In gory detail
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1992 ISDA
“Indemnifiable Tax” means any Tax other than a Tax that would not be imposed in respect of a payment under this Agreement but for a present or former connection between the jurisdiction of the government or taxation authority imposing such Tax and the recipient of such payment or a person related to such recipient (including, without limitation, a connection arising from such recipient or related person being or having been a citizen or resident of such jurisdiction, or being or having been organised, present or engaged in a trade or business in such jurisdiction, or having or having had a permanent establishment or fixed place of business in such jurisdiction, but excluding a connection arising solely from such recipient or related person having executed, delivered, performed its obligations or received a payment under, or enforced, this Agreement or a Credit Support Document).
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2002 ISDA
“Indemnifiable Tax” means any Tax other than a Tax that would not be imposed in respect of a payment under this Agreement but for a present or former connection between the jurisdiction of the government or taxation authority imposing such Tax and the recipient of such payment or a person related to such recipient (including, without limitation, a connection arising from such recipient or related person being or having been a citizen or resident of such jurisdiction, or being or having been organised, present or engaged in a trade or business in such jurisdiction, or having or having had a permanent establishment or fixed place of business in such jurisdiction, but excluding a connection arising solely from such recipient or related person having executed, delivered, performed its obligations or received a payment under, or enforced, this Agreement or a Credit Support Document).
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You may marvel at the triple negative here. Especially since the expression Indemnifiable Tax is often used in the negative (ie "a tax which is not an Indemnifiable Tax") - and even double negative (ie "other than a tax which is not an Indemnifiable Tax") in the body of the ISDA Master Agreement.
A need to know version is this:
An Indemnifiable Tax is any tax other than one that would only arise because of the relationship between the taxing authority and the recipient of the payment.
Under Section 2(d), if a party is subject to withholding on any payment, it does not have to gross up the withholding tax. this is unless it is an Indemnifiable Tax: that is, the tax is imposed by dint of the party's own connection to the jurisdiction levying the tax, unless the tax could be avoided by the reciving party taking any action or making any representaiton (or such a representation turning out not to have been true).
The basic rationale is that if the tax arises as a result of the underlier, there's no gross up. But if it is a function of the party, then it is grossed up.
See Also
See in particular Section 2(d) (Deduction or Withholding for Tax).