The Delek Group just scored a victory in district court – they don’t have to pay Israeli tax on NIS 375 million of capital gain. The Israeli Tax Authority (ITA) lost big time. How was it done?The facts: The taxpayer, Delek Hungary Ltd (“Delek”), was incorporated in Hungary in the year 2000 but became an Israeli resident in 2011.In 2001, Delek invested in Delek US Holdings Ltd (“Delek US”), a US resident company. In 2006 Delek US staged its IPO on the New York Stock Exchange and Delek’s holding dropped to 68%. In 2012 and 2013, Delek sold part of its holding in Delek US for NIS 2.56 billion. That was the sale price, but Delek treated NIS 375m. approximately as a deemed dividend out of undistributed profits, rather than capital gain. This was under special rules for 10%-or-more selling shareholders in Section 92 of the Income Tax Ordinance, aimed at avoiding dividend stripping.Tax rules and issues: Because the NIS 375m. is treated as a dividend, Delek claimed a foreign tax credit for its share of US federal and state corporate taxes paid by Delek US. This is called an underlying foreign tax credit. The dividend is first grossed up by the amount of US taxes, then Israeli tax calculated, then US taxes are credited against the Israeli tax. The ITA said the underlying tax credit wasn’t allowable, because only profits on which Israeli tax was charged under Israeli tax law may be treated as dividends this way, not profits charged to tax under US tax law. What the court ruled: The district court ruled that in an age when groups of companies operate internationally, the relevant rules for undistributed profits and foreign tax credits must be interpreted in a reasonable fashion.Therefore, the court ruled that tax brought into account within the framework of the tax system includes not only Israeli tax, but also tax “imported” into the Israeli tax system when giving a credit on a dividend (or deemed dividend in this case). Is this reasonable?: The judge obviously thought so.Even Delek was surprised at their win. How do we know? A good part of the judgment is taken up with discussion whether it was OK to file a late claim to spread the gain and the tax payment over four years.Will the result be appealed?: It is unclear whether Delek paid any US tax on its capital gain, because the US generally only taxes foreign investors on US real estate gains.Economically speaking, a capital gain is the present value reward for selling future profits to someone else. So, really, Delek credited American taxes relating to past years against Israeli tax on future profits. And if the purchaser happens to be another Israeli resident company, that purchaser may be able to take a dividend and credit the same past American taxes again!! That would be a double whammy against the ITA.It remains to be seen whether the ITA files an appeal, but if it doesn’t, the Israeli tax system will be at a low ebb. The same deemed dividend rules in the Israeli tax law apply to similar investments sold in any foreign country, not only the USA. So many others may follow in Delek’s footsteps and invest abroad, rather than in Israel in order to share in the double tax whammy spoils, at the expense of the Israeli treasury.As always, consult experienced tax advisers in each country at an early stage in specific email@example.comThe writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.