NOTE

14:

TAXES ON INCOME

U.S.

tax reform

December 22, 2017,

the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including but

not

limited to: a federal corporate rate reduction from

35%

21%;

creation of the base erosion anti-abuse tax (“BEAT”), introduction of the Global Intangible Low Taxed Income (“GILTI”) provisions; the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system; modifications to the allowance of net business interest expense deductions; modification of net operating loss provisions; changes to

162

(m) limitation rules and bonus depreciation provisions. The change to a modified territorial tax system resulted in a

one

-time U.S. tax liability on those earnings which have

not

previously been repatriated to the U.S. (the “Transition Tax”), with future dividend distributions

not

subject to U.S. federal income tax when repatriated. A majority of the provisions in the Tax Act became effective

January 1, 2018.

In connection with its analysis of the impact of the Tax Act, the Company had

$16,053

of Transition Tax inclusion reported on the tax return filed for the year ended

December 31, 2017.

After the utilization of existing tax net operating loss carryforwards, the Company did

not

pay additional U.S. federal cash taxes.

The Tax Act added a new code section

951A,

which requires a U.S. shareholder of a Controlled Foreign Corporation (“CFC”) to include in current taxable income, its GILTI in a manner similar to Subpart F income. The statutory language also allows a deduction for corporate shareholders equal to

50%

of the GILTI inclusion, which would be reduced to

37.5%

starting in

2026.

In general, GILTI imposes a tax on the net income of foreign corporate subsidiaries in excess of a deemed return on their tangible assets. The Company is subject to GILTI for

2018

and future periods. The Company is electing to account for the income tax effects of GILTI as a ‘period cost’, an income tax expenses in the year the tax is incurred.

For the fiscal year ended

2018

and

2019,

the Company had sufficient net operating losses and GILTI foreign tax credits to offset the U.S. tax liability and did

not

pay additional U.S. federal cash taxes.

Furthermore, the Tax Act limits the carryover of net operating losses generated after tax years

2017

80%

of taxable income and eliminates the ability to carryback. Losses incurred before

January 1, 2018

have

not

changed and are

not

limited to the

80%

of taxable income and will continue to be carried forward

years. The Company has fully utilized all pre-

2018

net operating losses. Any future net operating losses generated will be carried forward indefinitely and subject to an

80%

taxable income limitation.

The Tax Act amended section

168

(k) provision to allow

100%

expensing for investments in depreciable property for property other than real property or certain utility property and certain businesses with floor plan indebtedness. This applies to investments subsequent to

September 27, 2017

and before

January 1, 2023.

The Company has conformed to the provisions as applicable.

A number of the Company’s operating subsidiaries are taxed at rates lower than U.S. rates.

Irish Subsidiaries

The Irish operating subsidiary qualified for a

12.5%

tax rate on its trade. Interest income earned by the Irish subsidiary is taxed at a rate of

25%.

As of

December 31, 2019,

the open tax years, subject to review by the applicable taxing authorities for the Irish subsidiary, are

2014

and subsequent years.

Israeli Subsidiary

The Israeli subsidiary has been granted “Approved Enterprise” and “Benefited Enterprise” status under the Israeli Law for the Encouragement of Capital Investments. For such Approved Enterprises and Benefited Enterprises, the Israeli subsidiary elected to apply for alternative tax benefits—the waiver of government grants in return for tax exemptions on undistributed income. Upon distribution of such exempt income, the Israeli subsidiary will be subject to corporate tax at the rate ordinarily applicable to the Approved Enterprise’s or Benefited Enterprise’s income. Such tax exemption on undistributed income applies for a limited period of between

two

ten

years, depending upon the location of the enterprise. During the remainder of the benefits period (generally until the expiration of

ten

years), a corporate tax rate

not

exceeding

23%

will apply.

The Israeli subsidiary is a foreign investor company, or FIC, as defined by the Investment Law. FICs are entitled to further reductions in the tax rate normally applicable to Approved Enterprises and Benefited Enterprises. Depending on the foreign ownership in each tax year, the tax rate can range between

10%

(when foreign ownership exceeds

90%

) to

20%

(when foreign ownership exceeds

49%

). There can be

assurance that the subsidiary will continue to qualify as an FIC in the future or that the benefits described herein will be granted in the future.

