Distribution of corporate profits — not only under the Companies Law distribution tests

On April 5, 2026, the Haifa District Court delivered a precedent-setting judgment resolving a dispute over the interpretation of section 94B of the Income Tax Ordinance, which concerns the calculation of “distributable profits” for tax relief on a share sale. The judgment clarifies a distinctive issue of considerable importance to corporate and tax lawyers. It holds that distributable profits may be recognized, with the corresponding entitlement to tax relief, even if the company whose shares are sold has an accumulated loss at the sale date, and not necessarily by reference to the tests in the Companies Law.

Background and facts

The appellant sold a minority shareholding in a limited company. At the sale date, the company whose shares were sold had negative retained earnings — an accumulated loss. Nevertheless, between the appellant’s acquisition of the shares and their sale, the “distributable-profits period,” the company generated profits that substantially reduced its accumulated loss.

The parties’ positions

The appellant argued that profits generated during the holding period should be recognized as distributable profits under the accounting alternative, even if retained earnings remained negative, because those profits had been subject to tax at company level.

The Assessing Officer argued, by contrast, that distributable profits could not be recognized where the company had an accumulated loss at the end of the period, partly because it could not then distribute a dividend under section 302 of the Companies Law.

The court’s decision

The court allowed the appeal in full and held that the appellant was entitled to the calculation of distributable profits it sought. It accepted the appellant’s textual interpretation of section 94B: the section refers to profits that “accumulated” during the distributable-profits period, as distinct from “accumulated profit” at a particular point in time. The court held that the reference to the “company’s balance sheet” identifies a source of data, not a threshold condition excluding profits merely because retained earnings are negative at the end of the period.

The section’s purpose and prevention of double taxation

The court held that the central purpose of section 94B is to prevent double taxation. Since the profits generated during the relevant period had already been subject to corporate tax, failure to recognize them as distributable profits would lead to further taxation of the same profits on the share sale — three-stage taxation — an undesirable outcome. The court also held that recognition of these profits serves the principle of tax neutrality. Otherwise, shareholders would have an incentive to pressure the company to distribute dividends regularly instead of reinvesting them in the business, so as not to “lose” the tax protection on sale.

The relationship with Companies Law distribution restrictions

The court also rejected the Tax Authority’s argument that Companies Law distribution restrictions, such as the need for court approval where there is an accumulated loss, prevent profits from being classified as distributable profits for tax purposes. It held that section 94B takes precedence over those restrictions because it establishes a specific tax regime.

Summary and conclusions

In concluding its judgment, the court canceled the assessment issued by the Assessing Officer and held that the distributable profits accumulated during the relevant period must be recognized, reducing the appellant’s tax liability on the share sale.

Tax Appeal 36830-07-23, Judge Orit Weinstein.

The appellant was represented by lawyers from Shekel & Co., including Attorney Ohad Shiloh.

About the author

The author, Attorney Uri Shiloh, practices corporate law and did not represent a party in the proceedings.