Supreme Court Rules Dividends Must Offset Capital Losses for Tax Purposes

Israel's Supreme Court has ruled that companies must deduct dividends received from accumulated profits when calculating capital losses for tax purposes. This decision overturns a ruling by the Tel Aviv District Court's Appeals Committee and means that capital losses, which can be used to offset future profits, will be reduced, potentially increasing a company's tax liability.

The dispute centered on the sale of half of the shares in Bat Yam Mall (now Big Fashion Bat Yam) for NIS 125 million. The core of the legal debate involved interpreting Section 94G of the Income Tax Ordinance, which states that when a company sells shares, the capital loss should be reduced by any dividends received on those shares within the 24 months prior to the sale, up to the amount of the loss.

The Appeals Committee had previously determined that only dividends derived from profits accumulated before the company acquired the shares could be deducted. However, the Supreme Court, with Justices Dafna Barak-Erez, Gila Kenfy-Steinitz, and Yechiel Kosher presiding, accepted the position of the Tel Aviv District Tax Authority. They found no basis in the law for the Appeals Committee's interpretation, noting that the legislation was enacted based on recommendations that did not adopt such a restrictive approach.

The case involved Eldar Properties' sale of half its shares in the mall. Eldar had acquired its initial shares in 1987 and purchased the other half in 2008. It later sold half of its total shares in 2018 at a nominal loss. Over the years, the mall had distributed tens of millions of shekels in dividends to Eldar. The Tax Authority argued for a significantly higher taxable profit than Eldar's self-assessed tax payment.

As part of a proposed compromise, Eldar will pay an additional NIS 2.5 million in taxes, with the Tax Authority's appeal being accepted and Eldar's cross-appeal rejected. The broader implication of the Supreme Court's ruling is an expansion of the ability to offset dividends against capital losses for tax purposes.