesaid reduced rate within 30 days after the day of the distribution or
repayment.
(c) In this section –
(1) ” cooperative society ” – a cooperative society whose members
are cooperative societies or individuals and the gr eater part of the
income of each of 51% of its members is from agricu lture, on
condition that its members number no fewer than –
(a) 40 members, if only individuals are members;
(b) five cooperative societies with a total said m embership of at
least 200, if all members are cooperative societies .
(c) 30 members and five cooperative societies, if the members
are both individuals and cooperative societies;
(2) ” member ” includes a candidate for membership, for whom a y ear
of candidacy has not ended.

129A. Repealed
Income derived by a benefit fund from real estate a nd foreign securities
129B. (a) Notwithstanding the provisions of section 126, the chargeable income
of a benefit fund from a business of renting buildi ngs built by itself or
through others, construction of which began in or a fter tax year 1991,
shall be liable to tax at the rate of 20%.
(b), (b1), (c) and (d) Repealed
Income of a trust fund
129C. (a) Notwithstanding the provisions of section 126 –
(1) the income and profits of an exempt trust fun d are exempt of tax;
(2) those tax rates shall apply to the chargeable i ncome of a
chargeable trust fund, which would have applied to the said

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profits or income, if they had been received by an individual, for
whom the income is not income from business or occu pation,
unless there is a different specific provision; if no special tax rate
was determined for the income, then the income shal l be charged
tax at the maximum rate prescribed in section 121.
(3) repealed
(4) the deduction of interest and linkage different ial expenses shall
not be allowed in the calculation of a trust fund’s income and
profits;
(5) in respect of the determination of the chargeab le income of
chargeable trust funds, the Minister of Finance may , with
approval by the Knesset Finance Committee, prescrib e each of
the following:
(a) repealed
(b) in this section, ” trust fund”, “exempt trust fund ” and
” chargeable trust fund ” – as defined in section 88;
(c) special provisions on tax exemptions or special tax rates
for certain types of income of chargeable trust fun ds that
are intended for unit holders who are foreign resid ents,
according to the tax rate that would apply to that income, if
it were received by a foreign citizen;
(d) the method for calculating linkage or the infla tionary
amount according to the fund’s investments or asset s.
(b) In this section, ” business unit”, “trust fund “, “exempt trust fund “,
” chargeable trust fund ” and “mixed trust fund” – as defined in
section 88.

Special provisions on setting off losses in a charg eable trust fund
129D. A capital loss from foreign securities, which a chargeable trust fund suffered
until December 31, 2002 (in this section: the accru ed loss) shall be brought
forward to the coming years, one after the other, i n order to set it off against
capital gains from the sale of foreign securities, on condition that a loss
greater than 40% of the accrued loss shall not be a llowed to be set off in
each of the tax years 2003 and 2004; however, if le ss than 40% of the
accrued loss was set off in tax year 2003, then the differential of the accrued
loss shall also be allowed to be set off in tax yea r 2004; for this purpose:
” differential of the accrued loss ” – an amount equal to 40% of the accrued
loss, less the amount of accrued loss set off in ta x year 2003.

Powers of the Minister of Finance on the taxation o f savings programs
129E. (a) The Minister of Finance may, with approva l by the Knesset Finance
Committee, set the rate of tax to be paid by bankin g corporations and
insurance companies on certain income from money de posited in
savings programs and which under the terms of the p rogram is referred
to the saver, provided that the tax rate so set not be greater than the
differential between the tax rate that would have a pplied to that income,
had it been received by an individual for whom the income is not
income from business or occupation, and 15%; he may also set a limit
for the deduction of expenses, allocations and set- offs of losses against
that income, all on conditions that he shall prescr ibe.
(b) The tax said in this section shall be deducted from the income which
under the conditions of the program is referred to the saver, and the

195
banking corporation or the insurance company, as the case may be,
shall not be entitled to any deduction, credit or s et off in respect of that
tax.
(c) Notwithstanding the provision of any statute, a person who saves in a
savings program said in this section is not entitle d to any tax refund or
credit in respect of the tax paid by the banking co rporation or insurance
company, as the case may be.

PART EIGHT: RETURNS, NOTICES AND INFORMATION

CHAPTER ONE: PREPARATION AND SUBMISSION OF RETURNS

Power to require keeping of accounts
130. (a) (1) For purposes of the assessment, the Director may – either
generally or in respect of certain categories of as sessees – direct
that account books be kept in respect of income der ived from a
business or vocation, and in those provisions he ma y prescribe
rules on the method of keeping the account books, i ncluding the
assessee’s duty to require a person with whom he ma intains any
business relationship to deliver his personal parti culars to the
assessee and to identify himself; the directions sh all go into effect
three months after their publication in Reshumot, o r at a later
date prescribed by the Director, and he may do so e ither
generally or for a certain category of assessees; h owever, the
abrogation of directions or the issue of alleviatin g directions may
take effect earlier than three months after the day of their
publication.
(2) On an assessee’s application, the Director may – on conditions
and for a period as he may prescribe – approve a ch ange of the
provisions applicable to him; if the Director rejec ts the application,
then the assessee may, within three months, lodge o bjection with
a committee established under section 146 (hereafte r: books
acceptability committee).
(3) The Director may, on application of an assesse e who is the
owner of a small business within its meaning in sec tion 145A,
and after receiving the opinion of a committee appo inted by him
for that purpose, exempt that assessee from the dut y of keeping
books if he meets criteria set by the Director in r ules published in
Reshumot in respect of a physical or mental conditi on or illiteracy,
because of which the assessee is unable to fulfill the duty of
keeping books; notice of the composition of a commi ttee
appointed for the purposes of this paragraph shall be published
in Reshumot.
(4) For the implementation of this Ordinance, the D irector may order
that books be kept in respect of the income, expens es, intakes
and payments of a public institution defined in sec tion 9(2), of a
professional organization defined in section 9(2a), or of a
nonprofit institution defined in the Value Added Ta x Law 5736-
1975 (hereafter: institution), and in those instruc tions he may also
prescribe rules on the bookkeeping method, includin g the

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institution’s obligation to require anyone, with whom it maintains
any connection whatsoever, to give the institution his personal
particulars and to identify himself; the Director m ay order as
aforesaid in general or for a certain category of i nstitutions, and
the instructions shall go into effect three months after they were
published or at a later time prescribed by the Dire ctor; the
cancellation of aforesaid instructions or the presc ription of
alleviating conditions may go into effect earlier t han three months
after the day of their publication.
(5) For the implementation of this Ordinance the Director may order
a management company, as defined in the Control of Benefit
Funds Law, to keep books in respect of the moneys d eposited in
a benefit fund under its management.
(b) W hen directions under subsection (a) have been issued, the Assessing
Officer may refuse to accept accounts not based on account books
kept in accordance with those directions, if deviat ions from those
directions or the defects found in the account book s are material to the
ascertainment of an assessee’s income, and in the c ase of an
institution – if they are material.
(c) If the Assessing Officer refused to accept acco unts as said in
subsection (b), or rejected account books because a foresaid defects
were found in them, he shall send a notice to that effect to the
assessee or to the institution, specifying the grou nds for his decision.
(c1) Decisions by an Assessing Officer under subsec tions (b) and (c) in
respect of an institution require the Director’s ap proval.
(d) (1) Objection to a decision by the Assessing Of ficer under
subsection (c) may be lodged with the books accepta bility
committee within 30 days after the notification was received.
(2) The period from the day on which objection unde r paragraph (1)
was lodged until the committee’s decision is receiv ed shall not be
included in the periods said in sections 145 and 15 2(c).
(e) If an objection was lodged as said in subsectio n (d) and was dismissed,
then the account books shall be deemed unacceptable for purposes of
an appeal against the assessment.
(f) An Order under section 152(b), based on the non -acceptance or
rejection of books, as said in subsection (b) or (c ), shall not be issued
before notice thereof under subsection (c) has been sent to the
assessee, before the time for lodging objection to the Assessing
Officer’s decision has elapsed and – if objection w as lodged – before
the books acceptability committee gave its decision .
(g) Lodging an objection under this section does no t take the place of a
contestation under section 150.
(h) If no objection was lodged under subsection (d) , then the Assessing
Officer’s decision under subsection (c) may be appe aled before the
District Court, together with the appeal under sect ion 153.
(i) The provisions of subsections (c) to (f) shall also apply to a decision by
the Director under section 147.
(j) Nothing in directions issued under subsection ( a) shall be construed as
requiring any person to disclose secret information given him in the
exercise of his vocation.
(k) (1) If directions were given under subsection ( a) and one of the
following was done, then the books shall be deemed
unacceptable, unless the Assessing Officer is satis fied that there
was sufficient reason for the said act:

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(a) use of an invoice issued without a sale or provision of a
service, or the amount stated in it does not reflec t the price
of the sale or the price of the provided service, a s the case
may be; for this purpose: ” invoice” – within its meaning in
the instructions issued under this section and also a tax
invoice, within its meaning in the Value Added Tax Law;
(b) income of a substantive amount was not included in a
return submitted under section 131;
(c) in a return submitted under section 131 a priva te
expenditure was deducted, or an expense without any
purchase or acquired service, or the amount of expe nse
deducted as aforesaid does not reflect the price of the
purchase or the price of the service received, all in a
manner that reduced the chargeable income or increa sed
the loss by a substantive amount.
(2) If a person disputes a decision made under para graph (1), then
he may request – within thirty days after he receiv ed the decision
– that the Assessing Officer reconsider and change it; if the
Assessing Officer rejected the request to change al l or part of his
decision, then appeal may be lodged against the dec ision, as if it
were an Order under section 152(b), provided that t he date for
lodging the appeal be within sixty days after his d ecision was
handed down, or together with the appeal against th e
assessments made for that tax year; for purposes of this
paragraph: ” Assessing Officer ” – exclusive of an Assistant
Assessing Officer and of a Chief Collector.

Keeping books in a foreign currency and determining income accordingly
130A. (a) A diamond merchant may keep the account b ooks, which under section
130 he is required to keep for his diamond business , in terms of a
foreign currency, in accordance with rules to be pr escribed by the
Minister of Finance with approval by the Knesset Fi nance Committee,
which shall include the conditions on which a perso n who chose to
keep books as aforesaid may retract that choice; fo r this purpose:
” diamond merchant ” – a person whose business, or part of whose
business is the processing of or the trade in or th e brokering of
diamonds, as well as a controlling member, as defin ed in section 32(9),
of a company the business of which is as aforesaid;
” diamond business ” – the processing of diamonds, trading in
diamonds or brokering them, and for a diamond merch ant who is a
controlling member of a company that is a diamond m erchant – any act
that affects the property, the obligations or the c apital which he invested
in or received from the said company, or from a com pany which is a
diamond merchant and which is under his control.
(b) If an assessee has a permanent enterprise abroa d, not in an area as
defined in section 3A, then he shall keep the accou nt books, which
under section 130 he is obligated to keep in respec t of his income from
the said enterprise, in terms of foreign currency, in accordance with
rules prescribed by the Minister of Finance with ap proval by the
Knesset Finance Committee.
(c) In addition to the provisions of subsections ( a) and (b), those specified
below may keep the account books they are obligated to keep under
section 130 in foreign currency, according to rules prescribed by the
Minister of Finance with approval by the Knesset Fi nance Committee,

198
which shall include the conditions on which a person who chose to
keep books as aforesaid may retract that choice:
(1) a partnership, if all its members are foreign residents and all their
investments and all the loans which they extended t o the
partnership are in foreign currency, and if the Dir ector approved it
for purposes of this section;
(2) a foreign invested company, as defined in sect ion 53H of the
Encouragement of Capital Investments Law 5719-1959;
(3) a company, at least 90% of whose income is fro m the operation
of ships or aircraft in international transportatio n.
(d) In respect of a diamond merchant who chose to keep books as
specified in subsection (a), of an assessee who has a permanent
enterprise abroad as said in subsection (b), of a c ompany or a
partnership which chose to keep books as said in su bsection (c), the
Minister of Finance may, with approval by the Kness et Finance
Committee, prescribe rules for the determination an d calculation of its
chargeable income and, in particular, of expenses, income and
depreciation, and rules on tax liability and tax pa yments and on linkage
differentials and interest thereon, all taking into account that books are
kept in a foreign currency as aforesaid; rules unde r this subsection shall
apply notwithstanding anything provided in any stat ute.

Who must make a return
131. (a) The following shall submit a return: (1) an individual Israel resident who reached age 18 by the
beginning of the tax year; a registered spouse may refrain from
including the income of his spouse, if the spouse s ubmitted a
separate return of his income or if the registered spouse attached
to his return a declaration signed by his spouse th at he will report
his income separately;
(2) a spouse who is not a registered spouse who dec lared as said in
paragraph (1) that he will make a separate return o f his income;
(3) an individual Israel resident who had not yet reached age 18 at
the beginning of the tax year, if in that year he h ad chargeable
income in an amount not less than NS 59,570 in tax year 2007, or
some other amount set by the Minister of Finance fo r this
purpose;
(4) an individual foreign resident who had chargea ble income in the
tax year;
(5) a body of persons which had income in the tax year;
(5a) a person who during the tax year sold a real e state right or
performed an association act, as defined in the Lan d
Appreciation Tax Law, which is not exempt of tax un der that Law,
and who did not pay appreciation tax at the highest rate
applicable under the Real Estate Taxation Law on th e real
appreciation that arose out of the sale or act, as the case may be;
(5b) in respect of trusteeships, each of the follow ing:
(1) a trustee in a trusteeship of Israel residents or a trustee in a
trusteeship under a will that under section 75L(c)( 1) is
deemed an Israel resident, provided the creator did not
elect to be assessable and chargeable under the
provisions of sections 75G(h) or 75L(e) and that no
representative creator or representative beneficiar y was
chosen under the provisions of section 75F1, as the case

199
may be;
(2) a trustee who had income or assets in Israel, w hether or
not he is an Israel resident;
(3) a creator or a beneficiary, as the case may be, who elected
to be assessable and chargeable under the provision s of
section 75G(g) or (h), or under section 75L(e) or ( f);
(4) a representative creator or a representative be neficiary, as
the case may be, who elected to be assessable and
chargeable under the provisions of section 75F1;
every term in this paragraph shall have the meaning it has in
section 75C or in section 75F1, as the case may be;
(5c) a controlling member, as defined in section 7 5B, of a foreign
occupational company, as defined in section 5, or i n a controlled
foreign company, as defined in section 75B;
(5d) a person who performed an act, which under sub section (g) is
designated as tax planning that requires reporting;
(6) every person of whom the Assessing Officer so demanded, even
if he does not have to submit a return under paragr aphs (1) to
(5).
(a1) If a return was submitted that includes the i ncome of both spouses,
then each of the spouses shall sign it to attest th e correctness of what
is declared about his part.
(b) The return shall specify the income which the person who submits it
had in the year to which it relates, as well as all the particulars required
for purposes of this Ordinance in respect of that i ncome, and to it shall
be attached –
(1) a balance sheet and profit and loss account – if the return is
based on a complete set of double-entry accounts;
(2) particulars of the calculation on which the de clared income is
based – if it is based on a set of accounts other t han said in
paragraph (1);
(3) a detailed estimate of turnover, expenses and percentage of
profit, or documents or other data on which the dec lared income
is based – if the return is not based on account bo oks.
(b1) The return shall specify every act, which unde r subsection (g) is said to
constitute tax planning that must be reported;
(b2) (1) If an individual is under obligation to su bmit a return under
subsection (a)(1) to (4), (5a), (5c), (5d) and (6), and if he has
income under section 2(1), (2) or (8), then he shal l submit the
return according to the provisions of this section in an online
manner, as the Director shall provide, together wit h a declaration
on a form prescribed by the Director, according to which the
particulars he gave in the return are correct and c omplete, as well
as a printout of the said return, signed by him (he reafter: online
independent return).
(2) If an individual said in subparagraph (1) did not submit an online
independent return, then for the purposes of the pr ovisions of this
Ordinance he shall be deemed a person who did not s ubmit a
return.
(3) The provisions of this Ordinance about a retur n under section
131 shall apply to the online independent return, u nless there is
an explicit different provision.
(4) Notwithstanding the provisions of paragraph (1 ), the Minister of
Finance may – with approval by the Knesset Finance Committee

200
– designate categories of individuals who will be exempt of the
obligation to submit online independent returns acc ording to
criteria of economic status, amount of income and m edical
condition, and also because of other special reason s that will be
prescribed in regulations, on condition that a said exemption not
apply to individuals who submitted claims for grant s under the
Law For Increased Labor Force Participation and the Reduction
of Social Gaps (Negative Income Tax) 5768-2007.
(c) A return under subsection (a)(5), other than t he return of a partnership,
shall be certified by an auditor, within the meanin g of the term in the
Auditors Law 5715-1955, and adjusted by him for pur poses of the tax;
however, for a body of persons which is a cooperati ve society affiliated
to an audit union the return may be certified and a djusted for tax
purposes by an audit union official duly registered with the Registrar of
Cooperative Societies.
(c1) (1) The trustee, creator, representative crea tor, beneficiary or
representative beneficiary, as the case may be, sha ll specify all
the following in a report as said in subsection (a) (5b)(1), (3) or
(4):
(a) the particulars of all creators and all benefic iaries,
particulars of the trustee and of the protector of the
trusteeship, if there is one, and the residential s tatus of
each of these;
(b) particulars of the assets vested in the trustee or from which
income was vested in the trustee, and also particul ars of
the income from these assets that was vested in the trustee
as aforesaid, and the date when the asset or the in come
was vested as aforesaid;
(c) particulars of the assets that were distributed and
particulars of the income that was distributed, and also the
date of the distribution.
(2) The trustee shall specify all the following in a report said in
subsection (a)(5b)(2):
(a) the particulars of all creators and all benefic iaries,
particulars of the trustee and of the protector of the
trusteeship, if there is one, and the residential s tatus of
each of these;
(b) particulars of the assets in Israel that were v ested in the
trustee or from which income was vested in the trus tee,
and also particulars of the income that was vested in the
trustee from aforesaid assets, and when the asset o r the
income was vested as aforesaid;
(c) particulars of the assets in Israel that were d istributed and
particulars of income from assets in Israel that wa s
distributed, and also the date of the distribution.
(3) In this subsection, ” particulars of the assets ” – including the
original cost, the balance of the original cost and the day of the
acquisition, as defined in section 88, the value of the acquisition
and the day of acquisition within their meaning in Chapter Three
of the Real Estate Taxation Law, and the balance of the
acquisition value, as defined in section 47 of the said Law, as the
case may be.
(c2) To a return under subsection (a)(5c) by the co ntrolling member of a
foreign occupational company shall be attached an a udited financial

201
report of the foreign occupational company in accordance with
bookkeeping principles accepted in Israel, and – if it is a company that
reports to or is assessed in a reciprocating state, within its meaning in
section 196 – the report drawn up for tax purposes in accordance with
the tax laws of that state.
(d) The Minister of Finance may, with approval by the Knesset Finance
Committee, prescribe rules that obligate a partners hip to file a return
certified by an auditor and adjusted by him for tax purposes.
(e) The Minister of Finance may prescribe, by Orde r, the form of the
certification and of the adjustment said in subsect ion (c).
(f) If a person did not attach the documents speci fied in subsection (b) to
the return, or if the return submitted by him was n ot certified and
adjusted as provided in subsection (c), then – for the purposes of
sections 145(b) and 158A(c) – he shall be treat ed as if he had not
submitted a return, unless he submits the said docu ments on another
date permitted him by the Assessing Officer.
(g) The Minister of Finance may, with approval by t he Knesset Finance
Committee, designate acts that constitute tax plann ing that must be
reported, how they are to be reported and to what e xtent; in this
subsection, ” act” – includes a transaction and a sale, including th ose to
which the provisions of the Real Estate Taxation La w apply.
Additional returns
131A. The Minister of Finance may, by regulations, prescribe additional returns
which a body of persons bound to make a return unde r section 131(a)(5) or
an Israel resident bound to make a return under sec tion 131(a)(5b) shall
attach to the return under that section.

