Egyptian natural gas supplier East Mediterranean Gas Company (EMG) has a full 20-year tax exemption from the Israeli government, an inquiry by "Globes" has discovered. According to experts, the tax exemption was granted as part of an extraordinary and unlimited agreement tailored for the company as part of its contract with Israel Electric Corporation (IEC) (TASE: ELEC.B22) to supply gas for 15 years with an option to extend to 20 years. The current estimated value of the contract is $6 billion.
The commercial contract between EMG and IEC signed in Cairo in 2005 was accompanied by a covenant between the Israeli and Egyptian governments signed by then-Minister of National Infrastructures Benjamin Ben-Eliezer and Egypt's Minister of Petroleum and Mineral Resources Sameh Fahmi on June 30, 2005. Article 6 of the covenant, its longest article, grants EMG a complete tax exemption throughout the period of EMG-IEC contract. It states, "EMG, whose place of residence is Egypt, will be exempt from taxes in Israel on income from the sale and supply of gas from Egypt to Israel and from the distribution of gas at the Ashkelon terminal."
The covenant adds, "EMG will not be required to open an income tax file or file annual tax reports in Israel."
The tax exemption applies to the companies tax, currently at 25%, and VAT, currently at 16%.
Egyptian businessman Hussain Salem owns 28% of EMG, Egyptian Natural Gas Holding Company owns 10%, Thai energy giant PTT Public Co. Ltd. owns 25%, Israeli business Yosef Maiman owns 20% through Ampal-American Israel Corporation (Nasdaq: AMPL; TASE:AMPL) and his private company Merhav MNF Ltd., and Israeli institutional investors own 4.4%. The Israeli shareholders are not exempt from paying taxes on dividends distributed by EMG.
Israeli tax experts told "Globes" that without the covenant, EMG would pay Israeli taxes because it has permanent business in Israel, including the terminal in Ashkelon, which is a fixed asset, as defined by the Israel Tax Authority. They added that the exemption granted EMG under the covenant is extraordinary in relations between companies. "This is a very unusual clause in international tax covenant law," Prof. Yosef Edrey of Haifa University told "Globes".
Published by Globes [online], Israel business news - www.globes-online.com - on August 2, 2010
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