The Knesset has just passed a tax amendment which forms part of Israel's own economic stimulus plan (Income Tax Ordinance amendment 169). It is part of the measures announced by the Finance Ministry on November 25, 2008 for expanding the credit supply amid the international financial crisis (see"Your Taxes: Israel's bailout plan" in The Jerusalem Post of December 3, 2008). The amendment is effective from the beginning of 2009. The principal measures enacted are summarized below. Bond interest paid to foreign investors To help revive the corporate bond market, an exemption is granted to foreign residents regarding interest, discount premiums, indexation and exchange differences on bonds traded on the Tel-Aviv Stock Exchange. No exemption applies to: (1) income from a permanent establishment (not defined, but usually a fixed place of business) in Israel (2) 10 percent shareholders of the bond issuer company; (3) related companies, being a 25% parent or subsidiary of the bond issuer; (4) employees, service providers, product suppliers and other parties having a special relationship with the bond issuer - unless the Assessing Officer is satisfied that the rate of interest or discount premium was fixed in good faith. Capital gains derived by foreign investors To encourage foreign investment in securities of Israeli resident companies (public or private), an earlier limited exemption from Israeli capital gains tax has been expanded. The exemption is now available to any foreign resident investor, not only persons who resided for 10 years in a country that has a tax treaty with Israel. Also, there is no longer a requirement to notify the Israeli Tax Authority of the investment within 30 days after acquiring the securities. As before, the exemption would not apply to: gains from securities in companies whose main assets are Israeli real-estate interests; and gains attributable to an Israeli "permanent establishment" of the foreign investor Foreign dividends paid to Israeli multinational corporations To encourage Israeli multinational groups to repatriate money to Israel, they may elect a 5% rate of company tax (instead of 25%) for dividend income from a foreign source which is "used in Israel" in 2009, or within one year after actual receipt of the dividend, whichever is later. "Used in Israel" means the dividends cannot be paid to any 5% shareholder but can be used for any of the following: payment to Israeli residents for services or work performed in Israel; purchase or lease of assets from an Israeli resident or for assets used in Israel; improvement or maintenance of assets in Israel; research and development in Israel; debt repayment to an Israeli resident (if a related entity, it must use the money in Israel); interest or discount premium on a bond traded on the Tel-Aviv Stock Exchange or purchase of such a bond; deposit at an Israeli resident bank for at least a year or, if sooner, reinvestment in securities traded on the TASE for the remainder of the year; purchase of securities traded on the TASE and holding them or replacement securities for at least a year; payment of a dividend to another Israeli resident company for use in Israel. Dividends eligible for the 5% rate are reduced if the Israeli parent company effectively repays them to the dividend payor or its 25% affiliate in the period from December 1, 2008 to December 31, 2010, by way of a loan, share investment or loan guarantee which is called. If the election is made, the Israeli parent company cannot credit "underlying" corporate tax paid by the group abroad, nor can it carry forward any excess (unutilized) foreign tax credit under the regular Israeli tax rules. The 5% tax rate overrides the 25% tax generally imposed on income of a "controlled foreign company" in 2009 if it is distributed in the same year to the Israeli parent company and the 5% tax is paid. The election is not available to Israeli parent companies which are "house property companies" or "family companies" (where shareholders are taxed instead of the company). This 5% tax rate resembles the American Jobs Creation Act of 2004, which offered American multinationals a 5.25% tax rate if they repatriated their overseas earnings and reinvested them in their business. To sum up the new bailout amendment contains some useful Israeli tax benefits for foreign investors in Israeli bonds and other securities, and Israeli multinational groups. As always, consult experienced tax advisers in each country at an early stage in specific cases. email@example.com Leon Harris is an international tax specialist.