Report from auditor or audit union official
131B. An Assessing Officer may, if he found reasona ble cause for doing so,
demand in writing from the auditor or from the audi t union official who under
section 131 certified a balance sheet or adjusted a nd certified an adjustment
account for a body of persons, that he deliver to h im a report on the extent
and findings of the audit carried out by him in res pect of the particulars stated
in the Assessing Officer’s aforesaid demand; in thi s section –
(1) ” certified a balance sheet ” –
(a) in respect of a company other than a cooperativ e society
affiliated to an audit union – the preparation of a report said in
section 109 of the Companies Ordinance;
(b) in respect of a cooperative society affiliated to an audit union –
the performance of an audit under section 20 of the Cooperative
Societies Ordinance;
(2) ” Assessing Officer ” – other than an Assistant Assessing Officer and a
Chief Collector;
(3) ” audit union official ” – as said in section 131.

Date for submission
132. (a) A return under section 131 shall be deli vered to the Assessing Officer
not later than April 30 of each year.
(b) Notwithstanding the provision of subsection (a ) –
(1) if a person’s return is based on a complete set of double entry
accounts, then he shall deliver the return under th at subsection
not later than May 31 of each year;
(1a) if an individual must submit an online indepen dent return, then he
shall submit it until May 31 after the tax year in respect of which

202
the return is submitted;
(2) if a special assessment period was set for a pe rson, then he shall
deliver the said return not later than five months after the day on
which that special assessment period ended.

Deferment
133. The Assessing Officer may, if it was proved t o his satisfaction that there is
sufficient reason for doing so, defer submission of a return under section
132(a) or (b), all as the case may be, to a date wh ich he shall set, on
condition that a person who obtains an aforesaid de ferment submit, on the
date stated in section 132(a) or (b), as the case m ay be, an estimated return
of the said income, drawn up to the best of his abi lity to estimate.

Notification of beginning or change of occupation
134. If, in a particular tax year, a person opens a business, begins to engage in a
vocation or begins to carry on his business or voca tion in an additional or in a
different place, or if he changes the type of his b usiness or vocation, then he
shall – no later than on the date of the said begin ning or change – so inform
in writing the Assessing Officer, in whose area of jurisdiction the business is
located or the vocation is exercised.

Power to exempt of filing of return
134A. The Minister of Finance may, with approval by the Knesset Finance
Committee, exempt – conditionally or unconditionall y – the following from the
obligation to file a return:
(1) a person whose income is mainly work income, pe nsion, or income on
which he paid tax under section 122;
(2) a person whose income is not derived from emplo yment, business or
vocation, and does not exceed an amount three times the amount of
credit points under sections 34 and 36;
(3) a foreign resident;
(4) a person who received income from which tax was lawfully deducted at
the source or to which exemption from tax applies, and who – if not for
that income – would be exempt of the obligation to submit a return;
(5) a trustee, whether he is an Israel resident or not, who in Israel had only
income that is tax exempt or from which the full am ount of lawful tax
was deducted, or assets the income of which is exem pt of tax.

Exemption from return
134B. Notwithstanding the provisions of section 131 , an individual who became an
Israel resident for the first time or a veteran ret urning resident, as said in
section 14(a), shall not have to submit a return as said in section 131 in
respect of all his income that was produced or accr ued abroad or that stems
from assets abroad during ten years after the date on which he became an
Israel resident as aforesaid; the provisions of thi s section shall not apply to
income, in respect of which the individual requeste d – under the provisions of
subsection (a) of section 14 – that the provisions of the said subsection not
apply, and in respect of income that stems from an asset that the individual
received exempt of tax under section 97(a)(5) on or after January 1, 2007.

CHAPTER TWO: POWER TO OBTAIN INFORMATION

203
Power to demand returns, information, account books etc.
135. In order to obtain complete information about a person’s income –
(1) (a) the Assessing Officer may demand from him, by written notice, that
he deliver to him any return specified in that noti ce, including a
return of the capital and assets of that person or of his spouse and
of their children for whom they are entitled to cre dit points or
pension points, or of assets for which he serves as trustee of
another person; however, that person may refrain fr om including
the capital and assets of his spouse in the return if he attaches to
it a declaration signed by that spouse that he will submit a
separate return of his capital and assets; if
such a declaration was
submitted, then the return shall be submitted when the spouse
must submit the said return; every return under thi s paragraph
shall be submitted to the Assessing Officer on the date specified in
the notice, but in respect of a capital declaration the date shall not
be set earlier than 120 days after the date to whic h the capital
declaration is to relate or after the date of the d emand, whichever
is later; the Assessing Officer may also demand tha t the person
appear before him, in person or by a representative , and that he
deliver to him all the particulars required by the Assessing Officer
in order to ascertain his income and that he produc e for
examination books, documents, accounts and returns which the
Assessing Officer deems necessary; however, the Ass essing
Officer – other than an Assistant Assessing Officer or a Chief
Collector – may demand that he appear in person, ei ther with or
without his representative, as that person wishes;

(b) Notwithstanding the provisions of subparagrap h (a), an individual
who became an Israel resident for the first time or a veteran
returning resident, as said in section 14(a), shall not have to
submit a return of his capital and assets abroad du ring ten years
after the date on which he became an Israel residen t as aforesaid;
the provisions of this subparagraph shall not apply to capital and
assets, if the individual requested under the provi sions of
subsection (a) of section 14 – in respect of all or part of the income
that stems from them – that the provisions of the s aid subsection
not apply to it, and not to any assets the individu al received
exempt of tax under section 97(a)(5) on or after Ja nuary 1, 2007.
(2) the Assessing Officer, or another officer auth orized by him for this
purpose in writing, may enter any place in which a business or a
vocation is carried on, and examine stock in trade, the cash box,
machinery, books, accounts, vouchers, records and o ther documents
that relate to that business or vocation and demand explanations in
connection with them, and he may also demand that t he owner of the
business or the practitioner of the vocation or his responsible clerk
show him where aforesaid books, accounts and docume nts are, enter
the place where they are located, examine them and demand
explanations if that appears necessary in order to ensure compliance
with the provisions of the Ordinance or to prevent an evasion of
compliance with those provisions;
(3) the Assessing Officer or a person authorized by him for this purpose in
writing may, while making an examination under para graphs (1) or (2),
seize books, accounts, vouchers, records and other documents that

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relate to that business or vocation, if he is convinced that it is necessary
to do so in order to ensure implementation of this Ordinance or to
prevent evasion of compliance with its provisions; however, the thing
seized –
(a) shall be removed from the place where it was se ized only by
Order of the Assessing Officer, and for this purpos e: “Assessing
Officer ” – other than an Assistant Assessing Officer or a Chief
Collector;
(b) shall be returned within three months after the date of the
seizure, if a criminal action for an offense agains t this Ordinance
was not brought before then;
(4) the Assessing Officer may summon any person who has business
relations with the assessee and who he believes can testify on his
income, to appear before him and he may question hi m under oath or
not under oath and demand of the said person that h e give him
documents that relate to that income; however, a cl erk or authorized
agent or employee of the assessee or any other pers on employed in his
affairs on a basis of personal trust may only be qu estioned at the
assessee’s demand, and the Assessing Officer shall not, on his own
initiative, interrogate the assessee’s spouse, chil dren or parents.

Power to demand information about suppliers and cus tomers
135A.(a) If a person owns a business or practices a vocation, then he must – if
the Assessing Officer so demanded of him – deliver to the Assessing
Officer information and documents about his busines s relations with his
suppliers, customers or other persons with whom he has business
relations, even though that information and those d ocuments are not
required to ascertain his income; however, if he no tified the Assessing
Officer within 15 days after the day on which he re ceived the demand
that it involves much administrative work, then he must enable the
Assessing Officer to collect the said information a nd documents
himself.
(b) The provisions of subsection (a) shall not obli gate an advocate,
physician or psychologist to disclose any informati on or document
which he is bound to keep secret under any statute.

Power to demand a return about employees from emplo yer
136. (a) Every employer must, if required to do so by a notice from the
Assessing Officer and within the time set by the no tice, prepare and
deliver a return for any year, which includes the n ames and places of
residence of persons employed by him and the paymen ts and
allowances made to them for their employment by him ; the provisions of
this Ordinance about failure to deliver returns or particulars demanded
by an Assessing Officer apply to the said return, b ut an employer shall
not be liable to a penalty for omitting from the re turn the name or place
of residence of any person employed by him and not employed in any
other employment, if the Assessing Officer finds, o n inquiry, that that
person has no chargeable income.
(b) If the employer is a body of persons, then the manager or other
principal officer shall be deemed the employer for purposes of this
Chapter, and every company director or person engag ed in a
company’s management shall be deemed to be employed by it.

Power to demand return of income received for or paid to another person

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137. W hen a person – no matter in what capacity – receives profits or income to
which this Ordinance applies and which belong to a certain person, or if he
pays said profits or income to a certain person or to his order, then the
Assessing Officer may give that person notice, dema nding that he submit –
within the time set in it, which shall not be less than 30 days after the day of
its service – a return that shall contain true and correct disclosure of all those
profits and income, and the name and address of tha t certain person.

Power to demand return from a house occupant
138. The Assessing Officer may give any person who occupies any house
property, land or industrial building, a written no tice demanding that within a
reasonable time he submit `a return that includes t he name and address of
the owner of that house property, land or industria l building, and a true and
correct statement of the rent paid and other consid eration given for it.

Power to demand return about lodgers and tenants
139. The Assessing Officer may give a person writte n notice, demanding that he
submit – within the time set in it, which shall not be less than 30 days after the
day of its service – a return that includes the nam e of every lodger or tenant
who resides in his house, hotel or institution on t he date of the notice and who
resided there during all of the preceding three mon ths, except for temporary
absences.

Power to demand official information
140. Notwithstanding the provisions of any other st atute, the Assessing Officer
may require any employee of a public body to supply any particular that is
needed for purposes of this Ordinance, which that e mployee has or knows,
but no aforesaid employee shall, by virtue of this section, be obligated to
disclose any particular that he is required to keep secret in accordance with
the Statistics Ordinance 1947, the Postal Bank Law 5711-1951, or the Bank
of Israel Law 5714-1953; an employee, required as a foresaid, shall supply the
particulars within 30 days after the day of the dem and or at another time
stated in the demand; for the purposes of this sect ion: “public body ” – the
State, any body subject to audit by the State Compt roller, and any other body
which the Minister of Finance, with approval by the Knesset Finance
Committee, declared a public body.

Obtaining information from the National Insurance I nstitute
140A. (a) W ithout derogating from the provisions of section 140 and
notwithstanding the provisions of any statute, the Director is entitled to
receive from the National Insurance Institute any i nformation
designated under subsection (b), which reached the National Insurance
Institute in the performance of its duties and whic h the Director requires
for the exercise of his responsibilities under any statute.
(b) The Minister of Finance shall – with the consen t of the Minister of
Justice, in consultation with the Minister of W elfa re and with approval
by the Knesset Finance Committee – designate the ca tegories of
information, which the Director is entitled to rece ive under the
provisions of subsection (a).

Duty to notify of agreement for net payment
141. If a person undertook in an agreement to pay t o another work income of not
less than a certain amount after deduction of tax u nder section 164, then both
the payor and the recipient must give notice thereo f to the Director within 30

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days after the day on which the agreement was made, specifying in it the
particulars of the agreement and every other partic ular that relates to it and
that the Director shall demand, and if the agreemen t was in writing, a copy of
it shall be attached to the notice.
CHAPTER THREE: MISCELLANEOUS

Assessing Officer may demand supplementary returns
142. The Assessing Officer may give a person writte n notice, at any time and as
often as he deems necessary, in which he shall be r equired to furnish – within
a reasonable time set in the notice – more complete or additional returns on
any matter on which a return is required or prescri bed by this Ordinance.

Preparation of return by another person
143. If a person helps another person, against paym ent, to prepare a return,
notification, form or other document for a purpose of this Ordinance, then he
shall declare on that document that he helped to pr epare it.

Returns deemed to be delivered by due authority
144. (a) A return, statement or form purporting to be delivered under this
Ordinance by or in the name of a certain person, sh all for all purposes
be deemed to have been given by that person or with his permission,
unless the contrary is proven, and every person who signs any return,
statement or form shall be deemed to be cognizant o f all matters in it.
(b) If a registered spouse alone signed any return, statement or form, then
he shall be deemed to hold a power of attorney from his spouse to sign
in his name.

Service on the Assessing Officer of copy of an acti on
144A. If an assessee brings action in any Court, ba sed on the amount of his income
from any source, then he shall deliver a copy there of to the Assessing Officer
with whom his file is kept; if he has no file, he s hall deliver the copy to the
Income Tax Director.

PART NINE: ASSESSMENT OF INCOME, TAXATION
DECISIONS, CONTESTATIONS AND APPEALS

CHAPTER ONE: ASSESSMENT

Power to assess
145. (a) (1) W hen a person has delivered a return u nder section 131, the
return shall be deemed a determination of income by that person
(hereafter: self assessment), and the Assessing Off icer shall
send him notice of the amount of tax due from him u nder the
return; a said notice shall be treated like a notic e of assessment
under section 149.
(2) The Assessing Officer may, within three years a fter the end of the
tax year in which the return was delivered to him – and, with the
Director’s approval, within four years after the en d of the said tax
year – examine it and do one of the following:

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(a) approve the self assessment;
(b) determine to the best of his judgment the amount of the
person’s income, of the deductions, set-offs and
exemptions allowable from it under any statute, and the tax
to which he is liable, if he has reasonable grounds for
believing that the return is not correct; an assess ment
under this subparagraph may be made according to an
agreement concluded with the assessee.
(2a) W ithin one year after the end of the period sa id in paragraph (2),
the Assessing Officer may – at his initiative or on application by
the assessee – correct any error made in the calcul ation of
deductions, credits or exemptions in an assessment under
paragraph (2)(b), if he is satisfied that the case is one of a
computational error.
(3) Notwithstanding the provisions of paragraph (1) , the Assessing
Officer may – within six months after receipt of th e return that
constitutes a self assessment – do as specified her eafter and the
return shall continue to be deemed a self assessmen t even after
the Assessing Officer did as said here:
(a) correct a computational error made in the retur n;
(b) apply the provisions of any statute applicable to the
assessee, in connection with the obligation to keep books
for any tax year or part thereof, if he did not kee p them or
only kept them during part of the period during whi ch he
was under obligation to keep them, or if he did not base his
return on his account books;
(c) apply the provisions of any statute applicable to the
assessee, after a final determination was made that his
books are not acceptable; in this context, ” final
determination ” – a determination against which there is no
further right of objection or appeal.
(b) If a person did not deliver a return and the As sessing Officer believes
that that person must pay tax, then he may determin e the amount of
that person’s chargeable income to the best of his judgment and
assess him accordingly, but that assessment shall n ot affect any other
responsibility of that person for failing or neglec ting to deliver a return.

Power to assess in special cases
145A. The Assessing Officer may determine – to the best of his judgment – the
chargeable income of an assessee who is the owner o f a small business of a
category designated by the Minister of Finance and who kept his records as
required by the Director’s directions under section 130, if the Assessing
Officer concludes that the assessee’s income accord ing to his records is not
reasonable, but the assessee’s books shall not for that reason be deemed
unacceptable.

Power to assess diamond merchants
145A1.W ithout derogating from his other powers unde r this Ordinance, the
Assessing Officer may determine – to the best of hi s judgment – the amount
of chargeable income of an assessee who is a diamon d merchant, within its
meaning in section 130A, and who kept his records a s required by the
Director’s directions under section 130, if the Ass essing Officer concludes
that the diamond merchant’s income according to his records is not
reasonable; however, before he makes an aforesaid a ssessment the

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Assessing Officer shall inform the diamond merchant of his decision to
assess him as aforesaid, and he shall enable the di amond merchant to object
before the books acceptability committee on one of the following grounds:
(1) that the business results are reasonable;
(2) that the extent to which he used concessions fr om the Director’s
directions, such as were prescribed by the Minister of Finance, did not
affect the business results materially.

Partial assessment in respect of tax planning that must be reported
145A2. (a) If, in a return under section 131, a per son reported an act designated
under subsection (g) of the said section as tax pla nning that must be
reported, then the Assessing Officer may – in addit ion to the provisions
of section 145 – determine that person’s income in connection with that
act by a partial assessment to the best of his judg ment, while ignoring
the tax planning that must be reported, and he may also determine the
deductions, set offs and exemptions allowed against the income under
any statute, as well as the tax which that person m ust pay, on condition
that until that time he had not assessed him for th at tax year under
section 145.
(b) An assessment under this section may be made b y agreement with the
assessee.
(c) A partial assessment under this section shall for all intents and
purposes be treated like an assessment said in sect ion 145(a), also for
the purposes of sections 147, 150, 152, 153 or 158A , but the partial
assessment shall not infringe the powers of the Ass essing Officer or
the rights of the assessee in connection with the a ssessment of the rest
of the assessee’s income according to the provision s of this Chapter.
(d) If in respect of the same tax year a partial a ssessment and an
assessment of all the assessee’s income were made – including an
assessment made by agreement, by order or by a judg ment, then the
Assessing Officer shall determine how they affect e ach other and he
shall draw up the necessary adjustments.

