A. TAX REFORM

B. THE TRUST RECOMMENDATIONS

C. REFORM IN CURRENCY CONTROL

D. NEW ANTI-MONEY LAUNDERING LEGISLATION

A. TAX REFORM

1. General

Previous to the Reform Law, under the Income Tax Ordinance [New Version]
(“the Ordinance”), the tax system in Israel was based largely on a
territorial / remittance basis of taxation: Ordinary income was taxed if it was
accrued, derived or received in Israel, largely without regard to the residency
of the tax payer. As a result, foreign-sourced passive ordinary income (i.e.
dividends, interest, rents, etc.) earned by Israeli residents was not taxable
in Israel so long as it was not first remitted to Israel. On the other hand, capital
gains of Israeli residents were taxed on a worldwide basis, regardless of source.
The Reform Law changed the tax system in respect of international taxation from
a territorial one to a personal one based on residency, i.e. taxation of Israeli
residents on ordinary income earned worldwide (as in the case of capital gains).
Non-residents, as before, are taxed on Israeli sourced income. The Reform Law
also introduced significant amendments dealing with the taxation of the capital
markets in Israel, and the reduction of the tax rates on ordinary income (gradual)
and capital gains.

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2. International Taxation – Taxation of Foreign Income

2.1. Residency for Legal Entities

Legal entities (i.e. bodies of persons whether incorporated or not)
incorporated/registered in Israel are deemed resident by the mere act of
incorporation/registration in Israel. In addition, as was the case before,
foreign entities are also deemed resident in Israel if the control and management
of their business are carried out from Israel.

2.2. Residency for Individuals

An individual will be considered an Israeli resident if his center of life is
located in Israel. The center of life test takes into consideration the
financial, economic and social ties of the individual, including: the location
of the individual's permanent home, the place of residence of the
individual and his family, the location of his regular activities, jobs, assets
and investments, clubs, unions and institutions of which he is a member.

Refutable presumptions, based on the number of days a person stays in Israel
(183 days or more during the tax year, or 30 days or more during the tax year,
and a total of 425 days or more during the tax year and the two previous years)
have been fixed to assist in determining the residency status.

2.3. Source of Income

Rules regarding the place where income is accrued were fixed in respect of work
income, interest, rents, royalties, dividends, pensions and other sources of income.

2.4. Income from Personal Vocation

An Israeli resident receiving income from a vocation or an occupation abroad is
now subject to Israeli tax in respect of such income, even if this is not the regular
vocation or occupation of the person in Israel. Moreover, the same holds in the
case where the said vocation or occupation is carried on through a “foreign
vocation company”, the income of which is mostly sourced in the occupation of
a resident individual who - alone or together with other resident individuals or
Israeli citizens resident in the Territories (Judea, Samaria and the Gaza Strip)
- has 75% control of the company.

2.5. Tax Rates in Respect of Passive Foreign Income

Foreign sourced interest, rent, and royalties are subject, in principle, to the
same tax rates by which such Israeli sourced income is taxed. Regarding
interest, see below. Unless deemed income from business, rent from immovables
will generally be taxed at a reduced rate of 15%. Foreign sourced dividends are
also taxed at the same rate as domestic dividends, except in the case of: foreign
sourced dividends received by Israeli companies, which are taxed at the rate of 25%,
contrary to the domestic inter-company dividends which are tax free; where
a credit is received for foreign taxes paid, dividends are taxed at the corporate
rate not exceeding 36%.

2.6. Foreign Tax Credit

A tax credit is given in respect of all foreign taxes paid (even in non-treaty
countries) if calculated as a percentage of the income created abroad, save
for municipal taxes, as against Israeli tax payable on income from foreign
sources. Foreign tax cannot be credited against Israeli tax payable on Israeli
sourced income. “Unused” credits can be carried forward five years.

2.7. Deduction of Foreign Losses

Foreign business losses may be set-off against all of the taxable income
sourced abroad, provided that passive losses were first set-off against
passive income. Losses arising from non-depreciated rent may be set-off
against capital gains from the sale of a building. Foreign capital losses
may be set-off against all capital gains or land appreciation, first against
foreign gains, and then Israeli.