The Company’s Israeli subsidiary’s tax-exempt profit from Approved Enterprises and Benefited Enterprises is permanently reinvested as the Company’s management has determined that the Company does

not

currently intend to distribute dividends. Therefore, deferred taxes have

not

been provided for such tax-exempt income. The Company intends to continue to reinvest these profits and does

not

currently foresee a need to distribute dividends out of such tax-exempt income.

Income

not

eligible for Approved Enterprise benefits or Benefited Enterprise benefits is taxed at a regular rate, which was

23%

2019,

23%

2018

and

24%

2017.

December 2016,

the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the

2017

and

2018

Budget Years),

2016,

which includes the Amendment to the Law for the Encouragement of Capital Investments,

1959

(Amendment

) (the “Amendment"), was published. The Amendment, among other things, prescribes special tax tracks for technological enterprises, which are subject to rules that were issued by the Minister of Finance during

April 2017.

The new tax track under the Amendment, which is applicable to the Company, is the “Technological Preferred Enterprise”. Technological Preferred Enterprise is an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than

billion New Israeli Shekel (“NIS”). A Technological Preferred Enterprise, as defined in the law, which is located in the center of Israel (where our Israeli subsidiary is currently located), will be subject to tax at a rate of

12%

on profits deriving from intellectual property (in development area A - a tax rate of

7.5%

). Any dividends distributed to "foreign companies", as defined in the law, deriving from income from the technological enterprises will be subject to tax at a rate of

if foreign investors are holding at least

90%

of the Company’s common stock.

The Company expects to apply the Technological Preferred Enterprise tax track from tax year

2020

and onwards. Accordingly, the above changes in the tax rates relating to Technological Preferred Enterprises were taken into account in the computation of deferred taxes as of

December 31, 2019.

The Israeli subsidiary elected to compute taxable income in accordance with Income Tax Regulations (Rules for Accounting for Foreign Investors Companies and Certain Partnerships and Setting their Taxable Income),

1986.

Accordingly, the taxable income or loss is calculated in U.S. dollars. Applying these regulations reduces the effect of the foreign exchange rate (of NIS against the U.S. dollar) on the Company’s Israeli taxable income.

As of

December 31, 2019,

the open tax years, subject to review by the applicable taxing authorities for the Israeli subsidiary, are

2018

and subsequent years.

French Subsidiary

2017,

the French government passed a series of tax reforms allowing for the phased reduction in the corporate tax rate. In

2018,

the French operating subsidiary qualified for a

28%

corporate income tax rate for taxable profit up to

€500,000

(approximately

$559,930

) and the standard corporate income tax rate of

33.33%

for taxable profit above

€500,000

(approximately

$559,930

). In

2019,

the standard corporate income tax rate is reduced to

31%,

with the

first

€500,000

(approximately

$559,930

) of taxable profit still being subject to the

28%

rate. In

2020,

the

28%

corporate income tax rate will become the new standard rate for all taxable profits. In

2021,

the standard corporate income tax rate will be reduced to

26.5%.

2022,

the standard corporate income tax rate will be reduced to

25%.

As of

December 31, 2019,

the open tax years subject to review by the applicable taxing authorities for the French subsidiary are

2017

and subsequent years.

Taxes on income comprised of:

	Year ended December 31,
	2017			2018			201 9
Domestic taxes:
Current	$	(227	)	$	3		$	3
Deferred		—			—			—
Foreign taxes:
Current		3,473			2,913			1,936
Deferred		(1,375	)		(2,187	)		(600	)
	$	1,871		$	729		$	1,339

Income before taxes on income:
Domestic	$	(5,946	)	$	(5,680	)	$	(9,039	)
Foreign		24,845			6,983			10,406
	$	18,899		$	1,303		$	1,367

Reconciliation between the Company’s effective tax rate and the U.S. statutory rate:

