Incredimail 2008 Annual Report Download - page 58

decline to 25% in 2010 and thereafter. However, the effective tax rate payable by a company that derives income from an approved
enterprise (as discussed below) may be considerably less. In March 2006, a new program was approved, to begin in 2008. Special
Provisions Relating to Taxation under Inflationary Conditions
The Income Tax Law (Inflationary Adjustments), 1985, or the Inflationary Adjustments Law, represents an attempt to overcome the
problems presented to a traditional tax system by an economy undergoing rapid inflation. The Inflationary Adjustments Law is highly complex.
Until December 31, 2005 we measured our Israeli taxable income in accordance with this law, but from January 1, 2006 we have elected to
measure our Israeli taxable income in relation to changes in the U.S. dollar/NIS exchange rate rather than the Israeli inflation index. We were
permitted to make such a change pursuant to regulations published by the Israeli Minister of Finance, which provide the conditions for so doing. A
company that elects to measure its results for tax purposes based on the U.S. dollar/NIS exchange rate cannot change that election for a period of
three years following the election. We believe that we meet the necessary conditions and as such, continue to measure our results for tax purposes
based on the U.S. dollar/NIS exchange rate.
Law for the Encouragement of Capital Investments, 1959
The Law for Encouragement of Capital Investments, 1959 (the “Investment Law”) provides that capital investments in a production facility
(or other eligible assets) may, upon approval by the Investment Center of the Israel Ministry of Industry and Trade (the “Investment Center”), be
designated as an Approved Enterprise. Each certificate of approval for an Approved Enterprise relates to a specific investment program, delineated
both by the financial scope of the investment and by the physical characteristics of the facility or the asset. The tax benefits from any certificate of
approval relate only to taxable profits attributable to the specific Approved Enterprise.
On April 1, 2005, a comprehensive amendment to the Investment Law came into effect. The amendment revised the criteria for investments
qualified to receive tax benefits. An eligible investments program under the amendment will qualify for benefits as a Privileged Enterprise (rather
than the previous terminology of Approved Enterprise). As the amended Investment Law does not retroactively apply for investments programs
having an approved enterprise approval certificate issued by the Israeli Investment Center prior to December 31, 2005. The Company intends to
have the benefits of the “Privileged Enterprise” in 2008.
Currently we have two Approved Enterprise Programs under the Investment Law, which entitle us to certain tax benefits, and a ruling for one
Privileged Enterprise Program, to begin in 2008. The Approved Enterprise Programs granted to us are defined in the Investment Law as
Alternative Benefits Programs, which allow for a two years exemption for undistributed income and reduced company tax rate of between 10%
and 25% for the following five to eight years, depending on the extent of foreign (non-Israeli) investment in us during the relevant year. The tax
rate will be 20% if the foreign investment level is more than 49% but less than 74%, 15% if the foreign investment level is more than 74% but less
than 90%, and 10% if the foreign investment level is 90% or more. The lowest level of foreign investment during a particular year will be used to
determine the relevant tax rate for that year. The period in which we receive these tax benefits may not extend beyond 14 years from the year in
which approval was granted and 12 years from the year in which operations or production by the enterprise began.
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A company that has elected to participate in the alternative benefits program and that subsequently pays a dividend out of the income derived
from the Approved Enterprise during the tax exemption period will be subject to corporate tax in respect of the amount distributed at the rate that
would have been applicable had the company not elected the alternative benefits program (generally 10% to 25%, depending on the foreign (non-
Israeli) investment in it). In addition, such company is required to withhold tax at source from the dividend amount at the rate of 15%.
The Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are
included in an approved investment program.
The benefits available to an Approved Enterprise are conditioned upon terms stipulated in the Investment Law and the regulations thereunder
and the criteria set forth in the applicable certificate of approval. If we do not fulfill these conditions in whole or in part, the benefits can be
canceled and we may be required to refund the amount of the benefits, with the addition of the Israeli consumer price index linkage differences
and interest. We believe that our Approved Enterprises currently operate in compliance with all applicable conditions and criteria, but there can be
no assurance that they will continue to do so.
Income derived from sources other than “Approved Enterprise” programs during the benefit period will be subject to tax at the regular
corporate tax rate.
Pursuant to the amendment to the Investments Law, only approved enterprises receiving cash grants require the approval of the Investment
Center. Approved enterprises which do not receive benefits in the form of governmental cash grants, such as benefits in the form of tax benefits,
are no longer required to obtain this approval (such enterprises are referred to as privileged enterprises). However, a privileged enterprise is
required to comply with certain requirements and make certain investments as specified in the amended Investment Law. The amendment to the
Investment Law addresses benefits that are being granted to privileged enterprises and the length of the benefits period.
Tax benefits under the 2005 Amendment