ISRAEL INCOME TAX LAW 1961

PART ONE INTERPRETATION

Definitions

1. In this Ordinance

"person" includes a company and a body of persons, as defined 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 given under section 45 of the Securities Law, or a securities exchange 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 household with the person to whom he is married;

"registered spouse" a spouse designated or selected under section 64B; "industrial building", in an area that is not urban within its meaning in the Rural Property Tax Ordinance 1942;

"retirement age" the retirement age, within its meaning in the Retirement Age Law 5764-2004;

"income" a person's total income from the sources specified 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 exemptions from it, which are allowed under any statute;

"linkage differentials" any amount added to a debt or to a claimed amount in consequence of linkage to the currency exchange rate, the consumer price index or to some other index, including exchange rate 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 exchange rate or to the Consumer Price Index including exchange rate differentials 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 principal of a loan, which is a foreign currency deposit or a loan repayable in foreign 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, and any company, fraternity, fellowship or society, whether incorporated or not;

"company" a company incorporated or registered under any Law in effect in Israel or elsewhere, including a cooperative society;

"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 index increase;

"Israel resident" or "resident"

(a) in respect individuals a person, the center of whose life is in Israel, and the following provisions shall apply to this matter:

(1) in order to determine the place that is the center of a person's life, the totality of his family, economic and social ties 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 the place of his permanent employment;

(d) the place of his active and substantive economic interests;

(e) the place of his activity in organizations, societies and various institutions;

(2) it is a assumed that the center of an individual's life during a tax year is in Israel

(a) if during the tax year he spent 183 or more days 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 year 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 the Knesset Finance Committee, prescribe conditions under which an individual 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 Israel;

(c) he is an employee of the Jewish Agency for Israel;

(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 categories of individuals deemed Israel residents under paragraphs (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 persons 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 controlled and managed in Israel by an individual who became an Israel resident for the first time or is a veteran returning resident, as said in section 14(a) and ten years have not yet passed since he became an Israel resident as aforesaid, or by any person on 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 year, in the tax year and in the following tax year;

(b) the center of his life was not in Israel, as said in paragraph (a)(1) of the definition of "Israel resident" or "resident", during 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 respect of employment or by virtue of membership in it during not less than five 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 pension benefit fund or by a savings benefit fund, or paid under loss of working capacity insurance; for this purpose, "loss of working capacity" an impairment of working capacity due to disease, invalidity or accident, which caused the loss of wage income or profits under section 2(1) or (2);

(4) a taxable pension paid by the National Insurance Institute;

(5) a grant received in consequence of retirement or death;

(6) an amount received in consequence of the capitalization of one of the pensions said in paragraphs (1) to (4);

(7) an amount received by a person as rent for renting out an asset, which served that person during at least ten years before its rental for the production of income from personal exertion from business or vocation; for this purpose, "person" includes whoever was his spouse immediately before his death;

"index" the consumer price index published by the Central Bureau of Statistics;

"rate of index increase", in a certain period the difference between the index last published before the end of the period and 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 any statute, unless otherwise provided in that statute, and also participation certificates 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, including the Deputy Director;

"business" including commerce, handicraft, agriculture or industry;

"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 refused to accept or rejected, but a committee under section 146 or the Court set aside his decision, but books shall not be deemed acceptable if the assessee admitted 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 of Assessing Officers under this Ordinance or to carry out certain of their functions; appointments of Assessing Officers, of Deputy Assessing Officers, of Assistant Assessing Officers or Chief Collectors authorized as aforesaid shall be published in Reshumot;

"deposit" an amount deposited with a banking corporation or with a banking institution abroad, which operates under the Law of the country in which it operates;

"benefit fund", " savings benefit fund", " severance 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 Urban Property Tax Ordinance 1940; in an area that is not urban within 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 debenture trust deed, whether in the form of a mortgage or in the form of a document or certificate of some other kind, which includes acknowledgment of the obligation;

"local authority" a municipality, local council, or other similar authority established under a Law that is in effect at the time, 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 conducted according to rules prescribed by whoever is entitled 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 under the Urban Property Tax Ordinance 1940;

"tax year" a period of twelve consecutive months that begins 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) Law 5741-1981;

"savings program" in a banking corporation, including a savings plan approved under the Savings Encouragement Law and also 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.