Israeli Taxes - Competitiveness of Israel Compared to Other Jurisdictions

Israeli Corporate Tax – at a Glance Corporate Income Tax – 26.5% (may be reduced to 25% as of January 1, 2016) Capital gains tax rate – 26.5% (may be reduced to 25% as of January 1, 2016) Branch tax rate – 26.5% (may be reduced to 25% as of January 1, 2016), no branch remittance tax NOLs carry forward – Unlimited Withholding tax (may be reduced according to applicable tax treaties) Dividends 0%/15%/20%/25%/30% Interest 0%/15%/26.5%/25% Royalties from patents, Know-how, etc. 26.5% 2

An annual budget of approximately NIS 1.5 Billion (US $420M) supports hundreds of companies. Manufacturing needs to mostly be in Israel. Advantage – Grants need only be repaid if and upon successful commercialization of the R&D and may consist of up to 50% of the R&D budget. R&D failed/No commercialization – no need to repay the grant. Successful Commercialization – repayment of grant through royalties on sales, increased royalties if manufacturing is outside of Israel. M&A Transaction – OCS approval required; and penalty imposed on transfer of know-how overseas. The penalty is capped at three or six times the original grant (plus annual interest) depending on R&D activity remaining in Israel. Grants and Incentives from the Israeli Government – Office of Chief Scientist (OCS) 3

“ Preferred Enterprises” are entitled to the following tax benefits: Reduced corporate tax rates depending on the geographical location. Reduced tax rates on dividends distributed from the company's preferred income. Accelerated depreciation and amortization for tax purposes. A company will be considered a “Preferred Enterprise” if all the following conditions are met: Incorporated in Israel and is controlled and managed from Israel; Owns an “Industrial Enterprise” (including Hi-Tech companies providing R&D services); Contributes to the economic independence and the gross national product of Israel – minimum export requirement of 25%; No minimum investment requirement. Grants and Incentives from the Israeli Government – Preferred Enterprise Status 4

Corporate Income Tax Preferred Enterprise Status – Tax Rates 5 Other Areas in IsraelDevelopment Zone ATax Years 16%9%2014 onwards Tax on dividends distributed from the company's preferred income: Maximum of 20% for preferred enterprise plans implemented as of January 1, 2014 (may be reduced according to applicable tax treaties).

Comparison of Jurisdictions Tax benefits to encourage employment Patent Box Royalties withholding tax Interest withholding tax Dividend withholding tax Capital gain tax rate Corporate tax rate Yes*NO26.5%0/15%/ 25%/ 26.5% 0%/15%/ 20%/25%/ 30% 26.5%26.5% or 16%/9% Israel Yes 20% for patent or 0% in other cases 20% or 0% in certain cases 20% or 0% in certain cases 20%25% But could be reduced to 12.5% Ireland NoYes0015% or 0% in certain cases 20%21% or 6% in certain cases (the lowered tax rate may be applicable until 2021) Luxemburg No 0/10%10%/15%0%0% or 17% 17%Singapore 6 * The tax benefits for the encouragement of employment in Israel are limited in scope and relate to specific geographic areas.

Comparison of Jurisdictions Tax benefits to encourage employment Patent Box Royalties withholding tax Interest withholding tax Dividend withholding tax Capital gain tax rate Corporate tax rate NoYes4.95%/ 16.5% 0% 0% or 16.5% 16.5%Hong Kong Yes 0% 0% or 35% 35%Malta NoYes0% 0%/15%0% or 25% 25%Netherland Yes 0%0%/35%35%0% or 8.5% 8.5%Switzerland Yes 20% 0%0% or 20% 20%United Kingdom 7

R&D Tax Incentives Accelerated depreciation on R&D assets Tax deductions and/or exemptions Cash grants/ Financial support Tax credits Tax depreciation allowances with respect to capital expenditure incurred during scientific research. - Enterprise Ireland – grants for R&D expenditures. Irish Industrial Development Authority – offers grants for first- time foreign investments. R&D expenditures are credited for up to 37.5%, instead of the regular 12.5% corporate expenditures deduction Ireland Accelerated depreciation on the R&D assets. Under certain conditions, 80% of the net income generated by the exploitation of an IP right is exempt. Available aid of up to 25% of R&D investments. Further incentives may be granted based on the essence of the company’s activity. -Luxemburg - Up to 400% deduction (subject to relevant caps). A 200% deduction on R&D expenditure incurred on approved projects. Support of 30% or 50% of the total qualifying cost -Singapore 8

