Following is a round-up of a few important Israeli tax developments not yet covered in this column. Professional advisors should be consulted in specific cases. ACCELERATED DEPRECIATION Recently issued tax regulations allow 100% depreciation for all fixed assets purchased in the period from July 1, 2005, to September 30, 2006, if the taxpayer's main activity is any of the following qualifying activities: productive activity relating to industry; software development; agriculture; construction; or the operation of a hotel or camping site. Construction covers buildings, excavation, demolition, drainage, sewerage, pipe laying, road and path laying. The following activities do not qualify: packaging; trade; transport; warehousing, the supply of communication, sanitary or personal services; repairs or renovations to buildings. The taxpayer must claim accelerated depreciation for all assets purchased in the aforementioned period or none. The Israeli Tax Authority has indicated that 100% depreciation is only available for tangible fixed assets, not intangibles such as know-how or goodwill. The 100% depreciation is spread over 12 months from the month the asset is first put into service, so it will typically span two tax years (calendar years, generally). The effect is to rapidly write off fixed asset expenditure, thereby saving company tax in applicable cases at rates of 34% in 2005, 31% in 2006 and 29% in 2007. For example, a productive company buys a machine costing NIS 1.2 million and puts it into service on April 1, 2006. The company can depreciate nine-twelfths of the cost in the 2006 tax year (NIS 0.9 million) and three-twelfths in the 2007 tax year (NIS 0.3 million). The asset must be used to generate income from a qualifying activity continuously up to the end of the tax year(s) for which the 100% depreciation is claimed - up to the end of 2007 in the above example. This depreciation is not available in the following cases: assets purchased from related parties; assets that were originally inventory of the taxpayer; assets acquired via a tax-free reorganization;and taxpayers whose budget is 20% or more supported by the State of Israel (except fixed asset grants under the Law for the Encouragement of Capital Investments, 1959). To prevent abuse, assets sold to related parties within four years after their acquisition will have a zero depreciable cost for the related party. NEW ISRAELI TAX TREATIES On January 1, 2006, Israel's new tax treaties for the avoidance of double tax took effect with Brazil and Singapore. The treaty with Singapore replaced an earlier one and aims to stop two tax planning techniques. First, under the old treaty with Singapore, Israeli companies enjoyed a complete exemption from tax in Singapore and Israel on dividends paid by Singapore companies in which they held 25% of the share capital. Under the new treaty, such an exemption will only be allowed for dividends paid up until the end of 2007 by companies resident in Singapore before the end of 2005. In all other cases, dividends paid by Singapore companies to Israeli residents will now be taxable in Israel at rates of 25% to 31%, with a credit for Singapore taxes, according to detailed rules in the treaty and the Israeli tax law. Second, under the old treaty with Singapore, royalties paid to any Israeli resident were exempt from withholding tax in Singapore and subject to a maximum tax rate in Israel of 15%. This was unlike any other treaty. Under the new treaty, royalties paid to any Israeli resident are subject to a 5% withholding tax in Singapore and a maximum tax rate in Israel of 20%, less a credit for the Singapore tax. PRIVILEGED ENTERPRISE ELECTION DEADLINES: In the past, we have reviewed the Israeli tax breaks for "Privileged Enterprises" under the Law for The Encouragement of Capital Investments, 1959. Many Israeli companies in industry, hi-tech, life sciences and tourism may now enjoy company tax rates of 0% to 25% and dividend withholding tax rates of 0% to 15%, resulting in total Israeli taxes on distributed profits of 0% to 36.25%. To claim these Privileged Enterprise tax breaks, an Israeli company must effect a minimum investment (NIS 300,000 for a new enterprise, more for an existing one) within three years ending on the last day of the year first claimed for a project and be ready to export at least 25% of its sales unless it is engaged in biotechnology or nanotechnology. A claim is then attached to the tax return of the year first claimed for a project - no bureaucracy. A longer procedure applies if Approved Enterprise status is sought instead - this confers eligibility to fixed asset grants of 10% to 32% if the enterprise is located in a Development Area in Israel. The deadline for claiming Privileged Enterprise status for 2004 expired at the end of 2005. The deadline for claiming Privileged Enterprise status for 2005 expires at the end of 2006, but if advance clarification is desired from the Israeli tax authority regarding eligibility, the request must be submitted to the Tax Authority by June 30, 2006. Time flies, so don't miss out on these tax incentives for business in Israel. firstname.lastname@example.org The writer is an International Tax Partner at Ernst & Young Israel.