1 13 L.S.I. 258 (hereinafter the Law). Subsequently amended in 1961, 1962, 1965, 1967, 1968, 1969, 1970, 1971, 1973, 1974, 1975.

2 For the sake of clarity it is worthwhile to set forth the applicable statutory provisions:

Period of benefits.

45. Benefits under sections 46 and 47 shall be granted:

(1) on income derived during the five years beginning with the year in which there was for the first time a chargeable income, so long as twelve years have not passed since the year in which the approval was granted nor ten years since the year in which—according to the determination of the Director—the enterprise was put into operation or in which production was begun or in which the citrus plantation, vines or fruit trees first bore fruit; but the Board may remove the twelve-year and ten-year time-limits in respect of pioneering enterprises;

(2) on dividend payable out of income derived during the five years referred to in paragraph (1), even if such dividend accrues to the assessee only within the ten years following the expiration of the said five years.

Tax on income from approved enterprise during period of benefits.

46. (a) Where an individual has received a chargeable income the source of which is an approved investment, he shall not be liable to tax thereon at a rate exceeding 25 per cent of such income, and such income shall, for the purposes of the tax, be regarded as the highest portion of his chargeable income.

(b) Where a company has received a chargeable income the source of which is an approved investment, it shall be liable to income tax thereon at a rate of 25 per cent of such income and shall be exempt from any other tax thereon.

(c) Proceeds of an investment which are paid by a company out of income as specified in subsection (b) shall be deemed to be income the source of which is an approved investment.

Tax on income from approved investment during period of benefits.

47. (a) A company which owns an approved enterprise shall be liable, on its chargeable income derived from such enterprise, to company profits tax at a rate not exceeding 33 per cent of such income, and shall be exempt from all other tax thereon. Company profits tax as aforesaid shall not be deductable under sec. 127 (b) (1) of the ordinance.

(b) Where a person has received any dividend paid out of income as specified in subsection (a), derived in the tax year 1958 or thereafter, he shall be exempt from any tax thereon additional to the tax paid by the company. The same shall apply to investment proceeds paid by a company out of dividend as aforesaid.

3 See preceding note.

4 I have purposely simplified the facts. From the judgment it appears that Elite received a new certificate of approval and hence, part of its entire enterprise was an “approved enterprise”. Under the Law, such an enterprise is known as a “mixed enterprise”, and the benefits provided by the Law are bestowed only upon the approved part. In the Earnst case it was agreed by both parties that the dividends attributable to the “approved part” were tax free.

5 See preceding note.

6 Sec. 41 of the Law provides that “every term shall have the same meaning as it has in the Income Tax Ordinance”, for purposes of the statutory provisions with which the case was concerned. Under sec. 1 of the Income Tax Ordinance, “chargeable income” was defined as “the total amount of income of any person from the sources specified in sec. 2, remaining after all deductions, reliefs and exemptions allowed under this Ordinance”. However, as of 1973 the Ordinance was amended so as to include in “chargeable income”, income which under Israeli laws is treated as income under the Ordinance, and the words “under this Ordinance” were substituted by the words “under any law”. It would therefore seem, that during the years under consideration in the Earnst case, an argument could be made that the tax-free dividends were “chargeable income”, in view of the fact that they were not exempt under the Income Tax Ordinance. This argument is further strengthened by the later amendment of the Ordinance. How ever, as a matter of logic, it seems odd that “chargeable income” as defined by the Income Tax Ordinance for purposes of the Law for the Encouragement of Capital Investments, is not tantamount to “chargeable income” under the Income Tax Ordinance. Moreover, connotating a tax-free dividend as “chargeable income” for purposes of the Income Tax Ordinance, serves no useful purpose whatsoever. The matter was left undecided in the Earnst case and today, after the amendment of the Income Tax Ordinance, there can be hardly any doubt as to the exclusion of such a tax-free dividend from the definition of “chargeable income”. See, Baumel v. Assessing Officer, Haifa (1974) (I) 28 P.D. 650.

7 In fact, in the Earnst case, no attempt was made to show that the dividends were attributable to the “approved investment”.

8 See supra n. 6.

9 See Chapter IX of the Law, as well as sec. 48.

10 See Rafael, , “Tax Problems of American Investment in Israel” (1971) 6 Is.L.R. (part I) 321, (part II) 517, at p. 531Google Scholar.

11 This consideration is put forward to demonstrate that the final result in the Earnst case could have been reached by a preconceived plan. Cf. Henriksen v. Grafton Hotel Ltd. [1942] 1 All.E.R. 678; Jackson v. Lasker's Home Furnishers [1956] 3 All.E.R. 891.

12 17 L.S.I. 193, as amended in 1965, 1967, 1968, 1971, 1975.

13 Cf. sec. 57 of the Law.

14 In the District Court of Tel-Aviv (1973) 6 P.D.A. 228Google Scholar, Judge Lowenberg, hearing the Earnst case in the first instance, and relying on the “Mefi” case, (1968) (II) 21 P.D. 593, held the transaction to be artificial. See, Rafael, , “A Capitalistic Adventure” (1968) 24 HaPraklit 160Google Scholar, and the cases cited there. Later cases are not totally relevant to the issue under consideration. Interesting material is to be found in Spry, Arrangements for the Avoidance of Taxation (The Law Book Company Ltd., 1972)Google Scholar.

15 Sec. 86 reads as follows:

Fictitious or artificial transactions.

86. (a) Where the Assessing Officer is of the opinion that any or artificial transaction which reduces or would reduce the amount of tax payable by any person is artificial or fictitous or that any disposition is not in fact given effect to, or that one of the principal objects of a particular transaction is improper avoidance or improper reduction of tax, he may disregard any such transaction or disposition and the person concerned shall be assessable accordingly. Avoidance or reduction of tax may be regarded as improper even if it is contrary to law.

For the present purpose “transaction” includes an “act”.

(b) Nothing contained in this section shall prevent the decision of the Assessing Officer in the exercise of any discretion given to him by subsection (a) from being questioned in an appeal in accordance with sections 153–158.