Tax Law: The Pi-Glilot Case – Allowing Tax Deduction in connection with Dividend Distribution
In October 2008, the Israeli Supreme Court issued a precedent setting decision in the case re Pi-Glilot Oil Terminals and Pipes Ltd. (the Pi-Glilot case). The Court decided that, under the certain circumstances of this case, financial expenses due to a loan for the purpose of dividend distribution will be eligible for deduction.
The decision of the Supreme Court was based on an earlier case (the Paz-Gas Case), in which it was decided that in order to make deductions there has to be a direct link between the expenses and the income, although there may be exceptions that will allow deductions based on an indirect link. In the Pi-Glilot case it was determined that the company can be eligible for this exception because it used its accumulated surplus as a source to finance its assets and only later took a loan in order to distribute dividends, and therefore this course of action was seen as economically parallel to distributing dividends out of the accumulated surplus and then taking a loan to finance assets. In addition, if Pi-Glilot had wanted to distribute dividends out of its own capital it would have had to realize fixed assets at a higher price, which would have led to higher expenses in financing the dividends than taking a loan to finance it.
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