R&D Tax incentives 9 Accelerated depreciation on R&D assets Tax deductions and/or exemptions Cash grants/ Financial support Tax credits Full Amortization for R&D intangible assets. An extra deduction of 60% is available for eligible R&D costs and investments. Cash grants for partnerships between private and public parties A tax credit of 35% for the first €250K of the eligible R&D wages Costs, and 14% is applicable to the remaining. Netherland Possibility to account a one-off depreciation under certain conditions. Tax holidays - relief from capital and profit taxes for a maximum of 100% over a period of maximum 10 years and for 1 legal entity. - Contributions to investment costs. Contributions to investment costs, repayable on an interest free basis, subject to conditions. Switzerland Accelerated depreciation on the R&D assets. Large companies - deduction of 130% SME’s – up to 225% Full first year allowance on qualifying capital expenditure R&D expenditures are credited for up to 30%, instead of the regular 20% corporate expenditures deduction United Kingdom

10 ‘Cost-Plus’ Markup for Employee Stock Options Many companies in Israel provide R&D services to non-Israeli affiliated companies. In order to provide the R&D services to the affiliated companies, Israeli companies are required to determine the appropriate ‘cost-plus’ markup, which must meet the ‘arm’s length’ principle. The applicable ‘cost-plus’ markup is generally set between 7%-10%. A recurring issue for companies which provide R&D services on a ‘cost-plus’ basis, is whether the basis for the calculation of the ‘cost-plus’ markup should include the expenses which stem from employees stock incentive plans. The ITA takes the position that the cost basis, to which the ‘cost-plus’ markup should be applied, includes such expenses, although this expense is not tax deductible.

11 Markup on Employee Stock Options Expenses For example, an Israeli company (“LTD”) provides R&D services to its parent company (“INC”) which is a USA resident. The yearly salary cost of providing the R&D services is $500,000 and the appropriate ‘Cost-Plus’ markup is 10%. In addition, LTD grants it’s R&D employees with INC’s stock options, under the purview of section 102’s ‘capital gains track’. The stock options yearly vesting value is $100,000. Under the Israeli tax regime, the expenses related to granting stock options may not tax deductible. INC LTD ‘cost-plus’ markup without stock options ‘cost-plus’ markup with stock options $500,000$500,000+$100,000=$600,000Cost of services $500,000*0.1= $50,000$600,000*0.10= $60,000Profit $100,000 Non-deductible expenses $150,000$160,000 Total taxable income ($39,750)($42,400) Corporate Tax (26.5%) $50,000-$39,750=$10,250$60,000-$42,400=$17,600Net profit

12 ‘Cost-Plus’ Markup Following an Acquisition Transaction A similar recurring dispute regarding the relevant cost basis to which the ‘cost-plus’ markup should be applied occurs following an acquisition transaction where a portion of the consideration is conditioned upon fulfillment of an employment period. For example, an Israeli subsidiary (“Sub”) of a USA resident multinational company (“MNC Inc”) purchases an Israel software company (“Target”) for the consideration of $100M. At the time of the transaction, 90% of Target’s share capital was held by different funds while 10% of Target’s share capital was held by it’s founder, and which received the following consideration: Following the transaction the founder transferred to Sub, and the Conditional Consideration will be paid after the lapse of a one year period, provided that the founder is still employed with Sub or an affiliated company of MNC Inc. As part of an assessment agreement with the founders of Target, Sub undertook a commitment according to which it will not deduct, for Israeli tax purposes, any of the expenditures which were incurred related to the transaction. Sub provides R&D services to on a ‘Cost-Plus’ basis to MNC Inc. The yearly salary cost of providing the R&D services is $1M and the appropriate ‘Cost-Plus’ markup is 7%. MNC Inc Sub Target $10MTotal Consideration $4MCash $5MConditional Consideration $1MEscrow Amount

