Incredimail 2011 Annual Report Download - page 79

Passive Foreign Investment Company Considerations
Special U.S. federal income tax rules apply to U.S. Holders owning shares of a passive foreign investment company. A non-
U.S. corporation will be
considered a passive foreign investment company for any taxable year in which, after applying certain look-
through rules, 75% or more of its gross income consists of
specified types of passive income, or 50% or more of the average value of its assets consists of passive assets, which generally means assets that generate, or are held
for the production of, passive income. Passive income may include amounts derived by reason of the temporary investment of funds. If we were classified as a passive
foreign investment company, a U.S. Holder could be subject to increased tax liability upon the sale or other disposition of ordinary shares or upon the receipt of
amounts treated as "excess distributions." Under these rules, the excess distribution and any gain would be allocated ratably over the U.S. Holder’
s holding period for
the ordinary shares, and the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a passive foreign
investment company would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject to tax at the highest marginal rate in
effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such
other taxable years. The tax liability with respect to the amount allocated to years prior to the year of the disposition, or "excess distribution," cannot be offset by any
net operating losses. In addition, holders of stock in a passive foreign investment company may not receive a "step-
up" in basis on shares acquired from a decedent.
U.S. Holders who hold ordinary shares during a period when we are a passive foreign investment company will be subject to the foregoing rules even if we cease to be
a passive foreign investment company.
We believe that we are not a passive foreign investment company for U.S. federal income tax purposes, but we cannot be certain whether we will be treated
as a passive foreign investment company for the current year or any future taxable year. Our belief that we will not be a passive foreign investment company for the
current year is based on our estimate of the fair market value of our intangible assets, including goodwill, not reflected in our financial statements under U.S. GAAP,
and our projection of our income for the current year. If the IRS successfully challenged our valuation of our intangible assets, it could result in our classification as a
passive foreign investment company. Moreover, because passive foreign investment company status is based on our income and assets for the entire taxable year, it is
not possible to determine whether we will be a passive foreign investment company for the current taxable year until after the close of the year. In the future, in
calculating the value of our intangible assets, we will value our total assets, in part, based on our total market value determined using the average of the selling price of
our ordinary shares on the last trading day of each calendar quarter. We believe this valuation approach is reasonable. While we intend to manage our business so as to
avoid passive foreign investment company status, to the extent consistent with our other business goals, we cannot predict whether our business plans will allow us to
avoid passive foreign investment company status or whether our business plans will change in a manner that affects our passive foreign investment company status
determination. In addition, because the market price of our ordinary shares is likely to fluctuate and the market price of the shares of technology companies has been
especially volatile, and because that market price may affect the determination of whether we will be considered a passive foreign investment company, we cannot
assure that we will not be considered a passive foreign investment company for any taxable year.
The passive foreign investment company rules described above will not apply to a U.S. Holder if the U.S. Holder makes an election to treat us as a qualified
electing fund. However, a U.S Holder may make a qualified electing fund election only if we furnish the U.S. Holder with certain tax information. We currently do not
provide this information, and we currently do not intend to take actions necessary to permit you to make a qualified electing fund election in the event we are
determined to be a passive foreign investment company. As an alternative to making this election, a U.S. Holder of passive foreign investment company stock which is
publicly-
traded may in certain circumstances avoid certain of the tax consequences generally applicable to holders of a passive foreign investment company by
electing to mark the stock to market annually and recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year
between the fair market value of the passive foreign investment company stock and the U.S. Holder’
s adjusted tax basis in the passive foreign investment company
stock. Losses would be allowed only to the extent of net mark-to-
market gain previously included by the U.S. Holder under the election for prior taxable years. This
election is available for so long as our ordinary shares constitute "marketable stock," which includes stock of a passive foreign investment company that is "regularly
traded" on a "qualified exchange or other market." Generally, a "qualified exchange or other market" includes a national market system established pursuant to Section
11A of the Exchange Act. A class of stock that is traded on one or more qualified exchanges or other markets is "regularly traded" on an exchange or market for any
calendar year during which that class of stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. We believe that the
Nasdaq Global Market will constitute a qualified exchange or other market for this purpose. However, no assurances can be provided that our ordinary shares will
continue to trade on the Nasdaq Global Market or that the shares will be regularly traded for this purpose.
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