Rejection of books because intakes were not entered or no cash register
was kept
145B. (a) (1) If an assessee records his intakes on a cash register tape, on
receipt vouchers, on invoices, in a daily receipts diary or by any
other documentation that he must keep under the Dir ector’s
directions by virtue of section 130, and if he did not record in
them a intake which he should have recorded in acco rdance with
those directions, then his books shall be deemed un acceptable,
unless the Assessing Officer is satisfied that ther e was
reasonable cause for the default; if a person disag rees with a
decision made under this paragraph, then within thi rty days after
he received the decision he may request the Assessi ng Officer,
as defined in section 130(k)(2), to reconsider and change it; if the
Assessing Officer rejects the request to change all or part of the
decision, then his decision may be appealed, as if it were an
Order under section 152(b), provided that the date for lodging the
appeal be within sixty days after his decision was handed down;
(2) (a) If an assessee does not record an intake wh ich he must
record as said in paragraph (1) twice or more often in one
tax year or in twelve consecutive months in two tax years,
including at least once after the Assessing Officer

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cautioned him in writing, then his books shall also be
assumed to be unacceptable in the two tax years tha t
preceded the year in which he twice did not record an
intake as aforesaid, or also in the tax year that p receded
the first year within the twelve months in which he twice did
not record an intake as aforesaid, even if his retu rns were
accepted and assessments were made according to the m,
unless the Assessing Officer was convinced that the re was
sufficient reason for the failure to record; an ame nded
assessment for the said tax years may be made by th e
Assessing Officer in consequence of the failure to record
intakes, and it shall be treated like an Order unde r section
152(b);
(b) a decision by the Assessing Officer not to acc ept the
reason for not recording as sufficient may be appea led, as
if it were an Order under section 152(b), on condit ion that
the date of submitting the appeal be within 60 days after
the decision was handed down, or together with the appeal
against assessments made in consequence of the fail ure to
record the receipts; if the Court did not allow the appeal
against the said decision, but did allow in full th e appeal
against the assessments in respect of the Assessing
Officer’s decision about the failure to record inta kes, then
the said presumption of unacceptability in respect of years
preceding the year in which the failure to record w as
discovered shall not apply.
(b) If an assessee, being required by the Director’ s directions under section
130 to keep a cash register tape, does not do so, t hen his books shall
be deemed unacceptable.
(c) (1) If an institution, within its meaning under section 130(a)(4), did
not record an intake which it must record under the Director’s
instructions by virtue of section 130(a)(4) two or more times within
twelve consecutive months, then its books shall be deemed
unacceptable, unless the Director is convinced that there was
sufficient reason for the failure to record;
(2) a decision by the Director not to accept the re ason for not
recording as sufficient may be appealed within 60 d ays after the
day on which the institution was notified thereof, as if it were an
Order under section 152(b).
(d) If the Assessing Officer concludes that an inta ke in an amount in
excess of the amount set by the Minister of Finance was not recorded
as said in this section, then he may seize and conf iscate half of the
amount received and not recorded as aforesaid, unle ss he is satisfied
that there was sufficient reason for not recording it; the decision of the
Assessing Officer may be appealed, as if it were an Order under
section 152(b), on condition that the time for subm itting the appeal be
within 60 days after the decision was handed down; for purposes of this
subsection: ” Assessing Officer ” – other than a Deputy Assessing
Officer, an Assistant Assessing Officer or a Chief Collector.

Books acceptability committees
146. (a) (1) The Minister of Finance shall, in cons ultation with the Minister of
Justice, appoint persons of whom the Director shall form books
acceptability committees.

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(2) Each aforesaid committee shall consist of three members; its
chairman shall be a public personality, expert in a ccountancy,
and the two other members shall be auditors of whom only one is
an employee of the State or of another governmental institution;
in an objection by a diamond merchant, under sectio n 145A1, a
representative of diamond merchants, appointed by t he Minister
of Finance upon recommendation by the industry’s
representatives, shall participate only in the deli berations;
(3) notice of the said appointments shall be publis hed in Reshumot.
(b) In an objection against a decision by the Asses sing Officer under
section 130(c) or against a decision by the Directo r under section 147
in connection with the acceptability of account boo ks, or against a
decision by the Assessing Officer under section 145 A1, they shall have
to justify their decision.
(c) W hen it hears an objection against a decision o f the Director under
section 130(a)(2), the committee may confirm or set aside the Director’s
decision or make a different decision, as it sees f it.
(d) W hen it hears an objection against a decision b y the Assessing Officer
under section 130(c) or against a decision by the D irector under section
147 in connection with the acceptability of account books, the
committee may do one of the following:
(1) confirm the Assessing Officer’s decision; in th is case it may
declare that the books are unacceptable under aggra vating
circumstances;
(2) set aside the Assessing Officer’s decision and direct him to
accept the books, either because they contain no de fect or
deviation from the Director’s directions, or becaus e the defects
and deviations they contain are immaterial to the d etermination of
the assessee’s income.
(d1) W hen the committee hears an objection under se ction 145A1, it may
decide that the Assessing Officer is not allowed to use his authority
under the said section.
(e) A committee decision on an objection under sect ion 130(a)(2), (d) or
(h), or under section 145A1 shall be final, but it may refer a legal
question to the District Court for its opinion.
(f) The committee is competent to gather evidence f or the exercise of its
powers under this Ordinance.
(g) The committee may award the costs of an objecti on, including the fee
of the assessee’s representative and traveling expe nses and loss of
working time allowance of witnesses.
(h) The Minister of Justice may make regulations on –
(1) procedures for convening objection committees;
(2) Law procedure in the committee;
(3) fees payable in respect of proceedings before t he committee;
(4) remuneration of committee members.

Director’s power of review and revision
147. (a) (1) W ithin the period that ends one year a fter the periods prescribed
in sections 145(a) or 152(c), whichever is later, o r within six years
after the day on which an assessment under section 145(b) was
made for the assessee, as the case may be, the Dire ctor may, at
his own initiative or on the assessee’s application ask for the
record of any proceeding taken by an Assessing Offi cer under
this Ordinance, and having received the record he m ay make any

211
inquiry he may deem appropriate or cause a said inquiry to be
made, and he may – subject to the provisions of thi s Ordinance –
make on this matter any Order that he deems appropr iate.
(2) If the assessee was convicted of an offense und er sections
216(8), 216B, 217 to 220 or under sections 117(b)(1 ), or (3) to
(8), 117(b2) or 117A of the Value Added Tax Law, or if monetary
composition was imposed on him under section 221 or under
section 121 of the Value Added Tax Law, then the Di rector may
act as said in paragraph (1) within the period that ends one year
after the day of the conviction or of the payment o f the
composition, as the case may be, or until the end o f the period
set in paragraph (1), whichever is the later.
(3) If a person delivered a return under section 14 5(a)(1) and the
Assessing Officer did not use his powers under sect ion 145(a)(2),
then the Director may act as said in this section o nly if the
assessee was convicted of an offense under sections 216(8),
216B or 217 to 220, or if monetary composition was imposed on
him under section 221.
(b) An Order under subsection (a) shall be made by the Director or by a
person so authorized by him, and an assessment made in
consequence of an Order made as aforesaid shall, fo r purposes of an
appeal, be treated like the Order.
(c) An Order under subsection (a), which increases the assessment, shall
be made only after the assessee was given a reasona ble opportunity to
present his arguments.
(d) An Order under subsection (a), which increases the assessment, shall
– for purposes of an appeal – be treated like an Or der under section
152(b).
(e) If an Order under subsection (a), which reduces an assessment, was
made before the time for the submission of an appea l against the
assessment expired, but before an appeal was submit ted, then the
assessee shall no longer have the right to appeal a gainst the
assessment, but he may appeal against the Order as if it were an Order
under section 152(b).
(f) If an Order was made under subsection (a) after appeal against an
assessment was brought, but before appeal proceedin gs were
concluded, then the appeal shall be heard as if it were an appeal
against the Order.

Lists of assessees and notices of assessment
148. (a) The Assessing Officer shall, as soon as po ssible, prepare lists of
persons assessed to tax.
(b) Such lists (hereafter: assessment lists) shall include the names and
addresses of the persons assessed to tax, the amoun t of chargeable
income of each of them, the amount of tax that he p ays, and other
prescribed particulars.
(c) If complete copies of all notices of assessment and of all notices that
amend assessments are filed in the office of the As sessing Officer,
then they shall constitute assessment lists for pur poses of this
Ordinance.

Notice of an assessment to the assessee
149. The Assessing Officer shall cause each person, whose name appears on the
assessment list and who was assessed under this Ord inance, to be served –

212
in person or by registered mail – a notice sent to him at his regular place of
residence or place of business, in which shall be s pecified the amount of his
chargeable income, the amount of tax payable by him and his rights under
section 150 or section 153, as the case may be.
CHAPTER TWO: OBJECTION AND APPEAL

Right of objection before Assessing Officer
150. (a) If a person disputes the assessment, then he may apply to the
Assessing Officer by a written notice of objection that he review and
change the assessment; a said application shall sta te precisely the
grounds for the objection to the assessment and sha ll be submitted
within 30 days after the day on which the notice of assessment was
served; however, if it was proven to the Assessing Officer’s satisfaction
that the person who disputes the assessment was pre vented from
submitting the application within that period becau se of his absence
from Israel, sickness or any other reasonable cause , then he may
extend the period, for as long as appears reasonabl e under the
circumstances.
(b) If an assessee did not submit a return in respe ct of a certain tax year
and an assessment was made for him for that year un der section
145(b), then only a return submitted by him for tha t year shall be
deemed an objection, unless it was proven to the As sessing Officer’s
satisfaction that the assessee was not obligated to submit a return or
that it was not possible to submit it.

Hearing of objection
150A. W hoever made the assessment shall not hear an objection to it.

Powers of the Assessing Officer in connection with objections
151. W hen an Assessing Officer receives the notice of objection said in section
150, then he may demand from the objector that he d eliver all particulars that
the Assessing Officer deems necessary in respect of the assessee’s income
and that he produce all books or other documents in his custody or
possession that relate to that income, and he may s ummon any person whom
he thinks able to give evidence on the assessment t o appear before him, and
he may interrogate him under oath or not under oath ; however, a clerk, agent,
or employee of the assessee or any other person emp loyed in his affairs on
the basis of personal trust shall be interrogated o nly at the assessee’s
demand; this section shall not derogate from any po wer of investigation under
any other statute.

Agreement or decision on an objection
152. (a) If the assessed person who objected to an assessment made for him
reaches an agreement with the Assessing Officer on the amount at
which he is to be assessed, then the assessment sha ll be amended
accordingly and notice of the tax he must pay shall be served on the
assessee.
(b) If no agreement is reached, then the Assessing Officer shall determine
the tax by written Order, and in it he may confirm, increase or reduce
the assessment.

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(c) If, within three years after the year in which the return under section 131
was submitted, and – with the Director’s approval – within four years
after the end of the said tax year, or within one y ear after the objection
was submitted, whichever is the latest, no agreemen t was reached as
said in subsection (a), and if the Assessing Office r did not exercise his
powers under subsection (b), then the objection sha ll be deemed to
have been allowed; however, if the objection was su bmitted against an
assessment made under section 145(b), then it shall be deemed to
have been allowed only if the Assessing Officer doe s not use his
powers said in this section within four years after the end of the tax year
in which it was submitted and – with the Director’s approval – within five
years after the end of the said tax year.

Right of appeal
153. (a) Any person who deems himself injured by a decision of the Assessing
Officer under section 152(b) may appeal before the District Court in
whose area of jurisdiction the Assessing Officer ac ted.
(b) The appeal shall be submitted and heard in acc ordance with the
provisions of the Ordinance and of procedural regul ations made
thereunder, and the Assessing Officer shall be the respondent to the
appeal.

Court of Appeal
154. (a) Appeals under section 153 shall be heard by one or more judges, as
the President of the District Court may prescribe, either generally or for
purposes of a certain appeal.
(b) The Court to which an appeal was submitted may , on the appellant’s
application, direct that the appeal or a certain st age of proceedings in it
be heard at the venue of another District Court.
(c) Every appeal to the District Court under this C hapter shall be heard in
camera, if the Court did not direct otherwise on th e appellant’s
application.

Burden of Proof
155. The appellant shall bear the burden of proving that the assessment is
excessive; however, if the appellant kept acceptabl e books or, in the case of
an appeal under section 130(h), if the account book s were audited by an
auditor and his opinion on the financial reports ba sed thereon does not
include any reservation, or a reservation which in the Court’s opinion is not
relevant to the question of the books’ acceptabilit y, then the Assessing Officer
or the Director, as the case may be, shall have to justify his decision.

Power of Court of Appeal
156. The Court shall confirm, reduce, increase or a nnul the assessment or rule
otherwise on the appeal, as it deems proper, and no tice of the chargeable
income and of the amount of tax to be paid by the a ppellant according to the
Court’s decision shall be served on both parties.

Appeal to Supreme Court
157. A decision of the District Court under section 156 may be appealed to the
Supreme Court as Court of Civil Appeals.

Procedural regulations on appeals
158. The Minister of Justice may make procedural re gulations on any matter

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connected to the lodging and hearing of appeals under sections 153 to 157,
including the payment of Court fees, the provision of collateral, making a
deposit with the Court and the presentation of evid ence.

CHAPTER TWO “A”: HEARING ARGUMENTS ABOUT ASSESSMENT S
BASED ON THE ASSESSING OFFICER’S JUDGMENT

Hearing arguments and presenting reasons
158A. (a) An assessment according to the best judgm ent under section 145, and
an Order under section 152 shall not be made withou t the assessee
having been given a reasonable opportunity to prese nt his arguments.
(b) In a notice of assessment or in an Order said i n subsection (a) the
Assessing Officer shall specify – in addition to th e reasons for not
accepting the return or the contestation – also the manner in which the
assessment was made.
(c) The provisions of subsections (a) and (b) shall not apply, if the
assessee did not submit a return as said in section s 131, 135, 161,
166, 171, or 181B.

CHAPTER TWO “B”: TAX DECISIONS

Definitions
158B. In this Chapter – “the tax laws” – each of the following:
(1) this Ordinance;
(2) the Value Added Tax Law;
(3) the Real Estate Taxation Law;
(4) the Inflationary Adjustments Law;
(5) the Encouragement of Capital Investments Law;
(6) the Encouragement of Capital Investments in Agr iculture Law 5741-
1980;
(7) the Encouragement of Industry (Taxes) Law 5729- 1968;
(8) every provision on tax in or under a Law, which relates to one or more
of the enactments enumerated in paragraphs (1) to ( 7).
” tax decision ” – a decision about any aspect of an applicant’s t ax liability,
about the resulting tax or about the implications o f an act he performed for his
tax liability, his income, profit, expense or loss;
” tax decision by agreement ” – a tax decision made by way of agreement
with the applicant; ” applicant ” – the person who requested that the Director make a tax decision
under the provisions of this Chapter; ” tax ” – a tax imposed under one of the tax laws;
” act ” – includes transaction and sale;
” profit ” – includes land appreciation.

Authority in respect of tax decisions
158C. (a) The Director may give a tax decision at a n applicant’s application, and
he may also give a tax decision by agreement.
(b) W hen an application for a tax decision has bee n made, the Director

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may make giving the decision conditional on another person being
joined as applicant, and he may also refuse to give a tax decision or
decide that the answer to the application be given by an Assessing
Officer otherwise than by way of a tax decision.
(c) A decision under subsection (a) may be limited in time, subject to other
limitations or conditional, as shall be prescribed in it.
(d) A decision under subsection (a) shall only be made after the applicant
was given a reasonable opportunity to present his a rguments.
(e) There shall be no appeal against a tax decisio n by agreement; a tax
decision not by agreement may be appealed as part o f an objection or
appeal against an assessment.

Application for a tax decision
158D. (a) An application for a tax decision – other than a application about tax
under the Value Added Tax Law or under the Real Est ate Taxation Law
– may be submitted before or after the act is perfo rmed, on condition
that it is submitted before the time set in section 132 or 133 for
submitting a return under section 131, in which the act, income, profit,
expense or loss that are the subject of the applica tion have been taken
into account.
(b) An application for a tax decision about tax un der the Value Added Tax
Law or under the Real Estate Taxation Law shall be submitted before
the act that is the subject of the application is p erformed.
(c) The application shall include all the substant ive facts and particulars
relevant to it, and all the documents, certificatio ns, opinions,
declarations, valuations, contracts – and if contra cts have not yet been
signed, then their drafts – shall be attached to it , together with every
other substantive particular, as the Director presc ribed, and certification
that the fee prescribed under section 158E has been paid shall be
attached.
(d) The Director may demand every particular or do cument he deems
necessary for his decision on the application.
(e) If the name and ID number of the applicant wer e not stated in the
application, then those particulars shall be provid ed later, and no tax
decision shall be given before they have been provi ded.
(f) An applicant must not withdraw his application before a decision is
given, except with the Director’s consent.
(g) If other provisions on applications for tax de cisions by the Director are
prescribed in the tax laws, then the provisions of this Chapter shall
apply, mutatis mutandis, as far as they do not cont radict the other
provisions.

Application fee
158E. The Minister of Finance may – with approval b y the Knesset Finance
Committee set a fee for an application for a tax de cision, either as an amount
or as a graduated percentage in relation to the val ue of the transaction, to the
applicant’s income or to some other criterion.

Additional provisions
158F. (a) W hen the Director has made a tax decision , he shall not have the right
to withdraw it, unless he finds that one of the par ticulars or one of the
documents necessary for the decision was not submit ted to him, or that
the circumstances relevant to the decision have cha nged, or that he
was given a false, erroneous or misleading particul ar.

