In Israel, can you take your tax losses with you? - opinion

• Published date: 23 September 2021
• Author: LEON HARRIS
• Publication title: Jerusalem Post, The: Web Edition Articles (Israel)

This may seem puzzling because Israel repealed estate/inheritance tax in 1981. Instead, the recipient of an inherited asset steps into the shoes of the deceased and acquires the cost basis and purchase date of the deceased regarding the assets: real estate, securities, and so forth.

So why can't the recipient inherit the tax losses of the deceased? And in the light of this decision, what action should now be considered by living Israelis and non-Israelis?

The main facts of the case

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Zvi Dinshtein (dec'd.) died in 2012 with accumulated capital losses for Israeli tax purposes of around NIS 46 million, and business losses of around NIS 1.7m. Three heirs of the deceased tried to utilize losses of the deceased against income arising in 2012 and 2013 but their loss claims were rejected by the Israel Tax Authority (ITA).

The main issue

Is the utilization of losses for tax purposes a right the taxpayer has by law an immovable "personal right," or is it realizable also by his/her heirs?

The Supreme Court decision

The District Court Decision already found that Section 28 of the Income Ordinance allows "the same person" to claim ordinary business losses that year against other income, while Section 92 allows "that person" who made capital losses to offset them against future capital losses. But the District Court found there was simply no section allowing heirs to use the tax losses of the deceased.

The Supreme Court reviewed the case at length and came to the same conclusion. The court noted that likewise, in most other countries reviewed, losses cannot be inherited by the heirs.

"The desire of the tax system is to reward business owners who invest and take a risk, by enabling them to utilize losses that arise now against future income of theirs after their investments bear fruit, doesn't imply that the tax system is interested in granting this benefit to another person such as an heir – a person who merely enjoys the benefit without taking the aforesaid risk" (Para. 30).

THE COURT noted that buying a company for its losses could be criticized as being artificial. Losses also cannot be carried back in Israel. The ability to utilize losses for tax purposes is a personal right that cannot be directly transferred directly to someone else and cannot be bequeathed (Para. 31). It is a...