Background
The dispute concerned section 94C of Israel’s Income Tax Ordinance, which provides that when a corporation sells shares, its capital loss must be reduced by dividends received on those shares during the preceding 24 months, up to the amount of the loss, unless tax of at least 15% was paid on the dividends.
The Tel Aviv-Jaffa Real Estate Tax Appeals Committee held that the provision applied only when the dividends derived from profits accumulated before the selling corporation acquired the shares. It added that condition through interpretation because applying only the two conditions stated in the statute could, in some circumstances, produce unjust overtaxation. The Director of Real Estate Taxation appealed that ruling, while Eldar Properties Ltd. filed a cross-appeal.
The Court’s Holding
The Supreme Court held that section 94C contains no basis for limiting the capital-loss adjustment to dividends derived from profits accumulated before the shares were acquired. The Appeals Committee therefore erred by adding a third condition not found in the statutory text.
The Court also relied on the provision’s legislative history. An earlier tax-reform committee had recommended a rule resembling the Appeals Committee’s approach, but the later Rabinovitch Committee adopted a different formulation, which the legislature enacted in Amendment No. 132. The Court concluded that the omitted restriction could not be restored judicially after the legislature chose another course.
Following the Court’s recommendation, the parties accepted a settlement informed both by that legal conclusion and by factual considerations specific to the case. The Court granted the state’s appeal, dismissed Eldar’s appeal, and ordered Eldar to pay the state an additional NIS 2.5 million as of the judgment date, ending the litigation. It made no costs order.
Key Takeaways
- Section 94C does not distinguish between dividends funded by profits accumulated before and after the shareholder acquired the shares.
- Courts may not add an extra statutory condition merely to prevent perceived overtaxation when neither the text nor the enacted legislative choice supports it.
- The parties’ accepted settlement required Eldar to pay an additional NIS 2.5 million, while the Court expressly resolved the central interpretive issue in the tax authority’s favor.
Why It Matters
The ruling clarifies that corporate taxpayers calculating a loss on the sale of shares must apply section 94C according to its express 24-month and tax-rate criteria, without tracing distributions to profits accumulated before the shares were acquired.
More broadly, the decision underscores the Supreme Court’s reluctance to use purposive interpretation to introduce a limitation that lawmakers considered in the reform process but did not enact.