Tax Alert No.30 - 

International taxation  3.7.2018

Supreme Court ruling on foreign tax credit overturns lower court ruling - 3.7.2018

The Israel Supreme Court announced its ruling this month on the case of Gmul America Ltd. (CA 8934/16), concerning interpretation of Article 26, Relief from Double Taxation, of the Israel-US Tax Treaty (hereinafter the “Treaty”). The ruling overturned the District Court’s decision on the case (Tax Appeal No. 49525-02-14).

The case in brief – Gmul America Ltd (hereinafter the “Company”), the respondent, realized a US capital gain in the tax year of the appeal (2006); US taxes were paid, the bulk in 2009. The subject of the appeal was whether a credit could be taken for foreign taxes paid in 2009, despite them having been paid after the 24 month period – a limit established in clause 207B of the Income Tax Ordinance for taking the credit in the relevant tax year (the year in which the income is declared in Israel).

The discussion in the District Court centered on the interpretation of the phrasing of article 26(3) of the Treaty, which requires Israel, under the circumstances, to allow a US tax credit against the Israeli taxes, where the credit shall be “in accordance with the provisions and subject to the limitations of the law of Israel (as it may be amended from time to time without changing the general principle hereof)”. This phrase appears in the Model Tax Convention of the OECD, and in all tax treaties in which Israel is a partner. The question at hand was whether denial of the credit by internal law (deferring it to subsequent years as excess credit, in effect) is part of those same provisions and limitations of the law of Israel, or whether it changes the “general principle hereof” (relief from double taxation). The District Court ruled in favor of the company, by stating that the principle of relief from double taxation suffices to take precedence over the provisions of the internal law which limit granting of credit.
The Supreme Court ruling overturned this decision, and established that provisions regarding the offset period are within the realm of those provisions and limitations of the law of Israel, as established by the aforementioned article 26(3), and do not constitute a change nor an annulment of the general principle. The court found additional support in the fact that denial of the credit as established in clause 207B of the Ordinance is not absolute, and taxes paid beyond the required period could be granted as excess credit in subsequent years (in accordance with the principles laid out in the chapter on credit).

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