13 ‘Cost-Plus’ Markup Following an Acquisition Transaction Since the Conditional Consideration is related to the founder’s employment and is considered a part of Sub’s ‘cost of labor’ for accounting purposes, the ITA may take a very aggressive position according to which, the cost basis, to which the ‘cost-plus’ markup should be applied, includes the Conditional Consideration. However, our approach is that the Conditional Consideration should be considered a part of the acquisition transaction’s consideration and has nothing to do with the actual cost of providing the R&D services. Hence, it should not be added to the cost basis to which the ‘cost- plus’ markup is applied. This is a matter which is often brought up in assessment proceedings and some companies have reached different compromises in this regard. MNC Inc Sub Target Cost of R&D services with Conditional Consideration Cost of R&D services without Conditional Consideration ($1M+$5M)*1.07=$6,420,000 Markup - $420,000Markup - $70,000

14 Post Acquisition Treatment of IP – Transferring IP Outside of Israel When transferring IP outside of Israel, the parties to the transaction must chose between a ‘one time sale’ and a ‘declining royalties payment module’. It is important to plan the transfer of the IP as part of the acquisition of the company, in order to prevent adverse tax consequences, which can be avoided if the transaction is structured properly. A One Time Sale The selling company will be subject to capital gains tax at a rate of 26.5% for the difference between the IP’s fair market value and the IP’s cost basis. It should be noted, that the ITA takes very aggressive approach in determining the IP’s fair market value, usually setting the IP’s fair market value between 70%-90% of the total price of the transaction. Provided that the transaction is not settled in cash, an intercompany debt will be formed between the selling company and the purchasing company which must be serviced. If structured properly, this intercompany debt can be used to repatriate funds with no adverse tax consequence. A Declining Royalties Payment Module The selling company will be subject to corporate tax at a rate of 26.5% for any income generated by royalties payed for the transferred IP (the company may be subject to a reduced corporate tax rate according to the Encouragement of Capital Investments Law). The advantage of this module is that the income is generated over time, thus postponing the payment of tax. It should be noted, that the ITA may reject the ‘declining royalties module’ and tax the transaction as a one time sale. Provided that the royalties are not paid in cash, an intercompany debt will be formed between the selling company and the purchasing company over time, and must be serviced. If structured properly, this intercompany debt can be used to repatriate funds with no adverse tax consequence.

15 Israeli VAT – at a Glance An Israeli company that renders services in the course of its business will probably be defined as a “dealer” for VAT proposes, hence it will be obliged to register with the VAT authorities. Value added tax is levied on the supply of goods and performance of services taking place in Israel, including on the importation of good. The Israeli VAT rate is currently 17%. However, a number of transactions may be zero-rated or exempt upon meeting certain conditions. A “dealer” may deduct from the VAT he obliged to input, VAT which is included in an invoice that was produced for him by law, provided that the input VAT was used for a taxable transaction (including zero-rated transactions). Zero-rated VAT rate may be applicable when granting services to foreign residents, provided that two aggregate conditions are met: A.The services were rendered exclusively to foreign residents, such that no Israeli resident benefited from the services; and B.The services are not rendered regarding an asset which located in Israel.

16 Multinational Financial Institutions – Exposure to Israeli VAT Over the past few years the Israeli Tax Authority (“ITA”) has challenged the zero-rated VAT position adopted by multinational financial institutions. The multinational financial institutions had Israeli subsidiaries which provided them with recruitment services of Israeli clients. The multinational financial institutions paid the Israeli subsidiaries a service fee for these recruitment services and they maintained that they should be subject to zero-rated VAT. The ITA claimed two alternative claims which negate the zero-rated VAT benefit: The recruited Israeli clients benefited from the services provided by the Israeli subsidiary; The recruited Israeli clients are themselves an asset in Israel. The general rule is that if an Israeli company provides R&D services to a non-Israeli company, the service fees for the R&D services should be subject to zero-rated VAT. The main challenge regarding zero-rated VAT on R&D services, occurs in cases where an Israeli company, which owns IP in Israel, is acquired by a non-Israeli company. In such cases the ITA may take the position that any payment for R&D services, rendered by the Israeli company, are related to the IP which is located in Israel, and thus should be subject to full VAT. This exposure can be mitigated by separating the IP located in Israel from the IP which is subject to the R&D services.