We would like to inform you that on December 22, 2016, the Israeli Parliament (the Knesset) approved a significant tax reform (the "New Law"). The New Law was formally published on December 29, 2016 and will become effective as of January 1, 2017. This New Law includes very significant changes which are expected to influence multinationals, other companies and individuals operating in Israel, as well as trustees of trusts having Israeli connections. The main provisions of the New Law are as follows:

Reduction of the Corporate Tax Rate. The Israeli corporate tax rate will be reduced in two stages, from 25% to 24% in 2017, and to 23% in 2018.

Increase of Surtax (Mas Yessef). The surtax levied on high income of individuals and trusts will increase as of 2017 from 2% to 3%. In addition, the surtax will be levied on a total annual income and gains that exceed NIS 640,000 instead of the current limitation of NIS 803,520 in 2016.

A Temporary Order for Distributing Dividends at a Reduced Rate. As a temporary order, a reduced 25% tax rate, instead of 30% or 33%, if surtax is applicable, will be levied on dividends derived from income which was generated until the end of 2016, that will be distributed by September 30, 2017, to an individual "substantive shareholder" (in general, this is a shareholder who holds 10% or more of the shares of the company). This is a highly significant provision and it is recommended that every taxpayer should examine whether to take advantage of this beneficial temporary order.

Introduction of a New IP Regime in Israel. The New Law determines a new IP regime in Israel which provides for a preferential tax rate of a 12% (and even 7.5% in certain preferential areas) to Technology and Hi-tech Companies which develop their intellectual property in Israel. In certain cases concerning multinationals (in general, where the turnover of the group is higher than NIS 10 billion), the applicable tax rate can be reduced to only 6%. In addition, dividends paid to foreign companies will be subject to a reduced withholding rate of 4% and in the case where the dividends are paid to other shareholders the applicable rate of withholding will only be 20%. In order to be entitled to these benefits, the New Law sets out certain convoluted conditions the purpose of which is to ensure that the benefits will be provided only when the IP is actually developed in Israel.

These tax benefits are part of a significant reform in the Law for the Encouragement of Capital Investments, in light of the recommendations of the OECD BEPS Project.

A Reduction of the Applicable Tax Rate Under the Law for Encouragement of Capital Investments in Israel. The New Law reduces the applicable tax rate of preferred enterprises which are located in Zone A (a preferential zone in Israel) from 9% to 7.5%. There is no change in the applicable tax rate for other preferred enterprises which remains at 16%.

Taxation of Withdrawals by Shareholders. Amounts that were withdrawn from a company by a "substantive shareholder" (in general, a shareholder who holds at least 10% of the company's shares) or by his relative will be taxed as if the amounts were distributed as a dividend (in the case where the company has no retained earnings, then these amounts will be taxed as a salary or other income). This provision will not apply where the money withdrawn is repaid to the company by the end of the tax year following the tax year in which the withdrawal was made. This provision is very broad in its scope and includes any withdrawal that exceeds NIS 100,000, including shareholders' loans and certain cases in which the company guarantee a loan of a shareholder. In addition, this rule also applies to loans between companies, unless the loan is between non-transparent companies based on a real economic purpose.

According to the transitional provisions, the new rule regarding withdrawals by a shareholder will not apply with respect to withdrawals which were made by December 31, 2016, provided that they will be repaid by December 31, 2017.

This rule also applies to foreign companies which withdraw monies from their Israeli subsidiaries without declaring a dividend.

In light of the above, it is very important for each taxpayer to examine whether this new provision applies with respect to any withdrawals that occurred by the end of 2016 and which fall within the scope of this new provision. It is required that such withdrawals be settled before the end of 2017.

Shareholders Use of the Company's Assets. A "Substantive Shareholder" who uses the company's assets will be taxed as if the shareholder had received these assets as a dividend (or in certain cases as a salary or other income). The relevant assets which are subject to this new legislation include apartments that are mainly used by the shareholder for personal purposes, art works, jewelry, aircraft and yachts which are mainly used for personal purposes.

In this regard, the transitional provisions enable an exemption from capital gains tax on real estate, for shareholders who decide to transfer the ownership of the asset by December 31, 2018.

Wallet Companies. This provision is aimed at taxing individuals who are in essence employees but provide their services through privately held companies (commonly known as "wallet companies") in order to enjoy the reduced rate of corporate tax. The New Law determines that such income, derived by the individual through a company, will be considered as the shareholder's income and will be subject to the individual's tax rates ("Marginal Tax") instead of the reduced corporate tax rate. The New Law sets out certain convoluted conditions for the application of this rule. Generally, these conditions will mainly apply to individuals who are in essence employees or directors.

Multi Residential Apartments Tax. Individuals (including foreign residents) who own three or more residential apartments in Israel will pay a new annual tax on the third apartment and above, including apartments held through a company.​ In essence, this tax will be determined at a rate of 1% of the value of the apartment but no more than an annual tax payment of NIS 18,000 per year.

Taxation of Deposits to Retirement Funds. The New Law determines that deposits to retirement Funds, for salaries that exceed NIS 32,000 per month (approximately US$8,500) will be subject to tax when the deposit is made to the Retirement Fund (the withdrawal from the fund will not be subject to double taxation and only the gains actually accrued will be subject to tax).

Tax Authorities can Enforce Certain Companies to Distribute a Dividend. In certain cases of "Minority Companies" (generally companies that are controlled by 5 individuals or less), the New Law provides the tax authorities, subject to the consent of a special public committee, with the power to demand that the company should distribute a dividend to its shareholders. The purpose of the New Law is to focus on companies which accumulate their income without investing it for business purposes whilst refraining from distributing it as dividend.

The power of the tax authority is limited to cases in which the company does not use the money for business purposes. In addition, it applies only with respect to profits which accrued more than 5 years before the power is exercised and only if the company has not distributed at least 50% of its profits. The New Law will not apply if the company's retained earnings are less than NIS 5 million.

We encourage each taxpayer to generally examine his/her tax position and the potential impact which these important recent amendments may have based on his/her specific circumstances. We will keep you updated as to any developments regarding these areas and are at your disposal to provide comprehensive advice based on your specific circumstances.