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

2
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)

3
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;

4
“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

5
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,

6
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

7
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 –

8
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:

9
(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);

10
“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

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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

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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

127
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

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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),