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(b) If the Director made a tax decision by agreement, then the applicant
shall comply with the conditions and provisions pre scribed in it, unless
the act that is the subject of his application was not performed, or the
income or the expense, in respect of which the appl ication was
submitted, was not received or not incurred.
(c) Notwithstanding the provisions of the tax laws , the Director may publish
a condensed version of tax decisions he made in the manner and
formulation he determined, also if the applicant di d not agree thereto;
the published condensation of a decision shall not include the
applicant’s name and ID number.
(d) The Director may make rules on tax decisions a nd on the
circumstances, under which a decision shall not be given.

CHAPTER THREE: ERRORS AND TAX REFUNDS

Defects and errors that do not invalidate
159. (a) An assessment, payment Order or any other proceeding that appears
to have been made according to the provisions of th is Ordinance shall
not be canceled or deemed fundamentally void or voi dable because of
an error of form, and it shall not be affected by a n error, defect or
omission in it, if it substantially and in effect c onforms to the provisions
of this Ordinance or of any Ordinance that amends i t, or to their intent
and meaning, and if the person assessed or to be as sessed or the
person to be affected is designated in it clearly o r in commonly
understood terms.
(b) An assessment shall not be impeached or affecte d because of a
mistake in it in the name or surname of the person liable to tax, or in the
description of any income, or in the amount of tax charged, or because
of any difference between the assessment and the no tice thereof, on
condition that the assessment notice was duly serve d on the person to
be charged to tax and that it includes – in substan ce and in effect – the
particulars on which the assessment was made.

Refund of excess tax in consequence of return
159A. (a) In this section: ” linkage differentials and interest ” – an addition to the
amount in question, equal to the said amount multip lied by the rate of
increase of the consumer price index during the per iod in question, plus
4% annual interest on the amount in question after the said linkage
differentials were added to it, or at another rate set by the Minister of
Finance with approval by the Knesset Finance Commit tee.
(b) If a person paid tax for a particular tax year, whether by way of
deduction or in any other manner, in excess of the amount to which he
is liable according to a return submitted under sec tion 131, that return
being based on account books or – if he is not req uired to keep
account books – on appropriate documents, then the excess shall be
refunded to him within 90 days after the day on whi ch he submitted the
return or on July 31 of the tax year following the tax year in respect of
which the return was submitted, whichever is later, unless his account
books were found unacceptable in the last tax year, in respect of which
an assessment was made for him, and he does not pro ve to the
Assessing Officer’s satisfaction that the grounds f or the books’
unacceptability did not exist in the year in respec t of which the refund is

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claimed.
(b1) If a person was under obligation to submit a r eturn under section 131 or
under section 135 before the time for the refund of excess tax under
subsection (b) (hereafter: tax refund date) and if he did not submit it by
the tax refund date, then the Director may delay th e refund for a period
of not more than 90 days after the said returns hav e been submitted.
(c) The refund of an excess during the period from the end of the tax year
or the day of payment, whichever is later, until th e date of the refund
shall be paid with the addition of linkage differen tials and interest; in the
case of a person with a special assessment period, the end of the
special assessment period shall, for this purpose, be substituted for the
end of the tax year.
(d) If amounts were refunded to an assessee under t his section and it
turned out that they were not due to him, then thos e amounts –
exclusive of linkage differentials and interest – s hall be deemed a tax
debt due from him from the end of the tax year to w hich relates the
return, on the basis of which they were refunded.

Refund of excess payment in consequence of assessme nt
160. (a) If it is proved to the Assessing Officer’s satisfaction that a person paid
tax for a tax year – by deduction or otherwise – in excess of the amount
to which he is liable and if the return for that ye ar was submitted not
later than the end of six years after that year, th en that person shall be
entitled to have the excess refunded to him within one year after the
day on which the assessment that established the ex cess amount was
made, or within two years after the end of the tax year in which the tax
was paid, whichever is later, with the addition of linkage differentials
and interest within their meaning in section 159A(a ) from the end of the
tax year in respect of which the return was submitt ed, or from the date
of payment, whichever was later, until the day of t he refund.
(b) No refund shall be paid to any person in respec t of a tax year for which
he did not deliver a return or neglected to deliver it, or for which he was
assessed in an amount that exceeds the amount in hi s return and for
which he received notice of assessment made for him in that year,
unless he proved to the Assessing Officer’s satisfa ction that the failure
or the neglect to deliver a true and correct return did not stem from any
fraud or willful act or omission; this provision do es not apply to sums to
be refunded after an objection or appeal.
(c) Any person who deems himself injured by the Ass essing Officer’s
decision on the amount to be repaid under this sect ion has the same
right to appeal against the decision, as he would h ave if he deemed
himself injured by an assessment made on him.

Delaying a tax refund during an assessment procedur e
160A. (a) Notwithstanding the provisions of section s 159A or 160, the Assessing
Officer may delay the refund of tax that was paid i n excess of the
amount the assessee owes according to a return or a ssessment, as
said in those sections, up to half the aforesaid am ount that is due to the
assessee, or up to the amount in dispute, whichever is lower, if the
Assessing Officer ordered the return to be examined .
(b) The delay of a tax refund said in subsection (a ) shall apply up to 90
days after the return was received; however, if bef ore the said 90 days
elapsed the Assessing Officer determined the assess ment to the best
of his ability, as said in Chapter One of Part Nine , then he may delay

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the refund of up to half the amount of tax he determined in the said
assessment for an additional ninety days, and if an objection under
section 150 was submitted – for an additional perio d that shall not
exceed 180 additional days after submission of the objection.
(c) If, within 180 days after the date of the objec tion, a decision on the
objection is handed down under section 152, then th e Assessing
Officer may delay the tax refund up to the amount o f the tax set in the
said assessment, until the date on which it becomes possible to collect
the tax debt under the assessment he made under the Taxes
(Collection) Ordinance, unless the Court before whi ch the appeal under
sections 154 or 158 was brought decides otherwise.

PART TEN: PAYMENTS AND COLLECTION
CHAPTER ONE: DEDUCTIONS ON ACCOUNT OF TAX

Article One: Deductions from Dividend and Interest

161. Repealed
Set off of tax on dividend and interest
162. If a body of persons deducted tax from interes t or dividends, and if that
interest or dividend or part of it is included in t he recipient’s income, then the
tax deducted shall be set off against the tax impos ed on that income.

Relief from tax on the dividends of foreign compani es from Israel income
163. (a) If an ordinary dividend was paid to a pers on who under this Ordinance
is liable to tax on it, and if he proves to the Ass essing Officer’s
satisfaction that the dividend was paid by a compan y that is not resident
in Israel and that the company’s income, out of whi ch the dividend was
paid (hereafter: the relevant income) includes inco me on which the
company paid tax under this Ordinance, whether by d eduction or in
some other manner (hereafter: Israel income), then he shall be entitled
to tax relief on a proportional part of the dividen d, in the proportion of
the Israel income to all the relevant income (herea fter: Israel dividend).
(b) The rate of relief shall be equal to the rate o f tax paid by the company
under this Ordinance or to the rate of tax applicab le to the Israel
dividend, treated as the highest part of that perso n’s income, whichever
is the lower rate.
(c) If relief was granted to a person under this se ction in respect of an
Israel dividend, then both the amount of that relie f and the amount of
the dividend shall be deemed his income from that d ividend.
(d) Any relief granted under this section shall, fo r the purposes of section
201, be deemed to reduce the amount of tax chargeab le under this
Ordinance in respect of the said dividend.
(e) For purposes of this section:
” ordinary dividend ” – a dividend on a share which is not a preferred
share and also that amount of dividend on a preferr ed share which is
not paid at a gross percentage rate;
” preferred share ” – a share which carries the right to dividends at a
fixed gross percentage rate, payable before any div idends on other

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classes of shares, whether or not it also carries the right to some further
participation in profits;
” tax ” – not including companies tax.

Article Two: Deduction from Work Income and from Other Income

Obligation to deduct at source
164. Any person who pays or is responsible for the payment of work income,
including the part of a grant received in consequen ce of retirement or death
that is not exempt under section 9(7a), of earnings or profit that stem from
gambling, lotteries or prize winning activity, as s aid in section 2A, of the
amount received from capitalization of a pension wh ich is not exempt under
sections 9A or 9B, of amounts and payments to which section 18(b) applies
and which constitute income for their recipient, of income under section 2(5),
of chargeable income that a real estate investment fund, as defined in section
64A2, transmits to its members, of consideration wi thin its meaning in section
88, of interest or dividends, or of any other incom e which the Minister of
Finance with approval by the Knesset Finance Commit tee so designated by
Order, shall – when payment is made – deduct tax fr om the amount to be
paid in the manner and at the rates prescribed, but the Minister of Finance
may prescribe that – in respect of gains or profit said in section 2A – the tax
deduction shall be as he shall prescribe, even if n ot at the time payment is
made and not out of the amount to be paid; this pro vision also applies to the
State.

Set off of deduction
165. (a) The said deduction shall be set off agains t the tax due from the
recipient’s chargeable income in the tax year in wh ich the deduction
was made or in the following tax year, at the Asses sing Officer’s option
at the time of or before the assessment.
(b) A set off under subsection (a) against the tax to which a controlling
member, as defined in section 32(9), is liable shal l only be made after
the deducted amount has been paid to the Assessing Officer, unless
the member’s control is less than 50% and he proves to the Assessing
Officer’s satisfaction that he did not know that th e deducted amount had
not been paid to the Assessing Officer or that he t ook all reasonable
measures to ensure its payment.

Obligation of person who makes the deduction
166. (a) W hen a person has deducted tax under sect ion 164, then he shall pay
the amount of tax deducted to the Assessing Officer at the time
prescribed by regulations, and at the same time he shall deliver to him
a return as prescribed.
(b) An employer or a person who deducted shall sub mit a return said in
subsection (a) in respect of the payment of an empl oyee’s work income
(Form 0126) and in respect of income liable to dedu ction (Form 0856)
in the online manner, as the Director shall prescri be, until April 30 after
the tax year in respect of which it is submitted, t ogether with a
declaration on a Form prescribed by the Director, a ccording to which
the particulars and the information given in the re turn are correct and
complete, as well as a printout of the said return signed by him
(hereafter: employer’s online return and deductor’s online return, as the
case may be).

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(c) In this section –
“income liable to deduction ” – payments designated under section
164 as income for purposes of the said section, as specified below:
(1) insurance commission;
(2) artists’, examiners’ and lecturers’ fees,
(3) writers’ fees;
(4) payments for agricultural work or produce;
(5) payments for construction work and haulage;
(6) payments for garment making, metal work, ele ctrical and
electronic work and haulage;
(7) payments for diamond work;
(8) payments for services or assets;
” employee” – other than an employee who works in an individu al’s
private household.

Assessing Officer may assess deductions
167. (a) If a person, to whom the provisions of sec tions 161 or 164 apply, did
not deduct tax as provided by them or did not deliv er a return as said in
sections 161 or 166, or if he delivered a said retu rn, but the Assessing
Officer has reasonable grounds for believing that t he return is not
correct, then the Assessing Officer may, to the bes t of his judgment,
assess the amount that person should have deducted, and this
assessment shall not relieve that person from any o ther responsibility
under this Ordinance; an assessment under this subs ection shall be
treated like an assessment under section 145; the A ssessing Officer
may assess a person as said in this section during the period said in
paragraph (1) or in paragraph (2), whichever is lat er:
(1) during the period in which he may – to the best of his judgment –
determine that person’s chargeable income for the t ax year in
which is obligated to deduct tax;
(2) within three years after the end of the tax yea r in which the liable
person’s last deductions return for the tax year wa s submitted
under the provisions of sections 161, 164 or 234, a nd with the
Director’s approval – within four years after the e nd of the said tax
year.
(b) The provisions of subsection (a) shall also ap ply when an assessment
or an Order which is no longer open to contestation or appeal has been
made for the year to which the return relates in re spect of the person
from whose income the tax should have been deducted , if that
assessment or Order does not include the income fro m which the
deduction should have been made.

Right of objection
168. If a person disputes the correctness of an ass essment under section 167, he
may, within two weeks, deliver a written objection to the Assessing Officer,
and the provisions of sections 150 to 158 shall app ly as if the objection had
been filed under those sections; the amount of tax, determined by the
assessment by Order under section 152(b) or in an a ppeal under section 153,
shall be paid within seven days after notice of ass essment was delivered or
after the Order was made or the judgment handed dow n, all as the case may
be, or by another date prescribed by regulations.

169. Repealed

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Article Three: Deduction from Foreign Resident

Obligation of person who pays to a foreign resident
170. (a) A person who pays to a person who is not r esident in Israel – or to
another for him – any income that is chargeable und er this Ordinance –
other than income from which tax was deducted under sections 161 or
164 – shall deduct from that income tax at the rate of 25 agorot for
every shekel at the time of its payment, if the rec ipient of the payment is
an individual, or tax at the rate imposed by sectio ns 126 and 127 if the
recipient is a body of persons, or at another rate the Assessing Officer
will prescribe for them by written notice; however, the Assessing Officer
may permit the income to be paid without deduction of tax, if it has been
proven to his satisfaction that the tax already was paid or that it will be
paid in some other manner; for this purpose: ” person who pays”
includes a financial institution, as defined in the Value Added Tax Law
5736-1975, through which the income is paid, unless the financial
institution holds certification from the Assessing Officer, exempting it
from the obligation to deduct at the source.
(b) The provisions of subsection (a) shall not appl y to a person who pays
income said in subsection (a) and who, under sectio ns 108 to 115, is
himself responsible for paying tax on it.
(c) Notwithstanding the provisions of subsection (a ), if a real estate
investment fund, as defined in section 64A2, transm its chargeable
income of shareholders, within its meaning in secti on 64A4, to a person
not resident in Israel, then it shall deduct from i t tax at the tax rate that
obligates it under the said section.

Obligation of the person who deducts from a foreign resident
171. W hen a person has deducted tax under section 1 70(a), then he must pay the
amount of tax he deducted to the Assessing Officer within seven days after
the day of deduction, and he shall deliver a return to him, specifying the name
and address of the person to whom or for whom the i ncome was paid.

Set off of deduction
172. The amount of deduction under section 170 shal l, for purposes of collection,
be set off against the tax that will be imposed on the person who received the
said income.
Assessing Officer may assess deduction
173. If a person is under obligation to deduct tax under the provisions of this Article
and does not deduct all or part of the amount, or i f he did not deliver a return
said in section 171, or if he delivered a said retu rn but the Assessing Officer
has reasonable grounds for believing that the retur n is not correct, then the
Assessing Officer may assess the amount of tax whic h that person was
obligated to deduct to the best of his judgment; an assessment under this
section shall be treated like an assessment under s ection 145; the Assessing
Officer may assess a person said in this section du ring the period during
which he may determine – to the best of his judgmen t – that person’s
chargeable income in the tax year in which he was u nder obligation to deduct
the tax; that assessment shall not relieve that per son from any other
responsibility under this Ordinance.

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Article Four: Auxiliary Powers

Power to enter, inspect and interrogate
173A.(a) If the Assessing Officer deemed it necessa ry to do so in order to
ensure compliance with the provisions of this Chapt er or with any
provisions on tax deduction at the source or in ord er to prevent evasion
from compliance with them, then he or a public serv ant so authorized
by him in writing may –
(1) enter the premises – except a dwelling not used for his business
or vocation – of any person who must deduct tax at the source, or
who has possession of the books and documents that relate to
tax deduction at the source, and he may inspect any register,
record, certificate or other document related to ta x deduction at
the source, which is in their possession;
(2) interrogate any person who is required to deduc t tax at the
source or who has possession of the books and docum ents that
relate to tax deduction at the source or from whose income the
tax must be deducted;
for the purposes of paragraphs (1) and (2), ” tax deduction at the
source ” – deduction of tax under sections 161, 164 or 170 .
(b) If a person is interrogated or if his premises are inspected under
subsection (a), then he shall give the person who i nterrogates him or
who makes the inspection every opportunity to do so , and he shall
answer all questions put to him completely and trut hfully.
(c) The provisions of this section shall not deroga te from any powers of an
Assessing Officer or public servant under this Ordi nance.

Article Five: Miscellaneous Provisions

Postponement because of holidays
173B. The last date for the submission of a return under this Chapter shall be
postponed, if there were at least three days of res t during the five days that
preceded the said date, and it shall be on the four th working day after the end
of the consecutive days of rest; for this purpose: “days of rest ” – the days of
rest prescribed in the State of Israel within their meaning in section 18A(a) of
the Law and Administration Ordinance 5708-1948, as well as interim festival
days.

CHAPTER TWO: COLLECTION

Article One: Advance Payments

Definition
174. In this Article, ” the determining year ” – the last tax year in respect of which
the income of the assessee was assessed by January 1 of the tax year,
whether or not objection was lodged.

Assumption
174A Spouses shall be deemed, for purposes of this Article, a single assessee; this

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provision shall not derogate from the provisions of section 66A.

Advance payments
175. (a) On the fifteenth day of each of the ten mo nths from February to
November of each tax year every assessee shall, on account of the tax
for that tax year, make an advance payment of 10% o f the amount of
tax to which he became liable for the determining y ear; however, if that
taxpayer was allowed to calculate his income accord ing to a special
period, as said in section 7, then he shall pay the said advance on
account of tax for the tax year in which ends the s pecial period that
includes the date for the said advance payment.
(b) Notwithstanding the provisions of subsection (a ), the Minister of
Finance may prescribe, with approval by the Knesset Finance
Committee, in general or for categories of assessee s, monthly advance
payments that shall be a portion of those assessees ‘ turnover of
transactions during the period during which the adv ances are paid; the
rate of advance payment shall be set according to t he ratio between the
assessee’s turnover of transactions in the determin ing tax year and the
tax he was obligated to pay in that year on that tu rnover; for this
purpose: ” turnover of transactions ” – the total of transactions, as
defined in the Value Added Tax Law 5736-1975, exclu ding sales to
which Part Five or the Land Appreciation Tax Law 57 23-1963 apply; the
Minister of Finance may – in Rules – add or detract categories of
transactions, of income or of sales, either in gene ral or for categories of
assessees, all on conditions which he shall prescri be.
(c) If, during the determining tax year, a body of persons paid amounts
said in section 18(b), other than a regular monthly salary and
repayment of expenses (hereafter in this section: p ayments to a
controlling member) to an individual who is a contr olling member within
its meaning in section 32(9), then its advances sha ll be in the amount it
would have paid in that year, had it not made payme nts to the
controlling member.
(d) The amount of advance payments by a body of per sons shall be
reduced by the amounts of tax it withheld under sec tion 164 from
payments to controlling members.
(e) If a transparent company received a dividend, t hen the amount of the
first advance to be paid – after it was received – by it or by the share
holders, within their meaning in section 64A1, shal l be increased by an
amount equal to 25% of the dividend.
————————————————— —————————————————————
As long as the provisions of section 64A remain in effect, subsection (e)
should be read as it was before Amendment No. No. 1 32, as follows – Tr.
(e) If a family company received a dividend, then t he amount of the first
advance to be paid – after it was received – by it or by the assessee,
within its meaning in section 64A, shall be increas ed by an amount
equal to 25% of the dividend.
————————————————— —————————————————————
(f) The last date for payment under this section sh all be postponed, if
there were at least three days of rest during the f ive days that preceded
the said date, and it shall be on the fourth workin g day after the end of
the consecutive days of rest; for this purpose: ” days of rest” – the days
of rest prescribed in the State of Israel within th eir meaning in section
18A(a) of the Law and Administration Ordinance 5708 -1948, as well as
interim festival days.

