What are the losses in Israel?
The deduction of losses in Israel is designed to reduce profits over a given period by the amount of losses previously incurred.
The general details of loss deduction are specified in articles 28 and 29 (business losses) and article 92 (capital losses) of Israel's General Tax Code.
According to this ordinance, there are three types of losses that can be deducted:
- Loss of activity made in Israel - Loss arising from a business activity carried out in Israel, i.e. a business loss (active loss) or a rental loss (passive loss). Article 28 of the Tax Ordinance deals with this type of loss.
- Loss of foreign business - Losses arising from business activity or rents abroad. Article 29 of the Ordinance concerns business losses incurred by a resident of Israel as a result of foreign activity.
- Capital loss - Loss resulting from investments, whether in Israel or abroad. Article 92 of the Tax Ordinance concerns this loss.ALSO READ: THE GUIDE TO DOING BUSINESS IN ISRAEL
Is it possible to deduct losses between separate companies?
The official opinion of the tax authorities is clearly negative.
This means that there is a principle of "separate legal personality" and that it is not possible to deduct losses from two separate entities.
However, this is a complex issue that can be interpreted in many different ways.
For example, if a separate separation is somehow imposed by the bureaucracy, then arguably the losses are indeed deductible.
Each case is therefore unique. Please contact us for further details.
Do you have a question?
Transferring profits from one company to another through invoicing or management fees
Transferring profits from one company to another through management fees can also be used to reduce losses in Israel.
This means that the profits of the winning company are transferred to the losing company in return for a management fee or similar payment.
As in the previous clause, the transfer of profits must be appropriate and commercially rational, not artificial.
There are various criteria for determining the economic legitimacy of paying management fees (reasonable frequency, real management needs, reasonable amount, etc.).
Reduction of losses of a company acquired for legitimate tax planning purposes - MERGER
Is it possible to reduce the losses of an acquired company with the profits of a company?
In some cases, it is possible to transfer assets/activities from company A to company B as part of legitimate tax planning aimed at reducing tax costs.
However, it will be necessary to prove that there is an economic rationale behind the purchase (for example, the acquisition of a competitor) and that it is not just an "artificial transaction" to reduce tax payments.
Capital losses can only be deducted against capital gains.
In this context, there is an exception whereby capital losses can also be deducted against interest/dividend income from securities. Or, on the same security, it is possible to deduct without tax rate limit. If it is not the same security, then up to 25% can be deducted.
What happens to capital losses not properly reported in the past?
Is it possible to deduct capital losses that have not been properly declared in the past?
The answer is éObviously not.
However, it is still possible to declare retroactively over the last 6 years, in which case the loss will be recognized for future use and deduction.
In a nutshell:
Using the loss deduction in Israel, it is possible tosave a lot of tax.
For best results, it is necessary to receive a full consultation that takes into account all relevant revenues and expenses.
It is generally possible toexamine different deduction options which lead to different levels of taxation.
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