ARTICLE 10 — U.S. Income Tax Treaty

Grants

This Article details the manner in which Israeli governmental grants to United States residents will be treated for United States tax purposes.

Paragraph (1) provides that for the purpose of computing United States tax, if Israel, a political subdivision thereof, or any agency of either makes a qualifying cash grant to a United States resident, then the amount of such grant will be included in the gross income of such resident unless the U.S. resident elects to exclude it. If he does not so elect, and the grant is included in income, the U.S. resident would increase his basis in the stock of the Israeli corporation by the amount of the grant. If he so elects, and if the resident is a corporation, the amount of such grant will be treated as a contribution to its capital. The electing United States resident will be considered to have contributed the amount of such grant to the Israeli corporation designated by the terms of the grant, and the resident's basis for the stock of the Israeli corporation will not be increased by the amount of the contributed grant. The basis of the assets of the Israeli corporation (for purposes of determining the Israeli subsidiary's earnings and profits for U.S. tax purposes) will be reduced by the amount of the deemed contribution, in accordance with rules prescribed by the Secretary of the Treasury. The Convention has no special provision with respect to a U.S. resident who acquires assets directly from the proceeds of a grant. Thus, for example, if the U.S. resident is a corporation, the rules of section 362(c) of the Code will apply and the U.S. resident will be required to reduce its basis in certain assets acquired after the contribution.

Paragraph (2) defines a qualifying cash grant as one approved by Israel for investment promotion in Israel. A qualifying grant will not include any amount which in whole or part, directly or indirectly,

(a) is in consideration for services rendered or to be rendered by either the United States resident or the Israeli subsidiary, or for the sale of goods;

(b) is measured in any manner by the amount of profits or tax liability of the investor or the Israeli corporation in which the investment is made; or

A grant will qualify where It is made by Israel, or a political subdivision thereof, on the basis of the enterprise meeting an approved project's social or economic objectives, which may include, for example, creating employment, generating or conserving foreign exchange, tourism, or developing less developed regions. It is contemplated that qualifying grants may be made before commencement of an investment or after the investment has been made and may be based upon whether or not the enterprise has fulfilled the conditions of investment.