	Year ended December 31,
	2017			2018			201 9
Income before taxes on income	$	18,899		$	1,303		$	1,367
Theoretical tax at U.S. statutory rate		6,426			274			287
Foreign income taxes at rates other than U.S. rate		(2,304	)		369			(33	)
Approved and benefited enterprises benefits (*)		(2,698	)		(239	)		(154	)
Subpart F		737			563			568
Non-deductible items		294			217			124
Non-taxable items		(529	)		(434	)		(486	)
Changes in uncertain tax position		(1,757	)		16			(1,029	)
Stock-based compensation expense		(1,503	)		(62	)		(3	)
Deemed mandatory repatriation		1,916			3,542			—
Impacts of GILTI		—			880			967
Changes in valuation allowance		2,076			(5,005	)		(209	)
Other, net		(787	)		608			1,307
Taxes on income	$	1,871		$	729		$	1,339

(*)Basic and diluted earnings per share amounts of the benefit resulting from the “Approved Enterprise” and “Benefited Enterprise” status	$	0.12		$	0.01		$	0.01

. Deferred taxes on income:

Significant components of the Company’s deferred tax assets are as follows:

	As at December 31,
	2018			201 9
Deferred tax assets
Operating loss carryforward	$	9,505		$	8,778
Accrued expenses and deferred revenues		1,274			1,455
Temporary differences related to R&D expenses		3,194			3,123
Equity-based compensation		2,724			3,396
Right of use asset		—			1,546
Tax credit carry forward		1,381			5,666
Other		705			502
Total gross deferred tax assets		18,783			24,466
Valuation allowance		(12,745	)		(12,315	)
Net deferred tax assets	$	6,038		$	12,151

Deferred tax liabilities
Intangible assets	$	114		$	—
Lease liability		—			1,546
Total deferred tax liabilities	$	114		$	1,546

Net deferred tax assets (*)	$	5,924		$	10,605

(*)	Net deferred taxes for the years ended December 31, 2018 and 2019 are all from foreign jurisdictions.

Changes in valuation allowances on deferred tax assets result from management's assessment of the Company's ability to utilize certain future tax deductions, operating losses and tax credit carryforwards prior to expiration. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than

not,

be realized in the future. The net change in the valuation allowance primarily reflects a decrease in deferred tax assets on operating loss carryforward.

As of

December 31, 2019,

the Company’s undistributed earnings from non-U.S. subsidiaries are intended to be indefinitely reinvested in non-U.S. operations, and therefore

U.S. deferred taxes have been recorded.

Uncertain tax positions

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits based on the provisions of FASB ASC

No.

740

is as follows:

	Year ended December 31,
	2018			201 9
Beginning of year	$	2,224		$	2,739
Additions for current year tax positions		575			478
Reductions for prior year’s tax positions		(60	)		(16	)
Decrease as a result of the completion of a tax audit for prior years		—			(2,164	)
Balance at December 31	$	2,739		$	1,037

As of

December 31, 2018

and

2019,

there were

$2,739

and

$1,037,

respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. The Company did

not

accrue interest and penalties relating to unrecognized tax benefits in its provision for income taxes during the years ended

December 31, 2018

and

2019

because such interest and penalties did

not

have a material impact on the Company’s financial statements.

During the year ended

December 31, 2019,

the Company recorded a tax benefit of

$1,029

as a result of the completion of a tax audit for prior years in a certain foreign tax jurisdiction. The reduction in the unrecognized tax benefits balance for prior years as a result of the completion of the tax audit for the year ended

December 31, 2019

was

$2,164.

The Company believes that an adequate provision has been made for any adjustments that

may

result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner

not

consistent with management's expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. The Company does

not

expect uncertain tax positions to change significantly over the next

months, except in the case of settlements with tax authorities, the likelihood and timing of which are difficult to estimate.

Tax loss carryforwards:

As of

December 31, 2019,

CEVA and its subsidiaries had net operating loss carryforwards for California income tax purposes of approximately

$9,101,

which are available to offset future California taxable income. Such loss carryforwards begin to expire in

2030.

As of

December 31, 2019,

CEVA’s Irish subsidiary had foreign operating losses of approximately

$59,304,

which are available to offset future taxable income indefinitely. As of

December 31, 2019,

CEVA’s French subsidiaries had foreign operating losses of approximately

$2,602,

which are available to offset future taxable income indefinitely.

Tax returns

CEVA files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. With few exceptions, CEVA is

longer subject to U.S. federal income tax examinations by tax authorities, and state and local income tax examinations, for the years prior to

2010.