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176. Repealed
Crediting payments against advances
177. (a) An amount deducted during the tax year at the source – under sections
161 and 164 to 170 – from the assessee’s income in that tax year shall
be deemed a payment on account of advance payments to which that
assessee is liable under section 175 in respect of the income from
which the tax was deducted, and he is entitled to s et off any sum
deducted at the source during the tax year in respe ct of which the
advance payments are to be paid against his advance payments, on
condition that he has written certification of that deduction.
(b) An amount paid as an advance under section 181B in respect of an
excess expenditure incurred in that tax year shall be deemed a
payment on account of the advances which that asses see must pay
under section 175, and he is entitled to set it off against his advances,
on condition that he holds written certification of the payment of the
advance in respect of excess expenditures.
(c) The provisions of subsection (b) shall not appl y to an amount paid as
an advance in respect of excess expenditures by a b ody of persons, to
which the provisions of section 3(g) apply.

Doubt as to tax for the determining year
178. If the amount of tax for the determining year is in dispute, but is greater than
the amount of tax last finally determined, then the monthly advance payment
shall be calculated according to that part of the a mount of tax for the
determining year which is not in dispute, or accord ing to the amount of tax
determined as aforesaid, whichever is the larger am ount; “finally
determined “, in this section – by a determination not open to objection or
appeal.

Minister of Finance may change rates and times
179. The Minister of Finance may, by Order, increas e or reduce the rate of
advance payments under this Article, change their p ayment dates or
prescribe that they be paid once every two months o r at other intervals set by
him; he may also prescribe different rates of advan ce payments in respect of
different determining years and – with approval by the Knesset Finance
Committee – for each of the advance payments during the tax year, or for
different categories of assessees.

Assessing Officer may exempt or increase
180. (a) An Assessing Officer may exempt a person f rom all or part of an
advance payment under this Article, if it was prove n to his satisfaction
that the tax for the year in which the advance paym ent is payable and in
respect of which that assessee is likely to be liab le to tax will be less
than the tax to which he is liable in respect of th e determining year, but
he shall not so exempt a person who is required to keep account books
and does not do so.
(b) (1) If the amount of tax which the assessee mus t pay according to a
return submitted by him under section 131 during th e tax year –
and for this purpose the Minister of Finance may pr escribe a
percentage by which the said amount of tax shall be increased –
exceeds the amount of advance payments to which he is liable in
respect of that year, then the Assessing Officer ma y increase the

225
amount of advance payments under this Article by the amount of
the said differential.
(2) If the Assessing Officer has reasonable grounds for believing that
the tax which will be due from an assessee for a pa rticular tax
year will exceed the amount of the advance payments to which
he is liable for that year by at least 20% or by at least NS
500,000, whichever is the lesser amount, then he ma y increase
the amount of advance payments under this Article b y the
differential; an aforesaid decision shall, for purp oses of objection
and appeal, be treated like an assessment under sec tion 145.
(c) If an individual kept account books in the tax year and in the year that
preceded it, but did not and was not required to ke ep account books in
the year which serves as basis for the determinatio n of advance
payments in the tax year, and if the tax to which h e is liable for the
preceding tax year – according to the return submit ted by him and
based on account books – is less than the amount of advance
payments, then the amount of advance payments to wh ich he is liable
in respect of the tax year shall be reduced to the amount of tax to which
he is liable according to the return.

Person not previously assessed
181. If an assessee has chargeable income and previ ously he was not liable to tax
or was not assessed, then he shall make the advance payments under
section 175 or 176, as the case may be, in percenta ges of the projected
amount of tax which he is likely to have to pay on that income in that tax year
according to his estimate, and with the first payme nt he shall submit to the
Assessing Officer a declaration of the said estimat ed tax, and an additional
declaration six months after the first declaration was submitted; if he did not
deliver the said declarations, or if he delivered s uch declarations, but the
Assessing Officer has reasonable grounds for believ ing that the declarations
are not correct, then the Assessing Officer may – t o the best of his judgment
– set the amount of the advance payment which that assessee must pay, and
a said determination shall, for purposes of objecti on or appeal, be treated like
an assessment under section 145.

Power to grant reduction
181A. The Minister of Finance may, with approval by the Knesset Finance
Committee, prescribe by regulations reductions to b e granted to persons who
make advance payments under this Article before the time prescribed for their
payment or who make advance payments in amounts gre ater than what is
due from them, all at rates and on conditions presc ribed by him either
generally or for particular categories of assessees .

Article One “A”: Advance Payment for Nondeductible Expenses

Advance payment for excess expenses
181B. (a) If, for purposes specified in regulations under section 31, a body of
persons spent amounts which according to the said r egulations are not
deductible or which exceed the amounts set as deduc tible, or if it spent
amounts for expenses which according to section 32( 11) are not
deductible (in this Law: excess expenditures), or i f it paid a levy under
Chapter Six of the Arrangements in the State Econom y (Law

226
Amendments) Law 5749-1989, then it shall pay the Assessment Officer
at the prescribed time an advance payment at the ra tes specified below
of the excess expenditures which it incurred, and a t the same time it
shall submit to him a prescribed return and it shal l also submit to him an
annual return specifying and summing up all the exc ess expenditures
which it incurred in that year, all as specified be low:
(1) a body of persons, to which section 3(g) applie s – 90%;
(2) any other body of persons – 45%;
for purposes of this section: ” body of persons” – exclusive of
partnerships that do not include any partner that i s a body of persons to
which this section applies.
(b) The provisions of subsection (a) shall not appl y to amounts paid as
work income from which the person who pays them or is responsible for
their payment deducted tax under section 164.
(c) If a body of persons did not make the advance p ayments said in
subsection (a), or did not deliver a return under t hat subsection, or
delivered a return but the Assessing Officer has re asonable grounds for
believing that the return is not correct, then the Assessing Officer may –
to the best of his judgment – assess the amount of advance payment
which that body of persons must pay, and that asses sment does not
relieve it of any other obligation under this Ordin ance; an assessment
under this section shall be treated like an assessm ent under section
145; the Assessing Officer may assess a person as s aid in this section
during the period during which he may determine – t o the best of his
judgment – that person’s chargeable income in the t ax year in which he
was under obligation to pay the advance.

Set off against future tax
181C. If a body of persons, to which the provisions of section 3(g) do not apply,
made advance payments under section 181B for a cert ain tax year in an
amount that exceeds the amount of tax which it must pay in that year, then
the excess shall not be refunded to it; however, if its income from the same
business or vocation will be liable to tax – includ ing Land Appreciation Tax –
in subsequent tax years, then the excess amount sha ll be set off against the
tax or the Land Appreciation Tax; the excess amount shall be adjusted at the
rate of the index increase from the end of the tax year in which it was created
until the end of the tax year in which it was set o ff.

Article Two: Times for Payment of Tax

Payment on submission of return
182. (a) W hen a body of persons submits a return un der section 131 or an
estimative return under section 133, it shall pay t he amount of tax due
from it according to that return.
(b) The Minister of Finance may prescribe, by Order , in respect of other
assessees – except for individuals at least 75% of whose income is
chargeable income under section 2, paragraphs (2) o r (5) – that the
assessee to whom that Order applies shall, when he submits a return
under section 131 or an estimative return under sec tion 133, pay the
amount of tax due from him according to that return .

Payment after notice of assessment

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183. If a notice of assessment under section 149 was delivered to a person, then
he shall, within 15 days after delivery of the noti ce of assessment, pay the
balance of tax due from him under it, and if he fil ed objection under section
150 – the balance of tax that is not in dispute.

Payment after objection
184. If an amended notice of assessment under secti on 152(a) or an Order under
section 152(b) was delivered to a person, then he s hall – within 15 days after
delivery of the notice or Order – pay the balance o f tax due from him under it,
and if he filed objection under section 153 – the b alance of tax that is not in
dispute.

Article Three: Interest and Fines

Adjustment of payment after judgment
185. If the decision of a District Court under sect ion 156 or a decision of the
Supreme Court under section 157 was delivered to a person, then the
following provisions shall apply:
(1) if the assessee paid too much, then the excess amount shall be
refunded to him, plus interest and linkage differen tials, within their
meaning in section 159A(a);
(2) if the assessee paid too little, then the balan ce shall be paid within
fifteen days after the decision is delivered, plus linkage differentials and
interest as aforesaid for the period from the day t he appeal was filed
until judgment was given, unless the Court prescrib ed otherwise.

Interest on postponement of times of payment
186. The Assessing Officer may, if shown sufficient reason therefor, extend the
times prescribed under Article Two for the payment of all or of part of the tax,
or the times for payment of all or of part of the a dvance under Article One, for
a period he deems appropriate, on condition that th e assessee pay linkage
differentials and interest, within their meaning in section 159A(a), for the
period of postponement.

Payment of interest and linkage differentials
187. (a) (1) In respect of amounts of tax for a cer tain tax year which were not
paid by the end of that tax year the assessee shall be charged
linkage differentials and interest, within their me aning in section
159A(a) for the period from the end of the tax year until the date
of payment; for a person with a special assessment period the
end of the special assessment period shall, for thi s purpose, take
the place of the end of the tax year.
(2) The provisions of this subsection shall also ap ply to tax debts
under section 159A(c).
(b) The provisions of subsection (a) shall not appl y to a period, in respect
of which linkage differentials and interest are owe d under sections
185(2) or 186.
(c) (1) In respect of amounts of tax that should ha ve been deducted, but
were not deducted, or were deducted, but not transf erred to the
Assessing Officer at the time prescribed therefor, the person
obligated to make the deduction shall be charged li nkage
differentials and interest, within their meaning in section 159A(a),

228
for the period that begins on the fourteenth of the month before
the day on which he should have, but did not transf er the
amounts deducted, or on which he should have transf erred, if he
had deducted them on time, and until their transfer to the
Assessing Officer; however, if the amount liable to deduction
does not relate to a specific date and therefore is determined as
a total for a certain period, then linkage differen tials and interest
shall be charged for the period that began in the m iddle of the
said period.
(2) If the person required to make the deduction pr oves that the
person, from whose income he should have deducted t he
amounts that were not deducted, included the said a mounts in a
return of his income, then the date on which the am ounts should
have been transferred to the Assessing Officer shal l be replaced
by the expiration of the tax year to which the said return relates.
(d) If advances in respect of excess expenditure sh ould have been paid
under section 181B and were not paid to the Assessi ng Officer on the
prescribed date and if – had they been paid on time – they could not
have been set off against advances paid or tax paid in respect of that
tax year, then the debtor shall be charged linkage differentials and
interest within their meaning in section 159A(a) fo r the period from the
end of the tax year until the day of payment.

Incentive for early filing of return and payment
187A. (a) If an assessee paid any amount on account of tax due from him in
respect of a certain tax year before the last date set in section 132 for
submitting the return under section 131, then in re spect of that amount
he is entitled to exemption from linkage differenti als and interest
applicable thereto under section 187(a), as specifi ed below:
(1) on an amount paid until the end of the first mo nth after the end of
the tax year or special assessment period (hereafte r in this
section – tax year) – full exemption from linkage d ifferentials and
interest;
(2) on an amount paid during the second month after the end of the
tax year – exemption from half the linkage differen tials and
interest;
(3) on an amount paid during the third month after the end of the tax
year – exemption from one fourth the linkage differ entials and
interest.
(a1) The Minister of Finance may, by Order, increas e the rates of exemption
said in subsection (a);
(b) The relief under subsection (a) shall be comput ed first, and the relief
under the closing passage of section 187(a)(1) shal l be deducted from
the balance of the linkage differentials and intere st.
(c) Repealed

Fine for non-submission of return
188. (a) If a person did not submit a return by the date set in section 132, then
for each month of delay a fine of NS 200 shall be i mposed on him;
however, if a later date for the submission of the return was set for that
person under section 133 (hereafter: delayed date), and if that person
did not submit the return by the delayed date, then a fine of NS 400
shall be imposed on him for each month of delay aft er the delayed date.
(a1) If, in a return he submitted under section 13 1, a person did not specify

229
an act designated under the said section as tax planning that must be
reported, then the Assessing Officer may impose on him a fine of NS
500 for every month in which he did not report as a foresaid.
(b) Repealed
(c) If a person did not submit a return at the time set in sections 161 or
171, then the Assessing Officer may impose on him a fine of NS 200
for each month of delay.
(d) If a person did not submit on time any of the r eturns prescribed for the
purposes of sections 164 to 166, then a fine of NS 200 shall be
imposed on him for each month of delay.
(e) In this section, ” month” – a whole month.
(f) If a person, required to deduct tax at the sour ce from amounts paid by
him. does not at the prescribed time give to person s from whose
payments tax was deducted the forms that certify th e amounts paid to
them and the tax deducted, then the Assessing Offic er may impose on
him a fine of NS 100 in respect of every person to whom the form was
not delivered.
(g) If a person did not submit on time a return und er section 135(1), then a
fine of NS 200 shall be imposed on him for each mon th of delay;
however, if a date was initially set for delivery b y that person of a return
under section 135(1), and if subsequently on that p erson’s application a
later date was set for submission of the return (he reafter: delayed date),
and if that person submitted the return after the d elayed date, then a
fine of NS 400 shall be imposed on him for each mon th of delay after
the delayed date;
(h) The amounts stated in this section, as they wer e on January 1 of the
preceding tax year, shall be adjusted on January 1 of every tax year, at
the rate of index increase during the preceding tax year; if income
ceilings were adjusted in any month under section 1 20B(b), then the
Director may adjust the amounts said in this sectio n, as they were on
January 1 of that tax year, as if they were income ceilings.
(i) Repealed

Saving of criminal responsibility
189. (a) The payment of a fine under section 188 or the increase of tax rates
under section 191B shall not derogate from a person ‘s criminal
responsibility under this Ordinance.
(b) If criminal action was brought against a person for non-submission of a
return, then he shall not be charged a fine under s ection 188 for that
offense, and if he has paid an aforesaid fine, then it shall be refunded
to him; if a said criminal action was brought and t he defendant was
acquitted, then linkage differentials and interest, within their meaning in
section 159A(a), shall be paid him from the day of the payment of the
fine until its refund.

Fine for delay in payment
190. (a) (1) (a) If a person is more than seven day s late in paying an
advance which he must pay, or in paying part of it, then to
the amount in arrears shall be added a fine in the amount
of linkage differentials and interest within their meaning in
section 159A(a) (hereafter: linkage differentials a nd
interest), from the day set for the payment until t he payment
of the amount in arrears, or until the end of the t ax year in
respect of which the advance was required, whicheve r is

230
earlier (hereafter: end of period of fine).
(b) To a fine said in subparagraph (a) shall be add ed linkage
differentials and interest from the end of period o f the fine
until the payment of the fine, and the fine shall b e treated
like a tax debt for purposes of section 195A.
(c) Notwithstanding the provisions of subparagraph (a), if the
date for the payment of an advance was postponed un der
section 175(f) and if a person paid an advance more than
four days later than the date prescribed in section 175(a) or
than the date prescribed under section 175(b), and if he did
not pay the advance by the determining date set in section
175(f), then the fine shall be added to the amount in arrears
in accordance with the provisions of subparagraph ( a).
(d) If a person did not state the date for the paym ent of the
advance, and if therefore the advance was set at a total
amount for the entire period, then – for calculatio n of the
fine under this section – the date for payment shal l be
deemed to be at the midpoint of the period in respe ct of
which the advance was set.
(2) If a person requested that the amount of his ad vance payments
be reduced and it appears that the tax due accordin g to the
return filed by him exceeds the balance of advance payments
after the reduction, then he shall pay on the amoun t of the
reduction – but not on more than the difference bet ween the tax
due according to the return and the balance of the advance
payments after reduction – linkage differentials an d interest within
their meaning in section 159A(a) from the middle of the tax year
or special assessment period until the end of the t ax year or
special assessment period or, in respect of each pa yment, until
the date of payment, whichever comes first; for thi s purpose, any
amount paid on account of advance payments shall fi rst be
placed to the account of the advance.
(3) For the purpose of reducing the amount of advan ce payments in
a certain tax year, as said in paragraph (2), other than in respect
of participation in the financing of research and d evelopment
carried out by another person under section 20A(a) or under any
other statute, and other than in respect of credit for contributions
under section 46A or under any other statute, the t ax from the
payment of which the assessee was exempted because of the
said deduction or credit shall not be taken into ac count in the
calculation of tax in accordance with the return.
(4) If an assessee failed to give notice of the be ginning of business
activity or its change in accordance with section 1 34, and if he
consequently was not required to pay advances as sa id in section
181, or if consequently the amount of his advance p ayments was
not increased as said in section 180, then he shall be charged
linkage differentials and interest in respect of th e determining
period, for the entire amount of advance payments w hich he
owed, or for the amount by which the Assessing Offi cer was
entitled to increase his advance payments, as the c ase may be;
for this purpose: ” determining period ” – the period that begins in
the middle of the period between the opening of the business or
of its change and between the end of the tax year o r the special
assessment period, and that ends at the end of the said year or

231
period, as the case may be.
(5) For purposes of paying linkage differentials an d interest, and for
purposes of the order in which payments are credite d under
section 195A, linkage differentials and interest un der paragraphs
(2) to (4) shall be deemed a tax debt at the end of the tax year or
special assessment period, as the case may be.
(b) Repealed
(c) Repealed
(d) A fine imposed under this section shall not be deemed part of the tax
paid for purposes of claiming relief under any of t he provisions of this
Ordinance.

