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 said
in section 67C(a) hold true;
"held company" – a body of persons for which the provisions of section 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 company 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 – rights 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 tax year;
(2) real estate appreciation from the sale of a real 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 paid 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 or
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 entitling conditions):
(1) it was incorporated in Israel and all its business is controlled and
managed only from Israel;
(2) it is not a public company, as defined in section 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 provisions of section 64A
apply, and not a transparent company, as defined in section 64A1;
(4) the provisions of Part Five "B" did not apply at 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 asset 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 companies, 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 companies, plus the
balance of loans which it extended to the held companies
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 Adjustments 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 delivered to the
Assessing Officer within ninety days after its incorporation.
(b) If an entitling condition did not apply to the company in the year of its
incorporation and in the following year, then it shall be deemed never to
have been an Israel holding company.
(c) If one of the entitling conditions ceased to hold true for an Israel holding
company after the period said in subsection (b), then 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 Director, by a notice signed
by all its shareholders, that it chooses to cease being an Israel holding
company; having so announced, it shall cease being an Israel holding
company from the beginning of the tax year after the 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 reciprocating state and it submits a
return of its income in that foreign state, or it is 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 activity was 15% or more
when the Israel holding company first bought its shares;
(2) 75% or more of its income in the tax year, which was produced or
accrued outside Israel, is income that – if it were liable to tax in Israel –
would be chargeable as business income under section 2(1); when
calculating the said income a proportional part of the income of linked
companies shall be added, but income from management fees paid by a
relative, the consideration from asset sales and dividends 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, which were
issued by a company in which the held company is not a controlling
member;
"proportional part of the income of linked companies" – the
proportional part of a body of persons in the income of a foreign resident
body of persons, in which it has a direct or indirect 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 indirect share of the body
of persons in the said rights shall be calculated by 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 exceed 20% of the cost of all its
assets throughout the tax year; for purposes of this paragraph: "assets
in Israel" includes rights in a foreign resident body of persons, the main
assets of which are direct or indirect rights to assets 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 estate association rights –
does not exceed 20% of all its income in the tax year.

Exemption for the income of an Israel holding company
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 shares, 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 securities traded on the
Exchange in Israel;
(4) interest and linkage differentials received from a financial
institution, as defined in the Value Added Tax Law.
(b) No credit shall be given for foreign taxes in respect of income that is tax 95
exempt under the provisions of subsection (a).
(c) The Minister of Finance may, with approval by the Knesset Finance
Committee, prescribe tax exemptions for interest received by an Israel
holding company from a held company, if the interest was paid during a
period he prescribed and at an interest rate he prescribed, 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 shareholder in an Israel holding
company shall be charged tax at the rates said in paragraphs (1) or (2),
as the case may be;
(1) if the recipient of the dividend is an individual – at the rate
prescribed in section 125B, as the case may be;
(2) if the recipient of the dividend is a body of persons –
(a) if the dividend was distributed out of earnings said in section
67E(a)(3) or (4) – at the rate prescribed in section 126(a);
(b) if the dividend was distributed out of earnings said in section
67E(a)(1) or (2) – at the rate prescribed in section 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 undistributed 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 apply to a shareholder who
indirectly was a shareholder in an Israel holding company through
another shareholder who is an Israel resident, if the 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 dividend, 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 subsection (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 residents
67H. Notwithstanding the provisions of section 67F(b) and section 67G, the
following provisions shall apply to an individual shareholder 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) and (c):
(1) dividends he received from an Israel holding company 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 that stem from the Israel
holding company's capital gains upon the sale of shares in a foreign
resident company, the shares of which were acquired as aforesaid, all
during the period in which – under sections 14(a) or (c) or 97(b) –said
income would have been exempt of tax for the shareholders, had they
received it directly.

Selling the share of an Israel holding company
67I. (a) When a share in an Israel holding company is sold by an Israel resident,
he shall be given credit against the tax that applies to the capital gain, in
an amount equal to the tax he or the person from whom he received the
shares in a tax exempt sale or by inheritance paid on undistributed
profits under section 67G in respect of the sold share, on condition that
he had not yet received them as a dividend; the amount of tax paid as
aforesaid shall be adjusted at the rate of the index 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 available for distribution, as
defined in section 94B, in respect of which the seller 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 acquisition until the end of the
final year to the period from the day of acquisition 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 gain;
"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 notice under the said
section.
(b) When 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 company 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 the company
shall be exempt of tax on part of the entitling real capital gain and
liable to tax on the balance of the real capital gain;
(2) if in any year after the final year the company distributed to foreign
residents a dividend, the source of which are profits the company
accrued during the years when it was an Israel holding 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 company, then the provisions of
section 75B shall not apply to the Israel holding company that holds it
and to its controlling members who are Israel residents, in respect of
profits not paid by the held company; a shareholder shall not be deemed
an Israel resident only because he is shareholder of an Israel holding
company.