Under the Economic Enhancement proposal for 2009-2010, which is in advanced stages of legislation, a temporary benefit provision was determined, as an incentive to withdrawal profits and enriches the country’s treasury. According to the proposal, dividends that came from distributable profits until the “determined date” (31.12.02), and would be distributed from January 1^st, 2010 until September 30, 2010 (“The Benefit Period“), will be charged at a 12% tax rate instead of a the usual tax rate of 25% (or 20% for a non-significant shareholder). This benefit will apply in practice on the distributional profits that were entitled to a 10% tax rate benefit in the event of selling the shares or dissolution of the company. In order to receive the abovementioned reduced tax rate, 4 cumulative conditions must be obtained:

1. The dividends were accepted within the benefit period– meaning, it would be recommended to delay dividend distribution, whether as an actual distribution or as part of an agreement with the tax assessor on the closure of debit balance in order to be able to realize the reduced tax rate of 12%.

2. The shares were purchased until the “determined date”-before January 1^st, 2003.

3. The dividend receiver would have been entitled to distributable profits at 10% tax rate benefit as mentioned earlier.

4. The average income from the company will not change- the shareholders income in the years 2009-2010 from salary, interest, linkage differentials or other payment from the company that distributes the dividends will not reduce from the income average received by the shareholders mentioned above in the years 2007-2008. When calculating the income for the years 2009-2012 the reduced dividend rate will not be taken into account according to this section.

This provision takes out of context many possible situations as follows:

1. 1. A company that stopped producing an active income by the end of 2008, won’t pay its shareholders any kind of salary during the years 2009-2012, and as a result, wont stand up to the income average exam.

   2. The sanction for when the income average exam is not being held is not defined as a relative sanction and so, even a 100 NIS exception from the average income may rule out a benefit for a 1,000,000 NIS dividend.

   3. The fact that one has to hold the average income during the years 2009 to 2012 can bring to uncertainty situations when claiming the benefit during these years- who can determine if the dividend divider in the year 2010 will hold the average income exam in the following years 2011 and 2012?? This provision combined with the ceiling increase in national insurance, accordingly the interest will be to decrease the wage significantly, may lead to situations in which the dividends were distributed in a 12% tax rate and after a few years the tax assessor will claim that the conditions were not held. The outcome will be as if we started of as winners (12%) but ended up losing (25% and a waste of the 10% tax rate benefit forever).

To conclude, this temporary provision is blessed in its essence but the implementation of it is not simple. It raises countless number of methods and many arguments regarding the quantification of the deserved distributable profits, when before distribution we would need to examine the dividend sum. In addition there are several steps needed to be executed already in 2009 in order to create a high standard platform for effective use of the above mentioned benefit.

We think that the legislator should reconsider the abovementioned provisions. Meanwhile, advisers should be cautious in what they advise for- the position for those who will recommend a withdrawal at 12% that may end with paying 25% and wasting the 10% tax rate benefit forever will not be easy.