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It is a fact of life that sometimes a business or investment doesn’t work out. In this situation, you are going to end up with a loss; i.e. More money was spent than recouped.

In general, a loss can be used to offset other income or gains, as per the rules set out below.

But before that, there are three important rules about claiming losses that apply across the board:

A. If you make a loss in a situation where theby the profit would not have been taxable, the loss in such a situation cannot be claimed.

B. It is normally required that a loss be offset as soon as possible. If it is not, you will lose the right to use the losses in the future.

C. You can only carry forward losses into a new tax year if you file a tax return for the year you want to carry forward from. This is to allow the tax authority to check and agree the permissibility of the losses. This is of particular importance in the Voluntary Disclosure procedures.

Onto the details…

Israeli losses
1. Business losses can be offset again any other income earned during the same year that the loss is made. You are allowed to refrain from offsetting losses against capital gains, interest or dividend income, provided that the rate of tax on those incomes is no more than 25%.
2. Business losses that could not be used in the year in which they occurred can be offset against business profits (only) in subsequent years. You are required to use the losses at the earliest opportunity. If you stop doing business, you can offset such losses against salary income.
3. A loss from property can only be offset against future profits from the same property.
4. Capital losses can be offset against capital gains; first against the real gain. If you have inflationary gain, for each shekel of loss you can offset 3.5 shekel of inflationary gain. (see here for more on capital gains calculations).
5. Losses from share sales can also be offset against share income (i.e. dividends, bond interest etc.). For income from the same share, this is unlimited. For other shares, you can only offset provided that the tax rate is no higher than 25%. This rules out significant shareholders whose dividends are taxed at 30% (since 2012)
Overseas losses
6. In general, such losses are treated the same way as Israeli losses, but the offset is to be carried out against other overseas income only. The implication is that you may lose out on the foreign tax credit.
7. Passive losses can be offset against other passive income. Furthermore, rental losses can also be offset against the capital gain made on the sale of the property. Passive income includes interest, dividends, capital gains, property, commissions etc, provided that these are not earned as part of a business.
8. Business losses are to be offset first against business income or capital gains, and then against passive income.
9. Capital losses are first to be offset against overseas gains and only then against Israeli gains. The rules regarding offset against income are identical to those regarding Israeli capital losses.
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