We deem it appropriate to update our colleagues and clients, in this news bulletin, regarding a number of legislative processes and temporary orders which are relevant at the present time.

1. Raising Taxes

• The rate of VAT has been raised up to 17% (instead of 16%), effective from September 1, 2012.

• In August 2012, the Law for the Reduction of the Deficit was published, in which it was determined, inter alia, that commencing from January 1, 2013, additional tax would be imposed at a rate of 2% on the taxable income of an individual which exceeds NIS 800,000 (approximately US$ 200,000). For the purpose of the imposition of the additional tax, inflationary amounts and remuneration from an exempt sale of a residential apartment, shall be excluded out of the taxable income. With regard to chargeable appreciation tax on a residential apartment’s sale, the additional tax shall be imposed only if the amount of the sale exceeds NIS 4 million (approximately US$ 1 million). The additional tax shall also apply to amounts of income spread over consecutive years in which the income was generated (for example – the spread of a retirement bonus), in each one of the years of the spread.

• We shall recall that in the course of previous legislation for a modification of the tax burden, which took effect commencing from January 1, 2012, the rates of tax applicable to capital gains, dividends and interest were increased to a rate of 25% (instead of 20%). With regard to capital gains and dividends received by a significant shareholder (a shareholder who holds 10% or more of the rights in the Company), the rate of tax was increased to 30% (instead of 25%). In addition, in the same legislation, the rate of corporate tax was set at 25%, and the outline for the graduated decrease of the CIT was cancelled, at the end of which the rate of tax in the year 2016 was supposed to be 18%.

2. Voluntary Disclosure

As previously reported, a temporary order for voluntary disclosure of overseas assets and income, which was published on November 15, 2011, grants concessions at the level of the collection of tax – an exemption from interest and fines on the applicable tax, and the possibility of the cancellation of linkage differentials.

On June 26, 2012, an extension was published for the submission of applications for voluntary disclosure pursuant to the temporary order, in which the possibility was also granted of making an application to the tax authority, anonymously, so as to clarify the tax liability as arises from the facts in the case, before exposing the applicant’s name.

As of the date of the writing of this Bulletin, no additional extension has been published, and the final date for the submission of applications for voluntary disclosure pursuant to the temporary order is September 27, 2012. The Tax Authority has agreed to receive applications which do not contain documentation at the stage of the submission of the application, whilst granting the possibility of the submission of all of the relevant documents at a later date.

After the said date, applications for voluntary disclosure may be submitted pursuant to the “regular” fixed procedure (which was published in 2005). It shall be noted that the later procedure does not include concessions at the level of the collection of tax, and it does not include the possibility of making an anonymous application to the Tax Authorities.

3. Encouragement of Distribution of Profits – Temporary Order

On August 6, 2012, a Bill was published to amend the Law for the Encouragement of Capital Investments (hereinafter: the “Law”), which determines a temporary order for a period of one year from the date of the publication of the Law, once it shall be amended, pursuant to which a company which has accumulated tax-exempt profits pursuant to the Law may distribute them or may release them, whilst receiving a discount from the corporate tax which should have been paid at the time of the distribution (hereinafter: the “Released Profits”). The rate of the discount ranges between 30% to 60% out of the “regular” tax which should have been paid, as detailed below: Pursuant to the regular provisions of the Law, many companies benefited from an exemption from corporate tax on their qualified profits. However, the exemption is a temporary exemption, up until the date of the distribution of the qualified profits as a dividend. At the time of the distribution, the said companies are required to pay the corporate tax which was deferred at the rates which range between 10% (in the event of a company with a foreign ownership of 90% or more) and 25% (a “regular” company). Due to these provisions, many companies refrained from distributing their accumulated profits and according to an estimate made by the Israeli Tax Authority, this matter concerns accumulated profits in a total amount of approximately NIS 100 billion (approximately US$ 25 billion).

According to the temporary order, companies which wish to do so, may release the profits which have accumulated thereat by December 31, 2011, by paying a reduced rate of corporate tax, as aforesaid; there is no need to make an actual distribution of the said profits. At the time of a future distribution of the said profits which have been released, no additional corporate tax shall apply, but only the tax on the dividend (at a rate of 15%, subject to tax treaties’ provisions).

The rate of the discount (as aforesaid, a discount ranging between 30% and 60%) shall be determined linearly in accordance with the proportion of the released profits out of the amount of the accumulated profits. Thus, if the full amount of the accumulated profits is released, the rate of the discount from the tax is 60%, provided that the rate of the tax after the discount shall be not less than 6%.

The Bill does not include stipulations with regard to the manner of the use of the Released Profits, however we shall note that in light of the discussions of this matter at the Knesset Finance Committee, it is possible that terms and conditions shall be determined regarding the designation of the Released Profits for growth-generating investments in Israel.