NOTE 8 - TAXES ON INCOME

a. Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969:

The Company is an “industrial company”, as defined by this law. As such, the Company is entitled to claim depreciation at increased rates for equipment used in industrial activity, as stipulated by regulations published under the inflationary adjustments law.

b. Tax benefits under the Law for the Encouragement of Capital Investments, 1959:

1) Tax benefits prior to the 2011 Amendment

Substantially all of the Company’s production facilities have been granted “Approved Enterprise” status under the above law (including Amendment No. 60 to the law that was published in April 2005). Income derived from the approved enterprise was tax exempt for a period of ten years commencing in the first year in which the Company earned taxable income from the approved enterprise (provided the maximum period to which it is restricted by law has not elapsed).

According to the above law, in the event of distribution of cash dividends from income that was tax exempt as above, the Company would have to pay the 25% tax in respect of the amount distributed.

The entitlement to the above benefits was conditional upon the Company’s fulfilling the conditions stipulated by the above law, regulations published thereunder and the certificate of approval for the specific investments in approved enterprises. In the event of failure to comply with these conditions, the benefits may be cancelled and the Company may be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences to the Israeli CPI and interest.

Tax benefits under the 2011 Amendment

On January 6, 2011 an amendment (Amendment No. 68) to the Law for the Encouragement of Capital Investment-1959 (the "2011 Amendment") was published. The 2011 Amendment significantly revised the tax incentive regime in Israel, commencing on January, 1 2011.

The 2011 Amendment introduced a new status of “Preferred Enterprise”. Similarly to the “Approved Enterprise” status, a Preferred Company is an industrial company meeting certain conditions (including a minimum threshold of 25% export). However, under the New Amendment the requirement for a minimum investment in productive assets in order to be eligible for the benefits granted under the Investments Law as with respect to “approved enerprise”status was cancelled. Dividends distributed from income which is attributed to a “Preferred Enterprise” will be subject to withholding tax at source at the following rates: (i) Israeli resident corporations - 0%, (ii) Israeli resident individuals – 15% (iii) non-Israeli residents - 15%, subject to a reduced tax rate under the provisions of an applicable double tax treaty.

On July 30, 2013 the Israeli Parliament passed a Law for the change in the order of National Priorities (Legislative amendments to achieve budget objectives for 2013 and 2014) — 2013. As part of the legislation, the Law for the Encouragement of Capital Investments was amended so that the tax rate applicable to a “Preferred Enterprise” in this period in Development Area A will be 9% and the tax rate in other parts of the country will be 16%. Similarly, it was determined that the tax rate on dividends distributed to individuals and foreign residents out of preferred income will be increased to 20% as from January 1, 2014 as opposed to the current rate of 15%.

The following table summarise the reduced flat tax rate with respect to the income attributed to the Preferred Enterprise:

Tax Year	Development Region “A”	Other Areas within Israel

2011-2012	10%	15%

2013	7%	12.5%

2014 onwards	9%	16%

Tax benefits under the Law for the Encouragement of Capital Investments, 1959: (continued)

Tax benefits under the 2011 Amendment (continued)

The Company is located in Development Region "A" and during 2011 had chosen the status of the 2011 Amendment.

If only a portion of the Company's capital investments is approved, its effective tax rate will be the result of a weighted combination of the applicable rates. The tax benefits from any certificate of approval relate only to taxable income attributable to the specific “Preferred Enterprise”. Income derived from activity that is not integral to the activity of the “Preferred Enterprise” will not enjoy tax benefits. The Company's entitlement to the above benefits is subject to fulfillment of certain conditions under the Investment Law and related regulations.

During 2013, the Company applied for a tax ruling with respect to 2012 and future years. During 2014, the Company obtained the ruling, which provides that the portion of the income attributed to the “Preferred Enterprise” (and thereby subject to lower tax rates) will be calculated each year based on, among other things, the ratio between the number of the employees in Israel and abroad. According to the ruling, the tax rate on income in Israel in 2015 was approximately 22%.

c. Other applicable tax rates:

1) Income from other sources in Israel

On December 6, 2011, the “Tax Burden Distribution Law” Legislation Amendments (2011) was published in the official gazette, under which the previously approved gradual decrease in corporate tax was cancelled. The corporate tax rate increased to 25% as from 2012.

As part of the mentioned above law for the change in the order of National Priorities (Legislative amendments to achieve budget objectives for 2013 and 2014) — 2013 the corporate tax rate has increased to 26.5% in 2014 and 2015.

On 5 January 2016, the Israeli Parliament officially published the Law for the Amendment of the Israeli Tax Ordinance (Amendment 216), that reduces the standard corporate income tax rate from 26.5% to 25%. The amendment will enter into force on January 1, 2016 and the 25% corporate tax rate will apply to income that was generated from that day onwards.

2) Income of non-Israeli subsidiaries

Non-Israeli subsidiaries are taxed according to tax laws in their countries of residence.

d. Deferred income taxes:

	December 31
	2015			2014
	U.S. dollars in thousands
1) Provided in respect of the following:

Research and development expenses	$	54		$	13
Carryforward tax losses		1,494			2,284
Other		187			182
Less- valuation allowance		(1,494	)		(2,284	)
	$	241		$	195

As of December 31, 2015, the carryforward tax losses are related mainly to the Company’s subsidiaries (in the U.S. and U.K.) and amounted to approximately $4.6 million. The Company has provided valuation allowance in respect of deferred tax assets resulting from carryforward tax losses of the Company's subsidiaries. Management currently believes that it is more likely than not that those deferred tax losses will not be realized in the foreseeable future.

e. Taxes on income included in the statements of operations:

1) As follows:

	Years ended December 31,
	2015			2014		2013
	U.S. dollars in thousands

Current:
In Israel	$	1,283		$	1,473	$	116
Outside Israel		99			94		71
		1,382			1,567		187
Taxes in respect of previous years		(52	)		-		107
Deferred taxes in Israel		(46	)		101		(157	)
	$	1,284		$	1,668	$	137

Following is a reconciliation of the theoretical tax expense, assuming all income is taxed at the regular tax rates applicable to companies in Israel (see c. above), and the actual tax expense:

	Years ended December 31,
	2015			2014			2013
	U.S. dollars in thousands

Income before taxes on income, as reported in the statements of operations*	$	6,302		$	7,151		$	2,322
Theoretical tax expense		1,670			1,895			581
Less - tax benefits arising from approved enterprise status, see a. above		(271	)		(401	)		(60	)
		1,399			1,494			521
Increase (decrease) in taxes resulting from permanent differences:
Disallowable deductions		42			22			60
Taxes in respect of previous years		(52	)		-			107
Changes in valuation allowance		(747	)		62			243
Changes in taxes resulting from computation of deferred taxes at a rate which is different from the theoretical rate and other		642			90			(794	)
Taxes on income for the reported years:	$	1,284		$	1,668		$	137

* As follows:
Taxable in Israel	$	5,346		$	6,145		$	1,325
Taxable outside Israel		956			1,006			997
	$	6,302		$	7,151		$	2,322

f. Tax assessments:

The Company has received final assessments from the tax authorities, through the year ended December 31, 2011. The subsidiaries, except Omni, have not been assessed since incorporation. Omni has received final tax assessments through tax year 2006.

g. Sale of MIND Software SRL:

On July 2014, the Company sold its holdings in “MIND Software SRL” to “MIND Software Limited” in the amount of $3,880 thousand.

Following the sale, the Company recognized a capital gain, which was offset against carryforward capital losses from previous years.