Fine for unlawful set-off of deduction at the sourc e
190A. If a person deducted from his advance payment s a deduction at the source,
for which he does not have written certification or which was not deducted
during the period permitted under section 177, then he shall be liable to a fine
of three times the amount of the improper deduction .

Deficiency fine
191. (a) In this section, ” deficiency” – the amount by which the tax which an
assessee owes exceeds the tax payable by him accord ing to his return
under section 131 or, if he has not submitted such a return, the amount
of tax determined under section 145(b), all as the case may be.
(b) If a deficiency of more than 50% of the tax to which he is liable was
found in respect of any assessee, and if he does no t prove to the
Assessing Officer’s satisfaction that he was not ne gligent in making the
return delivered by him or in the non-delivery of a return, then he shall
be liable to a fine at the rate of 15% of the amoun t of deficiency.
(c) If the Director or a person empowered by him fo r this matter has
reasonable grounds for believing that the deficienc y was created
willfully and with the assessee’s intent to evade p ayment of tax, then
double the fines specified in subsection (b) shall be added to the
amount of tax to which the assessee is liable.
(c1) If a final assessment that can no longer be ap pealed includes – in
respect of an act which under section 131(g) was de signated tax
planning that must be reported – the determination that it must be
ignored under the provisions of section 86, then th e assessee shall be
liable to a fine at the rate of 30% of the shortfal l created by the said tax
planning; when a said fine is imposed, then no fine shall be imposed in
respect of that shortfall under the provisions of s ubsections (b) and (c).
(d) For purposes of sections 149 to 152, the additi on of a deficiency fine
under this section shall be treated like an assessm ent.
(e) Linkage differentials and interest shall be add ed to a fine imposed
under subsections (b) or (c) after February 28, 198 5, from the end of
the tax year in respect of which the return was sub mitted or the
assessment made under section 145(b), or from Febru ary 28, 1985,
whichever is later, and until the day the fine is p aid, and the fine shall
be deemed a type of debit charge for the purposes o f section 195A.

Fines for failure to deduct
191A. If a person without reasonable justification fails to deduct tax which he is
required to deduct under section 161, 164 or 170, t hen he shall be liable to a
fine at the rate of 15% of the amounts which he did not deduct.

232
Increase of tax rates for not keeping books
191B. (a) If an assessee is required to keep accoun t books for a certain tax year
or part of it and did not keep them, or he kept the m only during part of
the period during which he was obligated to keep th em, or if he did not
base his return on account books, then the tax to w hich he is liable for
that year shall be increased by 10% of the amount o f the chargeable
income in respect of which he was required to keep accounts, and in
every subsequent year in which he does not keep acc ount books as
aforesaid the tax shall be increased by 20% of the amount of the
aforesaid income; however, if a person was first re quired to keep books
in a certain tax year, but first began to do so aft er the date on which he
was required to begin, then the said additions shal l only apply to the
period during which he was required to keep books a nd did not do so.
(b) If an assessee was charged an addition to tax f or a certain tax year,
then the advance payments for the year during which the assessment
for that certain tax year is made shall be increase d by 20%, if the
addition to the tax is 10%, and by 40% if the addit ion to the tax is 20%,
but if the tax was also increased for the tax year according to which the
advance payments were fixed, then the rate of incre ase of the advance
payment shall be reduced by twice the rate of addit ion to the tax; this
provision shall not apply if the assessee proves, t o the Assessing
Officer’s satisfaction, that – in the tax year in w hich the aforesaid
assessment was made – he kept account books or was not required to
keep them.

Fine for false record
191C. If an assessee is required – under directions from the Director by virtue of
section 130 – to record identifying particulars of a purchaser who pays cash,
based on a document produced by him, and if he does not record them or
records incorrect particulars, then a fine of 5% of the amount of the sale in
respect of which he violated a said direction shall be imposed on him, or a
fine of NS 12,900, whichever is more.

Director’s authority to decrease interest or fine
192. The Director may reduce the rate of interest o r of linkage differentials and
interest under sections 186, 187 and 190, and the a mount of fine under
sections 188, 190, 190A, 191A and 191C, or waive th em completely, if it is
proved to his satisfaction that the delay which cau sed the liability to pay was
not caused by any act or omission that depended on the assessee’s will; the
Director may, at his absolute discretion, reduce or waive as aforesaid, if it is
proven to his satisfaction that the assessee did no t know the exact amount of
tax due from him before he filed the return; howeve r, the Director may not
reduce the amount of interest or linkage differenti als and interest under
sections 186, 187 and 190 only because the assessee duly made his
advance payments or because tax was duly deducted f rom him or he paid the
tax due from him in accordance with his return when he submitted it.

Time for paying interest, linkage differentials or fine
192A. The time for the payment of interest, linkage differentials and interest or fines,
which the assessee must pay under the provisions of this Ordinance, shall be
within 30 days after he was sent notification of th at obligation.

233
Article Four: Enforcing Payment

Assessing Officer may enforce payment
193. If a person is obligated to pay any amount und er this Ordinance, then the
Assessing Officer may enforce its payment as provid ed hereafter or under the
Taxes (Collection) Ordinance, and the provisions of that Ordinance, except
for section 12 there, shall apply to the collection of any said amount as if it
were a tax, within its meaning in that Ordinance; h owever, when the
Assessing Officer is not the District Officer, then the Assessing Officer shall
forward to the District Officer of the district in which the assessee resides or
carries on his business a certificate signed by the Assessing Officer that
specifies the amount of arrears due from the assess ee, and upon receipt of
that certificate the District Officer shall enforce payment under the provisions
of the Taxes (Collection) Ordinance that apply to t he collection of a said
amount.

Collection of tax in special cases
194. (a) If the Assessing Officer has reason to sus pect that the tax on a certain
income will not be collected because a certain pers on intends to leave
Israel, or because of any other reason, then he may –
(1) if that person already was assessed in respect of that income or
is under obligation to make advance payments on it – demand by
written notice that that person immediately provide collateral, to
the Assessing Officer’s satisfaction, for payment o f the tax
assessed or of the advance payments he must make;
(2) if that person has not yet been assessed as afo resaid – assess
him according to the amount of income of which a re turn was
made or, if that person has not made a return or ha s made a
return which does not satisfy the Assessing Officer , in an amount
which the Assessing Officer deems reasonable;
(3) if that person is not yet obligated to make a r eturn of that income
– require him by written notification to prepare a return
immediately, and thereafter the Assessing Officer m ay act as said
in paragraph (2).
(b) If an assessment was made under subsection (a)( 2), then the
Assessing Officer shall make notification of it, an d all the tax assessed
under that assessment shall be paid immediately upo n delivery of that
notification.
(c) If the assessee did not pay the tax or did not provide the collateral
according to subsection (a)(1), then the competent Court may, on the
Assessing Officer’s application, make an Order even in the assessee’s
absence –
(1) to stay his departure from Israel;
(2) to attach his property.
(d) If an assessee paid the tax or provided collate ral under this section,
then he is entitled to file objection and appeal un der sections 150 to
158, and the amount paid by him shall be corrected according to the
results.

Action by Assessing Officer
195. An action may be brought by the Assessing Offi cer in his official capacity for
tax and all costs, and it may be recovered in a com petent Court from the
person who owes it, as if it were a debt to the Gov ernment of Israel, and it
may be sued for and recovered by the means prescrib ed in section 193.

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Article Five: Crediting an Assessee’s Payments

Crediting payments
195A.(a) W hen a person pays any amount on account o f a tax debt, a
proportional part of the amount paid shall be credi ted against each type
of debit in that tax debt, in the proportion of tha t type of debit to the
entire tax debt; in this context:
(1) if the person did not specify the amount paid a s being on account
of his debt as assessee or as deductor, the amount shall be
credited against his debt as deductor;
(2) a tax refund, which under the Tax Set Off Law 5 740-1980 is set
off against a tax debt, and an amount collected und er the Taxes
(Collection) Ordinance or in any other way shall be treated like an
amount paid by that person.
(b) (1) If a person paid an amount on account of a tax debt which he
owes as an assessee, without specifying the year of the debt,
then the amount shall be credited against his tax d ebts as
assessee according to the years in which they were created,
beginning with the earliest tax year;
(2) if a person paid an amount on account of a tax debt he owes as a
deductor, then the amount shall be credited against his tax debts
as deductor in the order in which they were created , beginning
with the earliest one.
(c) In this section –
“tax debt ” – each of the following:
(1) the total amount of all types of debits owed by a person under
this Ordinance, as assessee for a certain tax year;
(2) the total of amounts of all types of debits owe d by a person under
this Ordinance as deductor, in respect of any payme nt which he
paid to another person;
” type of debit ” – each of the following: tax, interest, linkage
differentials.

Article Six: Monetary Composition in Respect of
Online Returns

Monetary composition
195B. Notwithstanding the provisions of Article Thr ee, if the Director has reasonable
grounds to assume that an online return was not sub mitted up to the date
said in section 132 or 166, as the case may be (in this Article: violation), then
he may impose a monetary composition on the violato r in the amount
specified below in respect of each whole month of d elay in submitting the
return;
(1) if an individual did not submit an online indep endent return under
section 131(b2) – NS 1,000;
(2) if an employer did not submit and employer’s on line return or if a
deductor did not submit a deductor’s online return – NS 1,500.

Demand for monetary composition and its payment
195C. Monetary composition for a violation under se ction 195B shall be paid at the

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Director’s demand on a form he prescribed (hereafter: payment notice) within
thirty days after the payment notice was dispatched ; the payment notice shall
specify, inter alia, particulars of the violation f or which the monetary
composition was imposed and its amount, and it shal l also include information
on the right to present arguments to the Director, as said in section 195D.

Writ of arguments
195D. (a) An individual, an employer or a deductor to whom a payment notice
was sent may, within thirty days after dispatch of the said notice, submit
his written arguments on imposition of the composit ion and its amount
to the Director in writing (in this section: writ o f arguments); to the writ of
arguments shall be attached an affidavit in support of the facts
specified in it.
(b) W hen an individual, employer or deductor has s ubmitted a writ of
arguments to the Director, then the Director shall decide on the basis of
the writ of arguments and of the affidavit whether to leave the payment
notice in effect or cancel it, and he may – in orde r to reach the said
decision – summon the person who submitted the writ of arguments to
a hearing before him; a notice of the Director’s de cision under this
subsection shall be sent to the person who submitte d the writ of
arguments.
(c) Submitting the writ of arguments under this se ction shall not stay
payment of the monetary composition at the time sai d in section 195C.
(d) If the monetary composition was paid and the D irector decided under
this section to cancel the payment notice, then the monetary
composition shall be refunded with linkage differen tials and interest
within their meaning in the Interest and Linkage Ad judication Law 5721-
1961 (in this Article: the Interest Adjudication La w) from the day of its
payment until the day of its refund.

Updating the amount of monetary composition
195E. (a) Monetary composition shall be at its upda ted amount on the day the
payment notice is dispatched, and if a petition was brought and the
Court that heard the petition ordered its payment t o be stayed – at its
updated amount on the day of the decision on the pe tition.
(b) The amount of monetary composition shall be up dated on January 1 of
each year (in this section: the updating day) at th e rate of increase of
the index known on the updating day over the index that was known on
the updating day of the preceding year, and in resp ect of the first
updating day – over the index that was known on Jan uary 1, 2008; the
said amount shall be rounded to the nearest amount that is a multiple
of NS 10.
(c) The Director shall publish the updated amount of the monetary
composition in a notice in Reshumot.

Linkage differentials and interest
195F. If monetary composition was not paid on time, then linkage differentials and
interest shall be added to it, within their meaning in the Interest Adjudication
Law, for the arrears period up to its payment (in t his Article: arrears
supplement).

Collection
195G. The Taxes (Collection) Ordinance shall apply to collection of the monetary
composition and of the arrears supplement.

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Reserving criminal liability
195H. (a) Payment of monetary composition shall not derogate from the
individual’s, employer’s or deductor’s criminal lia bility for the violation.
(b) If an indictment under section 216(4) or (4a) was brought against an
individual, employer or deductor for a violation, t hen he shall not be
obligated to pay monetary compensation for it, and if he paid, then the
amount paid shall be refunded to him with the addit ion of linkage
differentials and interest, within their meaning in the Interest
Adjudication Law, from the day of its payment until the day of its refund.

Petitioning the Administrative Affairs Court
195I. (a) Petitioning the Administrative Affairs Co urt against the imposition of
monetary composition under this Article, in accorda nce with section
32(5) of the Administrative Affairs Courts Law 5760 -2000, shall not stay
payment of the monetary composition, except with th e Director’s
consent or if the Court so ordered.
(b) If a petition said in subsection (a) was accep ted after the monetary
composition was paid, then the monetary composition shall be
refunded with the addition of linkage differentials and interest, within
their meaning in the Interest Adjudication Law, fro m the day of its
payment until the day of its refund

CHAPTER THREE: DOUBLE TAXATION RELIEF

Article One: Reciprocal International Agreement

Order that gives effect to agreement
196. (a) W hen the Minister of Finance has given not ice by Order, that an
agreement specified in the Order was concluded with a certain state to
afford double taxation relief on income tax and on every other tax of a
similar character imposed by the Laws of that state (hereafter:
reciprocating state) and that it is expedient to gi ve that agreement effect
in Israel, then that agreement (hereafter: agreemen t) shall have effect
in relation to income tax, notwithstanding any prov ision of any statute.
(b) An Order made under this section may be revoked by a subsequent
Order.
(c) In this section, AState @ – including areas outside Israel that are not a
State, enumerated in Schedule One AA1 @.

Obligation of secrecy in case of agreement
197. W hen an agreement has been given effect as sai d in section 196, then the
obligation to maintain secrecy imposed by section 2 34 shall not prevent
disclosure – to an authorized officer of the recipr ocating state – of any
information that is to be disclosed under the agree ment.

Power to make regulations
198. The Minister of Finance may make regulations f or implementation of the
provisions of an agreement.

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Article Two: Determining Amount of Relief

Definitions
199. In this Chapter –
“income tax ” – exclusive of companies tax;
” Israel taxes ” – income tax and companies tax;
” foreign taxes ” – taxes payable by an Israel resident to tax auth orities of a
state other than Israel, on income produced or accr ued in that state, including
taxes payable to states that are parts of a federal state or to regional
authorities that are parts of that state, calculate d as percentages of the
income and exclusive of municipal taxes; ” foreign income ” – income produced or accrued abroad;
” foreign income from a certain source ” – foreign income, classified by the
sources of income prescribed in section 2, in Part Five or in Part Five “C”,
less expenses that may be deducted from them and lo sses that may be set
off against them, all in accordance with the provis ions of the Ordinance.

Provisions on crediting double taxation
200. (a) Foreign taxes paid on foreign income that is chargeable to tax in Israel,
shall – translated into new shekel amounts – be all owed as credits
against Israel taxes under this Ordinance, in accor dance with the
provisions of this Article.
(b) Israel taxes shall be credited in a certain tax year only if the person
whose income is chargeable to those taxes was an Is rael resident in
that tax year.
(c) The Director may prescribe rules for the implem entation of this Article
and rules on the matter of returns.

Deduction of foreign taxes
201. (a) Foreign taxes paid in respect of foreign i ncome that is tax exempt in
Israel shall not be deducted.
(b) The relief granted in respect of dividends unde r section 163 shall be
deemed a reduction of the amount of tax which appli es to that dividend
under the Ordinance.

Credit against companies tax precedes credit agains t income tax
202. If an agreement permits credit against compani es tax and income tax, then
the amount of credit shall be used first to reduce companies tax on that
income and – to the extent that all of it cannot be used for that purpose – it
shall be used to reduce income tax on it; if the ag reement allows credit only
against income tax, then section 201 shall be const rued as if it said “income
tax” instead of “Israel taxes”.

Amount of credit against companies tax
203. (a) The amount of credit against companies tax , to which an Israel resident
body of persons is entitled under the provisions of this Article in respect
of foreign income from a certain source shall not e xceed the amount of
companies tax to which it is liable on that income.
(b) If the foreign income includes dividends, in re spect of which the
assessee company, as defined in section 126(c), req uested that it pay
tax at the rate prescribed in section 126(a), or if – under an agreement
to prevent double taxation – the foreign taxes paid on that dividend and
which were not imposed directly must be taken into account as credits,

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then the grossed up dividend shall be added to all of the company’s
income and credit shall be given in the amount of t he foreign taxes that
were not imposed directly on that dividend, in addi tion to the foreign
taxes; the total credit in this section shall not e xceed the amount of tax
that applies to the said dividend.
(c) In this section –
“foreign taxes not imposed directly ” – taxes paid by a foreign
resident body of persons on income which, after the payment of tax,
was distributed as a dividend; ” grossed up dividend ” – the amount of income from a dividend
received after tax was deducted at the source, plus the tax deducted at
the source, plus foreign taxes not imposed directly .

Amount of credit against income tax
204. (a) The amount of credit against income tax to which an Israel resident
individual is entitled under the provisions of this Article in respect of
foreign income from a certain source, which is ordi nary income, shall
not exceed the credit ceiling in respect of that in come.
(b) The amount of credit against income tax to whic h an Israel resident
individual is entitled under the provisions of this Article on foreign
income from a certain source, which is chargeable t o tax at a special
rate, shall not exceed the amount of tax that appli es to that income in
Israel.
(c) In this section –
“ordinary income ” – chargeable income, on which no special tax rate
is imposed; ” income ratio ” – the ratio obtained by dividing the amount of fo reign
income from a certain source that is ordinary incom e, by the total
amount of ordinary income; ” special tax rate ” – a tax rate that applies in Israel and is differ ent from
the tax rate prescribed in section 121; ” credit ceiling ” – the amount obtained by multiplying the income r atio
by the amount of income tax on the individual’s tot al ordinary income
before any credit under this Article was granted.

205. Repealed

Excess credit in a tax year
205A. (a) If the amount of foreign taxes paid in re spect of foreign income from a
certain source exceeds the amount of credit granted in its respect
against Israel taxes (in this section: excess credi t), then the assessee is
entitled to subtract the excess credit from tax to which he will be liable
in respect of income produced abroad from the same source in the
following five years, one after the other, adjusted at the rate of the index
increase from the end of the tax year in which it w as created to the end
of the tax year in which it was subtracted; the exc ess credit shall be
subtracted in accordance with this section, subject to the provisions of
this Chapter, mutatis mutandis.
(b) Notwithstanding the provisions of subsection (a ), if an excess credit
was created because of the set off of a loss that s tems from foreign
income from a certain source against foreign income from another
certain source, then in the five coming years, one after the other, it may
also be subtracted from the tax on foreign income f rom the source from
which the said loss stems, adjusted as said in that subsection.