2.8. New Residents

2.8.1. Capital Gains - New residents (i.e. any individual who becomes a
resident in Israel for the first time) and returning residents (former residents
returning to Israel after having permanently lived abroad for at least three
years) enjoy a ten-year tax holiday in respect of capital gains realized
from the sale of foreign assets, where such assets were owned by them
prior to becoming resident or during the period of non-residency, as the
case may be. Where the sale will be made after the expiry of the ten years,
the calculation of the gain will be made from date of original purchase to
date of sale, on a proportional basis.

2.8.2. Ordinary Passive Income - New residents and returning residents
enjoy a five-year tax holiday in respect of non-business income from
foreign interest, dividends, pensions, royalties and rent from assets which
they held before, and at the time of, becoming resident, or during the period
of non-residency, as the case may be. If on January 1, 2003, more than five
but less than ten years have expired from the time of becoming resident, the
tax holiday will avail only to the end of 2003. Special rules entitle new
residents who qualify for certain age/residence categories to benefit from
reduced tax rates on income from “foreign securities”.

2.8.3. Business Income - New residents (but not returning residents) enjoy
a four-year tax holiday in respect of business income derived from a business
owned by them at least five years prior to becoming resident.

2.9. Capital Gains Liability of Non-Residents

The Reform Law expanded the definition of the taxable Israeli source of
capital gains for non-residents to include the disposition of all of the
following, both in respect of movable and immovables: A foreign asset
that consists principally of a direct or indirect right to an asset in Israel. A
share or a right to a share of corporate entity resident in Israel. A right in
a foreign corporate entity, which is the owner, directly or indirectly, of an
asset situated in Israel. Non-residents are exempt from capital gains tax on
the sale of shares allotted to them as of 2003 in consideration for investment
in Israeli resident research and development companies.

2.10. Transfer Pricing

In cases where the price and/or conditions of the transaction were fixed
because of the existence of special relations between parties, resulting in
lesser or larger profit than would have been the case had the price been
fixed between non-related parties (“the market price”), the price of the
transaction is deemed to be the market price, and not the price fixed by the parties.

2.11. Controlled Foreign Companies

CFC rules apply in respect of controlled foreign companies , the income
of which is mostly passive, provided the passive profits of such company
in its country of residence are taxed at 20% or less. An Israeli resident who
controls a controlled foreign corporation is deemed to have received a
dividend equal to his proportional share in the undistributed non-business/vocation
passive income (interest, dividends, royalties, rentals, and consideration obtained
from the sale of assets, except for assets used in a business or a vocation) of the
foreign company, and is taxed accordingly. Credit is granted equal to the
notional withholding tax that would have been paid had the dividends been
distributed, and a credit of taxes paid by the shareholder as a result of the above
is also given against a taxable capital gain in the event of a subsequent sale of
the shares.

2.12. “Exit / Emigration Tax”

A person (individual or corporate) who ceases to be a resident of Israel is
deemed to have sold his/its capital assets on the day he/it ceased to be a
resident. The payment of the capital gains tax, that may be due as a result of
such “sale”, may be postponed, at the option of the assessee, to the date of
actual sale of the asset. In such case, the taxable gain will be the real gain at
the date of actual sale multiplied by the period in which asset was held from the
date purchase to the date of cessation of residency, and divided by the total
period in which the asset was held from the date of purchase to the date of
actual sale. Interest and linkage differences due on the payment are only
calculated from the date of actual sale to the date of actual payment.

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3. Taxation of Financial Income

3.1. Capital Gains Tax on Traded Securities

3.1.1. Israeli Residents: Contrary to previous law, where capital gains in
the hands of resident individuals in respect of sales of securities traded on
the Tel-Aviv Stock Exchange (“TASE”) were generally exempt from tax,
such capital gains are now taxed at the rate of 15% of the real gain (or 25%
if financing expenses were allowed as a deduction). The corporate business
sector continues to pay tax at the rate of 36% in respect of gains from traded
securities. Public institutions continue to benefit from an exemption in respect
of gains from traded securities.

Capital gains from the sale of “foreign securities”, previously taxed at 35%, will
be taxed at  the rate of 15% as of 2005.

