Passive investment income (not business related) derived by Israeli resident companies and individuals will generally be taxable at the rates shown in the table below. This table is a summary and exceptions exist for new residents and foreign residents in certain cases (to be covered later). Notes to the table: 1. Calculated applying higher of proven actual cost or market value on last three trading days of 2002. 2. Not for investments sold to relative, held via a business or if finance expenses were deducted thereon. 3. Does not include investments in 2005 in mutual funds or bonds issued or guaranteed by foreign governments or securities traded on a stock exchange or orderly market (Bloomberg, Reuters, etc) in a country that does not have a tax treaty with Israel - these will be classified as other assets. 4. Calculated by splitting the total gain on a time pro rata basis. 5. Pre-2006 interest, calculated on a time pro-rata basis, will be taxed at pre-2006 tax rates. 6. Regular tax rates up to 49% will apply if interest expense is deducted, or if the interest is business income, or if a special relationship exists (e.g. customer-supplier, employer-employee, related parties). 7. Alternatively, in December 2005, investors could elect a hypothetical and repurchase of any class of securities at market value via an Israeli bank or broker. If elected, only the post-December 2005 gain would be taxable at the rates applicable from 2006. Capital losses derived by individuals in 2006 onwards from foreign securities may be offset against capital gains from Israeli securities (and vice versa) or against dividends and interest income from securities (if otherwise taxable at no more than 25%). However, pre-2006 losses from foreign securities may not be offset against gains from Israeli securities (and vice versa) before 2007. Companies assessable under the regular tax system - applying the Income Tax Law (Inflation Adjustments, 1985) - continue to pay tax at the standard rate of companies' tax on capital gains from publicly traded securities (31% in 2006), but this rate will reduce to 25% for other post 2002 capital gains; various new technical rules apply. Non-business companies continue to be taxed at 25% on capital gains if they do not deduct finance expenses nor apply the Income Tax Law (Inflation Adjustments), 1985. Individuals who are US citizens or green card holders residing in Israel are taxable in Israel and in the US on their worldwide income. Foreign tax credit provisions in the domestic laws of the two countries and the Israel-US tax treaty should prevent double taxation and effectively "round up" the combined tax burden to the higher of the tax rates prevailing in the two countries. Experienced tax advisors should be consulted in this regard. Financial institutions in Israel and others that remit income or consideration from investment transactions or forward transactions are generally required to withhold tax at source at prescribed rates for each individual security, according to detailed rules. Also, self reporting is now required every half year regarding capital gains from securities publicly traded in Israel or abroad if the full amount of capital gains tax was not withheld at source. These reports are due every July 31 for the period January-June and January 31 for the period July-December. The first of these reports was due on July 31, 2006. However, if you conduct more than 20 to 30 forward transactions a month, it appears you may be taxed in Israel at rates of up to 49% (rather than 20%) on all income and gains from them. Israeli mutual funds are classified as "exempt" or "taxable." If the fund is exempt, the investor is taxed. Commencing 2006, it appears that the combined tax burden at the fund and investor levels for income and gains will be as follows: Exempt fund: 20% Israeli tax all paid by the investor. Taxable fund: 20% Israeli tax all paid by the fund. In addition to income tax and capital gains tax, there is national insurance (social security) to consider. Fortunately, commencing January 1, 2004, no national insurance contributions are generally payable by investors (except 10%-or-more shareholders) with respect to dividends on "foreign securities," other dividends, interest and gains from provident funds and further education funds, interest and discount premiums on bonds traded on the Tel Aviv Stock Exchange, interest and gains on non-work related savings plans and deposits, interest and discount premiums on short term government bonds or "foreign securities," and residential rental income in Israel. In other cases, National Insurance contributions may be due on investment income (not capital gains) at various rates ranging from 0% to 15.2% depending on an individual's personal circumstances. However, 52% of National Insurance paid on non-employment income is deductible for income tax purposes, resulting in a maximum effective rate of approximately 11.3%. Currently, an upper income limit for National Insurance contribution purposes is applicable (NIS 35,760 = approximately $8,000 per month). firstname.lastname@example.org The writer is an International Tax Partner at Ernst & Young Israel.