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Rules for computing income for purposes of credit
206. W hen calculating foreign income that is charge able to tax in Israel, no
deduction from it shall be allowed in respect of fo reign taxes.

Credit for tax on dividend in special cases
207. If the agreement provides, in respect of certa in categories of dividends, but
not in respect of others, that foreign taxes not im posed on them directly or by
deduction are to be taken into account for purposes of credit against Israel
taxes on them, and if a dividend paid is not of the said specific categories,
then – if the dividend was paid to a company which directly or indirectly
controls at least half the voting power in the comp any that pays the dividend –
the credit shall be allowed as if the dividend belo nged to one of those specific
categories.

Credit for dividend
207A. (a) If an Israel resident body of persons rec eived a dividend from a body of
persons, which is considered an Israel resident onl y because its
business is controlled and managed from Israel (in this section – the
other body) and if tax from the dividend was deduct ed at the source in
the foreign state, then the other body shall be ent itled to credit in the
amount of the tax deducted at the source as aforesa id, against the
companies tax that applies to it; the amount of the credit shall not
exceed the companies tax that applies in that tax y ear, but an unused
balance of the credit may be used against companies tax that will be
imposed on the other body in the following five yea rs, one after the
other.
(b) If an Israel resident individual received a div idend from the other body
and tax at the source was deducted in the foreign s tate, then the
individual shall be entitled to a credit in the amo unt of tax deducted at
the source, against the tax that applies to his inc ome from the said
dividend, all subject to the provisions of this Cha pter.

Credit for foreign taxes
207B. Foreign tax can be credited against Israel ta x that applies in a tax year only if
it was paid in the foreign state no later than 24 m onths after the end of that
tax year, except for tax that was supposed to be pa id on unpaid profits, as
defined in section 75B; foreign tax paid in the for eign state after the said
period may be deducted in the tax year in which it was paid in the foreign
state, against tax due in Israel on foreign income from the same source, and
the provisions of this Chapter shall apply to it, m utatis mutandis; in the case of
disagreement on the amount of the credit, the appli cant for the credit has the
right of objection and appeal, as said in sections 150 and 153, as part of an
objection and appeal against the assessment made fo r him.

Credit for foreign taxes – employee of a certain em ployer
207C. If an individual has income, the place of pro duction of which is in Israel only
because of the provisions of section 4A(b)(1), then for purpose of the
provisions of this Article the individual’s income shall be deemed foreign
income and the taxes paid to tax authorities in the foreign state in respect of
that income shall be deemed foreign tax.

Restriction on credit
207D. W hen a loss from a controlled business has be en set off against income in
Israel, as said in section 29(2)(c) or (e), then no credit shall be given under

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this Chapter against Israel taxes, to which the Israel resident is liable in
respect of chargeable income he had from a business abroad during the two
years before the tax year in which the loss was set off and in the five years
thereafter, one after the other, up to the amount o f the loss set off as
aforesaid.

Waiver of credit
208. Credit against Israel taxes to which a person is liable in a tax year shall not be
allowed, if he requested that no credit be given ag ainst his income in that
year; if he so requested, then the provisions of se ction 205A shall not apply.

209. Repealed
Error in calculating credit
210. If the amount of credit is found to have been set too high or too low, in
consequence of a change in the amount of tax payabl e in Israel or abroad or
because of the provisions of section 207D, then no provision of any statute
that limits the time for making assessments or clai ms for relief shall apply to
an assessment or claim to which the change gave ris e, if it was made not
later than two years after the assessments, changes and other decisions – in
Israel or abroad – which matter in respect of the q uestion whether any credit
is to be given and what it shall be.

Article Three: Miscellaneous Provisions

Definitions
211. In this Article –
“double taxation relief ” – any credit for income tax abroad, allowed for
purposes of income tax under this Ordinance, includ ing any credit or relief
taken into account in determining the net Israel ra te to be levied on dividends
received; ” rate of relief ” – the rate, which is the rate of the excess tax d educted from
the dividend, over the net Israel rate.

Effect of relief on set off and refund
212. W hen the tax payable by a company is affected by double taxation relief, then
the amount to be set off under section 163 or to be refunded under section
160 in respect of the tax deducted by the company f rom any dividend paid by
it shall be reduced according to the following rule s:
(1) If the recipient of the dividend is not liable to tax on it, then the
reduction shall be in an amount equal to the tax on the grossed up
dividend, at the rate of relief applicable to it;
(2) if the rate of tax to which the recipient is li able in respect of the dividend
is less than the rate of relief applicable to it, t hen the reduction shall be
in an amount equal to the tax on the grossed up div idend, calculated at
the difference between those two rates.

Place of dividend in scale of income
213. For purposes of section 212: (1) if the income includes one dividend said in sec tion 212, then it shall be
deemed to be in the highest bracket of the income;
(2) if the income includes several aforesaid divide nds, then any dividend,

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the net Israel rate of which is lower than that of another dividend shall
be deemed to be in a higher bracket in the scale of income;
(3) if tax a dividend is chargeable at different ra tes on its different parts, or
if the tax is chargeable on one part of a dividend and not on another
part of it, then each part shall be treated like a separate dividend.

Double taxation relief on a resident’s foreign inco me
214. (a) In respect of an Israel resident’s income, the source of which is abroad
and on which income tax or a similar tax is charged at its source, the
Minister of Finance may, by Order, grant double tax ation relief by
exempting the income from paying all or part of the tax, as shall be
specified in the Order.
(b) The provisions of this section shall not deroga te from the powers under
section 196.

PART ELEVEN: PENALTIES

Offenses for which no penalty is specifically provi ded
215. If a person is guilty of an offense against th is Ordinance or against a
regulation made thereunder, and if no other penalty is specifically provided for
that offense, then he shall be liable to one year i mprisonment or to a fine, or
to the fine said in section 61(a)(2) of the Penal L aw 5737-1977 (in this Part:
Penal Law), or to both penalties.

Failure to notify of beginning or change of occupat ion
215A. (a) If a person opened a business or began to exercise a vocation and did
not inform the Assessing Officer of that fact in ti me and also did not
submit on time the first annual return, which he is required to submit
after the said events, then he shall be liable to t hree years
imprisonment or to the fine said in section 61(a)(3 ) of the Penal Law,
and to one and a half times the tax to which he was liable.
(b) If a person opened a business in or began to e xercise a vocation in an
additional place or if he changed his place of busi ness or the place
where he exercises his vocation and did not notify the Assessing
Officer in time and also did not submit on time the first annual return he
is required to submit after the said events, then h e shall be liable to
eighteen months imprisonment or to the fine said in section 61(a)(3) of
the Penal Law, and to one and a half times the tax to which he was
liable.

Non-compliance with certain requirements, etc.
216. If a person, without sufficient cause, committ ed one of the following offenses,
then he shall be liable to one year imprisonment, o r to the fine said in section
61(a)(2) of the Penal Law, or to both penalties:
(1) he did not comply with a demand included in a n otification given to him
under this Ordinance;
(2) he did not appear, as required by a notificatio n under this Ordinance or,
he did appear, but did not answer a question lawful ly put him;
(3) he refused to accept a notification sent to him under this Ordinance;
(4) he did not submit a return under section 132 o r 133 in time;
(4a) he did not submit on time a deductor’s online return or an employer’s

242
online return under the provisions of section 166;
(5) he did not keep account books in accordance wit h directions by the
Director under section 130(a);
(6) he destroyed or concealed documents of value f or the assessment;
(7) he records intakes on a cash register tape, re ceipt vouchers, invoices,
a daily intake ledger or other documentation under the Director’s
directions by virtue of section 130, and did not re cord there an intake
which he was obligated to record under those direct ions; if the intake
was not recorded by the assessee’s employee or by t he assessee’s
representative who is not his employee, then the em ployee or
representative shall be accused of the offense, and the assessee shall
be accused of it, unless he proves that the offense was committed
without his knowledge and that he took all reasonab le steps to ensure
its prevention;
(8) he did not report an act that constitutes tax p lanning that must be
reported in a return, as said in section 131(g), in violation of the
provisions of section 131(a)(5d) or (b1) or (g).

Assault or obstruction in performance of duty
216A.(a) If a person assaults a person who performs any function or is employed
in the implementation of this Ordinance, with the i ntent to obstruct him,
or while the aggressor is armed with a firearm or o ther instrument, then
he shall be liable to five years imprisonment or to the fine said in
section 61(a)(4) of the Penal Law.
(b) If a person performs any act intended to obstru ct any person said in
subsection (a) in the due performance of his functi on shall be liable to
three years imprisonment or to the fine said in sec tion 61(a)(3) of the
Penal Law.

Transfer of assets with intent to prevent collectio n of tax
216B. (a) If a person transferred his assets to ano ther without transferring control
thereof, with the intention to prevent the collecti on of tax to which he is
liable or may become liable in respect of a period before the transfer or
in the year of the transfer, or in respect of a typ e of income the
production of which has begun but lasts several yea rs, then he – or if
the transferor is a body of persons, the person who effected the said
transfer – shall be liable to two years imprisonmen t or to the fine said in
section 61(a)(3) of the Penal Law.
(b) If a person distributed a company’s assets amon g its members with the
intention to prevent the collection of tax to which the company is liable
or to which it may become liable in respect of a pe riod before the
transfer or in the year of the transfer or in respe ct of a type of income
the production of which has begun but lasts several years, then he shall
be liable to two years imprisonment or to the fine said in section
61(a)(3) of the Penal Law, on condition that the am ount of the fine not
exceed the amount of the debt.

Unlawful representation
216C. If a person violates one of the provisions of section 236, then he shall be
liable to one year imprisonment or to the fine said in section 61(a)(4) of the
Penal Law 5737-1977, or to both penalties.

Incorrect return and information
217. If a person, without reasonable justification, makes an incorrect return by

243
omitting or understating income of which he is required to make a return
under the Ordinance, or if a person gave incorrect information in relation to
any matter or thing that affects his own liability to tax or the liability of any
other person or of a partnership, then he shall be liable to two years
imprisonment or to the fine said in section 61(a)(3 ) of the Penal Law, plus the
amount of income missing in consequence of that inc orrect return or
information, or which would have been missing if th e return or information had
been accepted as correct, or to both penalties; if the person argues that he
had reasonable justification, then he shall bear th e burden of proof.

Non-deduction of tax
218. If a person did not deduct tax which he is req uired to deduct under sections
161, 164 or 170, or if a person received work incom e or income under section
2(5), knowing that tax was not deducted from it und er those sections, then he
shall be liable to one year imprisonment or to the fine said in section 61(a)(2)
of the Penal Law, plus double the total of all the amounts not deducted, or to
both penalties.

Failure to transmit deducted tax
219. If tax was deducted under sections 161, 164 or 170 and without reasonable
justification it was not paid to the Assessing Offi cer as said in sections 161,
166 or 171, then the person required to make the de duction shall be liable to
two years imprisonment or to the fine said in secti on 61(a)(3) of the Penal
Law, and to double the total of all aforesaid deduc tions, or to both penalties; if
he argues that he had reasonable justification, the n he shall bear the burden
of proof.

Fraud, etc.
220. If a person willfully commits one of the offen ses specified below with the
intent to evade tax or to assist another person to evade tax, then he shall be
liable to seven years imprisonment or to the fine s aid in section 61(a)(4) of the
Penal Law and double the amount of income which he concealed, intended to
conceal or helped to conceal, or to both penalties; and these are the
offenses:
(1) he omitted from a return made under the Ordi nance any income which
must be included in the return;
(2) he made a false statement or entry in a retur n under the Ordinance;
(3) he gave a false answer, verbal or written, to a question asked or to
information requested of him in under the Ordinance ;
(4) he prepared or maintained or allowed another t o prepare or to maintain
false account books or other false records, or he f alsified or allowed
falsification of account books or records;
(5) he made use of any fraud, artifice or contriva nce or allowed use of
them;
(6) he presented a false document to the person who paid the income, in
order to prevent or reduce the deduction of tax at the source.

Linkage of amount on which fine is imposed
220A. For purposes of a fine under this Part or und er Part Ten, the basis of which is
an amount of income, the basis shall be increased i n proportion to the
increase of the consumer price index, from the inde x last published before
the end of the tax year to which that basis relates , to the index last published
before the fine is imposed.

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Payment of fine or of composition imposed on another person
220B. A body of persons shall not pay, directly or indirectly, any fine or composition
imposed on another person in respect of an offense under sections 215 to
220; whoever violates the provision of this section shall be liable to a fine
three times the amount of the fine or composition p aid; for this purpose:
” body of persons ” – exclusive of a body of persons, the members of which
must place their full working capacity at its dispo sal and who must transfer
their assets to it.

Monetary composition
221. If a person committed an offense under sectio ns 215 to 220, the Director may
– with that person’s consent – accept from him mone tary composition that
does not exceed double the highest fine that can be imposed for that offense,
and when he has done so, any legal proceeding again st that person in
respect of that offense shall be discontinued, and if he was under arrest for it
he shall be released.
Burden of proof
222. (a) If a person is charged with an offense und er section 216(4), then he
bears the burden of proof that he does not have to deliver a return.
(b) If a person is charged with an offense under section 216(6), then he
bears the burden of proof that the documents he des troyed or
concealed are of no value for the assessment.
(c) If a person, to whom the provisions of section 161, 164 or 170 apply, is
charged with an offense under sections 218 or 219, then he bears the
burden of proof that he has complied with the said provisions.

Presumption of guilt
223. If a person is charged with the offense of omi tting or understating income
under section 217, then his guilt shall be deemed t o have been established
prima facie, if one of the following has been prove n:
(1) domestic or other personal expenditures incurr ed in the tax year
exceeded the income of which a return was made to t he Assessing
Officer;
(2) his capital or the capital of his spouse or of their children under age 20
increased during a certain period of not more than five years by an
amount greater than the amount of the income of whi ch the spouses or
one of them made a return or returns for that perio d to the Assessing
Officer, less tax that was paid.

Responsibility of a person who helps to prepare ret urn
224. If a person helps another person to prepare an y return, notification or other
document for the purposes of this Ordinance, knowin g that that return, notice
or document contains incorrect information, or if a person appears as the
representative of an assessee and gives information for the purposes of this
Ordinance, knowing that it is incorrect, then he sh all – for the purposes of
sections 215 to 217 and 220 – be deemed to have com mitted the said acts.

Responsibility of director, etc.
224A. If a body of persons committed an offense und er sections 215 to 220, then
every person who was an active director or a partne r, accountant, responsible
officer, trustee or representative of that body whe n the offense was
committed, shall also be deemed guilty thereof, unl ess he proves one of
these –
(1) that the offense was committed without his kno wledge;

245
(2) that he took all reasonable steps to ensure prevention of the offense.

Prescription
225. A criminal action under this Ordinance shall n ot be brought later than six
years – or in the case of an offense against the pr ovisions of section 220, ten
years – after the tax year in which the offense was committed.

Penal proceedings do not exempt from payment of tax
226. The opening of proceedings for the imposition of a penalty, fine or
imprisonment under the Ordinance or their impositio n thereunder does not
relieve any person of the obligation to pay tax to which he is or may be liable.

Investigations and searches
227. The Minister of Police may authorize an Assess ing Officer to carry out
investigations or searches in order to prevent or t o detect offenses against
this Ordinance, and an Assessing Officer authorized as aforesaid may –
(1) exercise every power vested in an police office r of the rank of inspector
or above under section 2 of the Criminal Law Proced ure (Evidence)
Ordinance and sections 3 and 4 of the said Ordinanc e shall apply to a
statement taken by him as aforesaid;
(2) exercise the powers of a policeman under sectio n 17(1)(a) of the
Criminal Law Procedure (Arrest and Searches) Ordina nce, except for
the power to seize property other than documents;
(3) (a) exercise the power of an officer in charge, within its meaning in
section 9 of the Criminal Law Procedure (Arrest and Searches)
Ordinance [New Version] 5729-1969, release a person on bail,
and sections 10 to 15 of the said Ordinance shall a pply to this
matter;
(b) if a suspect was released on bail under subpara graph (a) and no
indictment was brought against him within 180 days after his
release, then he and his guarantors shall be releas ed from their
bail, and the provisions of section 55(b) of the Cr iminal Law
Procedure Law [Consolidated Version] 5742-1982 shal l apply to
this matter.

Saving of other Laws
228. The provisions of this Ordinance shall not aff ect any criminal proceeding
under another Law.

Publication of list of offenders
228A. Once a year the Director may publish a list o f all assessees convicted in the
preceding year, by final judgment, of an offense un der section 220; the said
publication shall be in at least two daily newspape rs.

PART TWELVE: GENERAL PROVISIONS

Appointment of executive authority
229. For the proper implementation of the Ordinance the Minister of Finance may
appoint a Director, Assessing Officers and other of ficers or persons, all
according to the need.

Powers of the Director

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230. The powers of an Assessing Officer shall also vest in the Director.

Order to appear
230A. If a person was lawfully required – on at lea st two occasions at least 30 days,
but not more than one year apart – to appear before the Assessing Officer,
and if he did not do so and did not inform the Asse ssing Officer of reasonable
grounds for his nonappearance, then a Judge or Regi strar of a Magistrates’
Court may, on the Assessing Officer’s application, make an Order that
obligates him to appear before the Assessing Office r at the time and place
stated in the Order.

Obligation of confidentiality
231. (a) A person who has an official position in t he implementation of the
Ordinance or is employed in its implementation must regard all
documents, information, returns, assessment lists o r copies thereof,
which relate to the income or to an item of the inc ome of any person, as
secret matter and as a personal confidence, and he must treat them as
such.
(b) Notwithstanding the provisions of subsection (a ), a man or a woman is
entitled to the disclosure of every particular in t he return submitted by
his or her spouse under section 131 or under sectio n 135, and also to
disclosure of the amount of income determined by th e Assessing
Officer or the Court, all in respect of the period during which they were
married and lived together.

Income tax employee shall not be required to reveal a secret
232. A person appointed under the provisions of the Ordinance or employed in its
implementation shall not be required to show to a C ourt any return, document
or assessment, or to divulge or communicate to a Co urt anything that came to
his knowledge in connection with the performance of his duties under the
Ordinance, except to the extent necessary for the i mplementation of
provisions of the Ordinance, or with the intention to bring action for an offense
related to income tax, or in the course of hearing such an action.