3.1.2. Non-Residents: Unlike Israeli residents, non-residents, individual or
corporate, continue to enjoy the exemption from capital gains tax on the
sale of securities on the TASE, by virtue of a special provision in the Reform
Law. The exemption, however, does not apply in case of a corporate non-resident
in which Israeli residents hold 25% or more of the means of control.

3.2. Interest on Financial Vehicles

Real interest (i.e. adjusted in accordance with the Cost of Living Index) from
Israeli traded securities and financial vehicles is taxed at the rate of 15%.
Real interest from “foreign securities” will be taxed at the rate of 15% as of 2005.
Bank deposits in Israeli currency and certain saving plans is no longer exempt
from tax in respect of interest paid after June 12, 2002. Interest on certain
governmental debentures and on deposits linked to the cost of living index or to
foreign currency, previously subject to tax at 35%, benefits from the new reduced
tax rate of 15%. The reduced rate does not apply to the business sector.

3.3. New Immigrants and Non-Residents

New immigrants continue to benefit from the 20-year tax exemption in
respect of interest on deposits in foreign currency in an Israeli bank.
Non-residents continue to be exempt from tax in respect of interest on
bank deposits.

3.4. Options to Employees

Allotment of shares to employees through a trustee is only taxable at the
time of sale of the share or its delivery to the employee by the trustee,
whichever is the earlier. The employer company has the option of choosing
between an ordinary income tax track (right of set-off by the company; normal
tax rates to the employee) and a capital income tax track (no right of set-off by
the company; 25% tax rate to the employee).

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4. Transparent Companies

A new tax-driven company structure is introduced, similar to a US
“S Corporation”. Provided certain conditions are met, such a structure
benefits from the incorporation advantages of a company on the one hand
(the limited liability), and the tax benefits of a partnership on the other
hand, i.e. flow-through taxation of the shareholders rather than taxation
of the company itself. All the shareholders of a transparent company must
be Israeli resident individuals.

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5. General Tax Rates

5.1. Ordinary Income

Tax rates on ordinary income are to be gradually reduced, beginning in 2003
until 2008.

5.2. Capital Gains

Previously capital gains were taxed at ordinary income rates. The
Reform Law provided that the general capital gains tax rate in
respect of dispositionof all types of assets (including patents – previously
taxed at 40%; and key-money leasehold rights – previously taxed at 35%)
which are not traded securities, is 25% of the real gain (i.e. the gain
without the rise in the Cost of Living Index), save for that part of the
real gain equal to the adjusted depreciation (accumulated depreciation
indexed by 50%), which is taxed at ordinary rates. This rate applies to
individuals and to companies. The new rates apply to sales made as
of January 1, 2003, and are calculated on a proportional basis. Undistributed
profits in respect of shares that are being sold – previously taxed at
10% – are taxed at the rate applicable to dividends, insofar as these profits
were accumulated after January 1, 2003. The preferred capital gains and
land appreciation graduated tax rates of 12%-24% previously applicable to
assets purchased prior to 1961 will continue to apply in respect of such assets
if sold until the end of 2004. As of 2005 the rates will gradually increase by 1%
every year, up to the maximal rate of 25%.

*A treaty with Luxembourg has been signed, but has not been ratified to date.

A treaty with Ukraine was signed on November 26, 2003, but has not been ratified to date. All information as of March 2005.

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B. THE TRUST RECOMMENDATIONS

1. Basic Principles

The following principles formed the basis for the Trust Recommendations:
A trust is not a legal person , and as such the person liable to tax is the
beneficiary, although the trustee may have an obligation to report and may
be assessed. The taxation provisions shall apply to irrevocable trusts. Trusts
controlled in law or in fact by the settlor shall be transparent for tax purposes.
The principle of tax neutrality in the taxation of trusts is adopted. The liability
to tax shall be determined according to the tax status of the beneficiary. The
residence of the trustee is irrelevant and therefore the appointment of an
Israeli resident trustee will not create an additional tax liability. In general,
the system of taxing the income of a trust on an on-going basis – even if not
distributed – is preferred over the postponement of taxation to, and its
collection upon, distribution to the beneficiaries. Tax benefits are granted
to trusts settled by non-residents in favor of Israeli residents and to trusts
settled by new immigrants prior to their immigration. Certain rules
and anti tax-planning provisions are made in order to prevent abuse
of the institution of trust.