Publication of list of assessees
233. (a) The Minister of Finance may publish a list of all assessees in a manner
and in a place to be determined by him, and in it s hall be specified the
amount of chargeable income of each in a certain ta x year, as stated in
the return made by him or as determined by the Asse ssing Officer or by
the Court, all as the case may be; if a change occu rred in the said list in
consequence of an objection or appeal lodged by an assessee, then
the list shall be corrected accordingly on the asse ssee’s application;
every person is entitled to inspect the list that w as published as
aforesaid at prescribed times and places and also t o receive a certified
copy of all or of part of the list against a prescr ibed fee.
(b) Notwithstanding the provisions of subsection (a ), the Minister of
Finance may – with approval by the Knesset Finance Committee –
refrain from including a certain category of assess ees in the list of
assessees that is to be published as aforesaid.

Penalty for disclosing an income secret
234. If a person has possession or control of docum ents, information, returns,
assessment lists or their copies, which relate to t he income of a person or to
a particular of his income, and if he at any time c ommunicates or tries to

247
communicate aforesaid information or any contents of those documents to a
person to whom the Minister of Finance did not perm it him to communicate it,
or if he communicates it not for purposes of this O rdinance, then he shall be
liable to six months imprisonment or to a fine of N S 12,900.

Restrictions on duty to give information
235. (a) Statutory provisions that obligate to deli ver information about another
person’s property or income, other than a said prov ision under the
Statistics Ordinance [New Version] 5732-1972, shall not apply to any
person who performs an official function or is empl oyed in the
implementation of the Ordinance, unless the Ordinan ce expressly so
provides.
(b) Notwithstanding the provisions of subsection (a ), it is permitted to
disclose information to the National Insurance Inst itute under the
provisions of section 384A of the National Insuranc e Law [Consolidated
Version] 5755-1995.
(c) Notwithstanding the provisions of subsection (a ), when an Order has
been made under section 60A of the Bankruptcy Ordin ance [New
Version] 5740-1980, then it is permitted to reveal to the Official
Receiver or to the Court, within their meaning in t he said Ordinance,
returns, information or documents specified in the said section and
according to its provisions.
(d) The provisions of sections 231, 232 and 234 sha ll apply, mutatis
mutandis as the case may be, to every person who pe rforms an official
function in respect of information he received unde r this section –
(1) in the implementation of the National Insuranc e Law
[Consolidated Version] 5755-1995;
(2) in the implementation of the Bankruptcy Ordinan ce [New Version] 5740-1980.

Interpretation
235A. For purposes of sections 235B to 235E:
“professional secret ” – communications between a client and an advocate ,
whether oral or written, which is substantively con nected to the professional
service rendered by the advocate to the client, inc luding records prepared by
the advocate for his own use, on condition that the y are substantively
connected to the said professional service; ” privileged document ” – a document that includes a professional secret;
” Court ” – the District Court, in whose area of jurisdicti on is located the office
of the advocate who claims privilege; ” judge ” – the president or relieving president of a Court .

Power to demand documents from advocate
235B. Notwithstanding the provisions of the Chamber of Advocates Law 5721-1961,
an advocate must, if he is called upon to do so by an Assessing Officer,
deliver to him any document in his possession, enab le him to examine and
seize any aforesaid document and allow him to perfo rm any other act in
respect of a said document, all in accordance with the powers vested in him
under this Ordinance, but the advocate shall not ha ve to do so if he claims
that the document is privileged.

Claim of privilege
235C. (a) If an advocate claims that a document dem anded by an Assessing
Officer is privileged, then the Assessing Officer s hall take the document

248
and – without inspecting it – place it immediately and in the advocate’s
presence in a package, close it, write on it the na me of the client to
whom the document relates, sign it and deliver it t o the Court; if
privilege is claimed for several documents that rel ate to the same client,
then he shall place all in the same package; the ad vocate may also, if
he so desires, sign the package, and he may accompa ny the Assessing
Officer when he delivers the package to the Court; for the present
purpose: ” package” – an envelope or any other container.
(b) If, for any reason, it is impossible to deliver the package to the Court,
then the Assessing Officer shall deliver it to a ju dge, and he shall
deliver it to the Court; for the present purpose: ” judge” – including a
judge of a District Court and a magistrate.
(c) Not later than seven days after the date on whi ch a document said in
subsection (a) was taken, the client or the advocat e from whom the
document was taken may apply to the Court to decide and announce
whether the document is privileged.

The Court’s decision
235D. (a) A judge, within whose jurisdiction an ap plication said in section 235C(c)
was received, shall hear the application and examin e the document not
later than seven days after the date on which the a pplication was
received; the judge shall hear the advocate and he may also hear the
Assessing Officer, without showing the document or disclosing its
contents to him.
(b) If the judge decides that the document is privi leged, he shall return it to
the advocate from whom it was taken; if he decides that it is not
privileged, he shall deliver it to the Assessing Of ficer.
(c) If the judge decides that the document is partl y privileged, then he shall
direct that a copy of the non-privileged part, cert ified by him, be
delivered to the Assessing Officer; a said copy, de livered to the
Assessing Officer, shall be admitted in evidence in any legal
proceeding, as if it were the original.
(d) If the Court did not receive an application sai d in section 235C(c) about
any document in a package delivered to it, then it shall deem the
document for which no application was submitted to be non-privileged
and it shall be delivered to the Assessing Officer.
(e) An application said in this section shall be he ard in camera and the
judge’s decision shall be final.

Permission to represent assessees
236. The following may represent assessees, and for this purpose: “represent” –
also before a books acceptability committee:
(1) an auditor, within the meaning of the term in t he Auditors Law 5715-
1955;
(2) a person qualified to audit the books of a coop erative society under
section 20 of the Cooperative Societies Ordinance;
(3) a representative tax consultant, as defined in the Regulation of
Representation by Tax Consultants Law 5765-2005;
this provision shall not infringe the rights of any advocate under the Chamber
of Advocates Law 5721-1961.

236A to 236I – Repealed

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Signature on notifications
237. (a) Every notification, which an Assessing Off icer must make or send
under this Ordinance, shall be signed by him or by a person appointed
by him for that purpose, and every notification on which a said signature
is printed or written, or on which the Assessing Of ficer’s name is
written, is valid; however, every notification unde r this Ordinance, in
which it is demanded that a person or a witness app ear before the
Assessing Officer, shall be signed in person by the Assessing Officer or
by a person duly authorized by him.
(b) A signature on any notification, that purports to be the signature of a
person appointed for that purpose, shall be deemed to be that person’s
signature, as long as the opposite has not been pro ven.

Service of notifications
238. (a) A notification may be served on a person e ither in person or by
registered mail to his last known business address or private residence;
if sent by registered mail, it shall be deemed a no tification served on the
sixth day after the day of its dispatch, if sent to a person in Israel, or – if
it was sent to persons outside Israel – on the day after the day on which
it would have arrived if sent by mail in the ordina ry way, and in order to
prove service in this manner it shall suffice to pr ove that the letter that
contained the notification was properly sent and pr operly addressed.
(b) If a notification was sent as said in subsectio n (a) and the addressee
refused to accept it, then it shall be deemed to ha ve been duly served.

239. Repealed

Rounding off
240. In calculating an amount of chargeable income and every amount which a
person must pay under this Ordinance, that amount s hall be increased or
decreased to the nearest whole new shekel.

Rules for the conversion of foreign income and loss es
240A. The Director may prescribe conversion rules, according to which an
assessee’s income, chargeable income, losses, expen ses and tax payments
that stem from abroad shall be translated into new shekel amounts.

Forms, information and returns
240B. (a) Subject to the provisions under section 2 43(1), the Director may
prescribe the forms needed for implementation of th is Ordinance; said
forms do not have to be published in Reshumot and t hey shall be
published in a manner prescribed by the Director; w hen the Director
has prescribed said forms, then no person shall use any others.
(b) If an assessee is required to deliver informati on or a return under this
Ordinance, he shall deliver the information or retu rn by magnetic media,
if the Director so required, all as the Minister of Finance prescribed with
approval by the Knesset Finance Committee.

Designating the tax year
241. A special assessment period shall be designate d by the number of the year in
which April 1 of that special assessment period fal ls.

Effect of Law concerning trade with the enemy or wi th absentees
242. If the Trading with the Enemy Ordinance 1939, the Absentees’ Property Law
5710-1950 or any other statute that deals with trad e with the enemy or with

250
absentees affects a person, an income or an asset, then the provisions in
Schedule Two shall apply.

Power to make regulations
243. The Minister of Finance may make regulations f or the implementation of the
provisions of this Ordinance, especially including regulations on –
(1) forms for returns, claims, statements and notif ications under this
Ordinance;
(2) the deduction at the source and payment of tax in respect of benefits
and pensions paid out of the State Treasury, on wor k income or on
income under section 2(5);
(3) any matter on which the Ordinance authorizes hi m to prescribe.

Power to change deductions and credits
244. The Minister of Finance may – by an Order that requires the Knesset’s
approval by a resolution – change the rates of the deductions and credits
specified in this Ordinance.
Special powers
244A. The Minister of Finance may, with approval by the Knesset Finance
Committee, prescribe conditions and necessary adjus tments for the purposes
of sections 5, 29, 64A1 to 64A10, 67B to 67K, 68A, 75C to 75Q, 85A, 91, 92,
100A, 102 and Chapter Three of Part Ten.

Prohibition of reductions and concessions
245. (a) Deductions or set offs shall not be allowe d, and exemptions, tax
reductions or other concessions shall not be grante d, unless they are
expressly prescribed in a Law or by virtue of a pow er defined in a Law.
(b) Notwithstanding the provisions of subsection (a ), the Minister of
Finance may, with approval by the Knesset Finance C ommittee, make
regulations for the grant of aforesaid concessions, but their effect shall
expire three months after the date of their publica tion; however, the
Minister of Finance may, with aforesaid approval, e xtend their effect
until the end of the tax year in which they were pu blished.
(c) (1) The Minister of Finance may, with approval by the Knesset
Finance Committee, prescribe for each tax year a ce iling for tax
benefits to be allowed in the tax year under sectio ns 20 and 20A,
and he may prescribe separate ceilings for categori es of benefits;
the ceiling for benefits in respect of oil prospect ing shall be set
after consultation with the Minister of Energy and Infrastructure.
(2) No regulations shall be made and no certificati on issued under
sections 20 or 20A in a certain tax year, if that i ncreases the total
of tax benefits allowed in that year by virtue of t he said sections to
more than the ceiling amount set by the Minister of Finance for
that tax year .
SCHEDULE ONE (Section 11)
Part One

Avivim, Abirim, Even Menahem, Idmit, Or Haganuz, Ei lon, Alkosh, Bet Hillel, Baram,
Betzet, Bar Yochai, Goren, Gush Halav, Gaaton, Gran ot Hagalil, Gesher Haziev,
Dovev, Dishon, Dalton, Dan, Dafna, Hagoshrim, Hila, Ziev Hagalil, Zarit, Hossen,
Hanita, Hurfeish, Yaara, Yiftah, Yiron, Kabri, Kfar Blum, Kfar Giladi, Kfar Yuval, Kfar
Szold, Kerem Ben Zimra, Liman, Metulla, Miron, Malk ieh, Manot, Manara, Meona,
Meilya, Mayan Baruch, Maalot Tarshiha, Matzuba, Mar galiot, Misgav Am, Matat,

251
Neot Mordechai, Nahariya, Netuah, Sasa, Saar, Safsufa, Evron, Ein Yaacov, Alma,
Amir, Aramshe, Fassuta, Pekiin, New Pekiin, Tzivon, Tzuriel, Rag’er, Rosh Hanikra,
Reihaniya, Ramot Naftali, Shear Yishuv, Sdeh Elieze r, Sdeh Nehemya, Shomera,
Shlomi, Shamir, Snir, Shetula.

Part Two
Avshalom, Or Haner, Ibim, Eilot Regional Council, E rez, Beeri, Bet Shean, Gibim,
Gvaram, Dekel, Zikim, Zimrat, Holit, Hatzor Glilit, Yevul, Yad Mordehai, Yachini,
Yesha, Yeted, Kissufim, Kfar Maimon, Kfar Aza, Carm iah, Kerem Shalom, Mivtahim,
Magen, Mefalsim, Nahal Oz, Nir Yitzhak, Nir Oz, Nir Am, Nirim, Netiv Ha’assara,
Suffa, Saad, Ein Habsor, Ein Hashlosha, Alumim, Ami oz, Central Arava Regional
Council, Arad, Pri Gan, Re’im, Sdeh Avraham, Shuva, Shokda, Tushia, Talmei
Yosef, Tekuma.
SCHEDULE ONE “A” (Section 75C)
(1) FOUNDATION – under the Laws of Holland, Liechte nstein, Panama, the
Bahamas or the Dutch Antilles
(2) ESTABLISHMENT – under the Laws of Liechtenstein
(3) REG. TRUST – under the Laws of Liechtenstein
SCHEDULE ONE AA1 @
(Section 196)
Separate Customs Territory of Taiwan, Penghu, Kinme n and Matsu

SCHEDULE TWO
(Section 242)
Definitions
1. In this Schedule –
“the Custodian ” – the Custodian of Enemy Property, appointed unde r section
2 of the Trading with the Enemy Ordinance 1939, or the Custodian of
Absentees’ Property, within its meaning in the Abse ntees’ Property Law 5710-
1950; ” Trading with the Enemy Laws ” – the Trading with the Enemy Ordinance
1939, or the Absentees’ Property Law 5710-1950, or any other statute that
relates to trade with the enemy or with absentees, and wherever this
Schedule refers to money or assets or income receiv ed or held by the person
in charge of it – including money or assets or inco me held to his order;
” asset ” – within its meaning in section 9 of the Trading with the Enemy
Ordinance 1939, or absentees’ property, within its meaning in the Absentees’
Property Law 5710-1950; ” blocked asset ” – money or an asset held by the Custodian;
” blocked income ” – income payable to the Custodian, which would ha ve
been included in the chargeable income of a person for a certain tax year, if
not for the Trading with the Enemy Laws, and ” owner of income” – an
aforesaid person.

252

Tax on blocked income
2. Blocked income shall be deemed the chargeable in come of the owner of the
income, and the Custodian may be assessed in respec t of that income, in the
manner in which the owner of the income would have been assessed, had it
been included in his income for that year.

Custodian’s entitlement to tax benefits
3. W hen the Custodian is assessed in respect of blo cked income under section
2 of this Schedule, or if he received blocked incom e paid after the deduction
of tax, and if it is proven to the Assessing Office r’s satisfaction that the owner
of the blocked income would have been entitled – on his claim – to tax
benefits, if not for the Trading with the Enemy Law s, then that credit shall also
be allowed the Custodian, whether by way of refund or in another manner.

Assessment of individual owner of income
4. If the Assessing Officer concludes, on the basis of information in his
possession, that the chargeable income of a certain individual owner of
income should have included income that is not bloc ked, then the Assessing
Officer may assess that person in respect of that i ncome which is not blocked
without a notification of assessment.
Custodian’s obligation to pay tax on blocked income
5. If tax was assessed on the Custodian under secti on 2 of the Schedule in
respect of blocked income, then the Custodian shall pay it alone or through
another, out of money of the owner of the income wh ich he holds.

Custodian’s obligation to pay all the tax due from owner of blocked income
6. The Custodian shall pay, out of the money of an individual owner of income
held by the Custodian – if there is no different ex plicit provision in this
Schedule – all the tax due from that individual acc ording to the Assessing
Officer’s demand for each assessment year or tax ye ar, and any amount paid
as aforesaid shall be treated as if it had been pai d by that individual; in an
aforesaid demand the Assessing Officer may also inc lude an amount, in
respect of which the assessment still is, or can be , the subject of objection or
appeal.

Effect of release of income
7. If the Custodian released to a person, to his cr edit or to his legal
representative everything in his possession to whic h that person would have
been entitled, if not for the Trading with the Enem y Laws, then thereafter –
(1) all income released as aforesaid shall be deeme d the income of the
person who would have received the income, if not f or those statutes;
(2) any tax paid in respect of that income by the C ustodian, whether by
deduction or otherwise, shall be treated as paid by the said person and
any benefit accorded the Custodian in respect of th at income shall be
deemed to have been accorded to that person;
(3) the said person or his representative may submi t objections and
appeals against an assessment of the Custodian in r espect of that
income, as if he had been assessed.

Owner of released income liable for assessment befo re release
8. If the Custodian was assessed under the provisio ns of this Schedule, and if –
before or after the assessment – he paid or transfe rred or released all or part

253
of the income to another person or permitted that to be done, then that part of
the tax which must be paid under the assessment, wh ich the Custodian
cannot pay under the provisions of this Schedule, s hall constitute a debt
owed to the State by the person who is deemed the o wner of that income
under section 7 of the Schedule, or by his legal re presentative, if it is a case
to which this section applies, or by the person to whom the income was paid,
transferred or released, and that part shall be pai d accordingly and the
Custodian shall cease to be responsible for the tax .

Relaxation of time limitations
9. Notwithstanding the limitations in the Ordinance for the preparation of
assessments, for objections and for appeals, assess ments may be made
under sections 2 and 4 of the Schedule at any time before a date set by the
Minister of Finance, and objections and appeals aga inst an aforesaid
assessment and claims for tax benefits may be submi tted at any time before
that date.

Persons deemed to be owners of income
10. For purposes of sections 2 to 4 of this Schedul e it is assumed – unless the
opposite has been proven – that since September 3, 1939, nothing happened
to change the identity of a recipient of blocked in come or of an owner of a
blocked asset, and every assessment under section 2 of the Schedule shall
specify the name of the owner of the income.

Tax on income generated, but still unpaid
11. If income from a certain source in a certain ta x year should have been paid to
the Custodian, if not for the fact that – during th at tax year – no income from
that source was available for payment, and if that income nevertheless would
have been liable to tax, if not for the Trading wit h the Enemy Laws, then the
provisions of this Schedule shall apply, as if inco me from that source had
been available in that year and had been paid to th e Custodian.

Effect
12. The provisions of this Schedule shall be in eff ect for assessment years
beginning with April 1, 1947, and for all the asses sment years and all the tax
years thereafter.