2. Taxation

2.1. Israeli Resident Trust (settlor and beneficiaries are all Israeli
resident individuals)

Generally taxable upon creation (in respect of settlement of non-cash
assets), and on current undistributed income, with option to be taxed
alternatively upon distribution to beneficiaries, if distribution is made
within 6 months after end of tax year.

2.2. Foreign Beneficiary Trust (settlor is an Israeli resident and all beneficiaries are
foreign residents)

Generally taxable upon creation (in respect of settlement of non-cash
assets), but not taxable on foreign sourced undistributed income, nor
on distributions to foreign beneficiaries during lifetime of trust or upon
its termination.

2.3. Foreign Settlor Trust (settlor(s) is(are) individual(s) foreign
resident(s), or former Israeli resident(s) provided at least 15 consecutive
years since the cessation of Israeli residence have elapsed at the time
of creation of trust; beneficiaries are Israeli resident individuals) –

Generally not taxable upon creation, nor on undistributed income
(unless Israeli sourced income that would have been taxable if assets
not transferred to trust), nor on distributions to beneficiaries during
lifetime of trust or upon its termination.

2.4. Limited Foreign Settlor Trust (all settlors are foreign residents,
among them a foreign body of persons or individual(s) who has/have
been non-Israeli residents for less than 15 years) -

Generally not taxable upon creation, nor on undistributed income
(unless Israeli sourced income that would have been taxable if assets
not transferred to trust), but taxable at the rate of 15% on all
distributions to beneficiaries during lifetime of trust or upon its termination.

2.5. Foreign Settlor & Beneficiary Trust: (all settlors and beneficiaries are
foreign residents)

Not taxable at any level even if trustee is Israeli resident.

In respect of the first three types of trusts the trustee is assessable
to tax but the tax may also be collected from the beneficiaries if
there is a distribution, but only up to a certain limit. Moreover, in
case of the first two, the settlor is deemed to be a guarantor of the
tax debt. In the case of a Limited Foreign Settlor Trust, the beneficiaries
are assessable.

All of the above relates to irrevocable discretionary trusts. Revocable
trusts, in general, will continue to be taxed, as to their current income,
in the hands of the settlor on a “see-through” basis.

3. Reporting

The Reform Law while not dealing with the taxation of trusts,
nevertheless does contain certain provisions regarding reporting
requirements in relation to trusts. The Trust Recommendations
provide for additional reporting requirements (even where there
is no liability to tax) by the trustee in all cases, and by the settlor
and/or beneficiaries in others. Moreover there are wider requirements
regarding the contents of the reports.

4. Miscellaneous Provisions

4.1. Definition of Settlor/Beneficiary - While there are no specific
definitions of “settlor” or “beneficiary” (nor of “trust”, for that matter),
the Trust Recommendations include a list of examples which “expand”
the definition of one or the other.

4.2. Residence - There are specific rules regarding the determination
of residence: in regard to point of time when determinable; in the
case of inability to identify a settlor; in the case of multiplicity
of settlors and/or beneficiaries; and in the case of change of
residence by settlors and/or beneficiaries.

4.3. Bodies-of-Persons (companies, etc.) – Fairly detailed provisions
are included regarding a company acting as a settlor (e.g. transfer
of asset to trust are deemed dividends), or as a beneficiary (e.g. effect
on the residence status of company where Israeli residents hold more
or less of 50% of the means of control).

5. Encouragement for the Operation of Trusts in Israel

Where a trust forms an underlying company in Israel solely for the
purpose of holding trust assets and the company carries on no other
business, all the income of such company will be deemed the income
of the trust. Such a company may hold assets both in Israel and
abroad and shall not have to file an annual report. Even where the
trustee is resident, management and control of its business shall not
be deemed to be in Israel. Where the settlor and beneficiaries are non
resident, the income of the trust shall not be taxed even if the trustee
is resident - if no tax would have been due in case where the trustee(s)
would have been non resident only.

6. Special Trusts

Special rules are provided for: Charitable Trusts, Real Estate Trusts,
and Revocable Trusts.