to another location outside Israel is out of the scope of the Israeli VAT law; this has implications for the input tax deduction (see Section F)
• Sale of intangibles or the provision of services by a taxable person in the course of its business
• Sale of an asset if the input tax on its purchase or import has been deducted
• An occasional transaction with respect to real estate (depends on the status of the seller and the purchaser and the classification of the asset sold) and including incidental service or sale of goods for commercial purposes
• Provision of “services” by non-Israeli suppliers to Israeli customers
• Support benefit or subsidy – including those not directly linked to the price of any supply (this may even extend to debt forgiveness) – provided a taxable person unless an exemption applies
• Importation of goods (including intangible property) into Israel
The term “taxable person” refers to a person or an entity that sells assets or provides services in the course of its business, provided that it is not a nonprofit organization or a financial institution, which are subject to different tax regimes. (In general, a nonprofit organization is subject to salary tax at the rate of 7.5%, which is calculated based on its salary expenses. A financial institution is subject, in addition to salary tax at the rate of 17%, to profit tax at the rate of 17%, which is calculated based on its profits.)
Taxable persons also include entities that make occasional transactions. An entity that has annual turnover not exceeding NIS120,000 and that does not fall under the list of exceptions (for example, advisors and professionals) is not liable to VAT register as a trader but must nevertheless register as an exempt entity for VAT purposes.
The term “asset” includes real estate and goods. “Goods” include all kinds of tangible and intangible property and all kinds of rights or interests but not securities, shares or similar negotiable instruments.
The term “service” includes all types of services provided to others for a consideration – including, importantly, credit transactions and money deposits. It does not include services provided by an employee to their employer.
An occasional transaction is the supply of goods or services in the course of a commercial activity. For real estate, it includes the sale of real estate by entities that are not in the real estate business to taxable persons, as well as the sale of land (excluding certain residential properties) by such sellers to nonprofit organizations, financial institutions or to certain purchasers specified in the Real Estate Tax Act.
Effective use and enjoyment. To avoid instances of non-taxation or double taxation, jurisdictions can apply “use and enjoyment” rules that allow a service that is “used and enjoyed” in the jurisdiction to be taxed or prevent a service that is “used and enjoyed” outside the jurisdiction from being taxed. If a service is taxed in the jurisdiction under the “use and enjoyment” provisions, a non-established supplier of the service may be required to register for VAT in every jurisdiction where it has customers that are not taxable persons. In Israel, no services are subject to the “use and enjoyment” provisions.
However, there may be a circumstance under which a business can apply to the Israeli tax authorities to receive approval that it is not required to register for VAT in Israel. Such an approval depends on the specific circumstances and is given on a case-by-case basis.
Transfer of a going concern. Transfer of going concern rules do not apply in Israel. As such, VAT applies to all sales of a business or part of a business capable of separate operation including assets.
Transactions between related parties. In general, any international transaction between related parties is required to be on an arm’s-length basis. For example, an intercompany loan is required
Non-established businesses. A foreign resident that makes transactions in Israel, as defined in the VAT law, or that acts as a financial institution or nonprofit organization in Israel must register for VAT in Israel and appoint a local representative (see below) to act on its behalf with respect to VAT matters within 30 days of beginning to carry on such activities in Israel. The term foreign resident means an individual who permanently resides outside Israel or a company that is registered or incorporated outside of Israel. For the purpose of zero-rate VAT for supplies made to foreign residents, additional requirements apply to meet the definition of “foreign resident.”
Tax representatives. Where a foreign resident is liable to register for VAT in Israel, for example, because it plans to make taxable supplies, it also must appoint a local representative, being both an Israeli citizen and resident, which would be liable to the tax authorities jointly and severally with the foreign resident.
Reverse charge. Supplies of services received from overseas must be self-accounted by the Israeli recipient. As for supplies of intangible property from overseas, the VAT on this should generally be withheld by the Israeli bank transferring payment to the overseas supplier. Failing that, the VAT should be self-accounted.
Domestic reverse charge. The domestic reverse charge applies in various scenarios, such as where certain services are supplied by a nontaxable person to a taxable person and also where land is sold or leased by a nontaxable person, so as to amount to an occasional transaction, etc.
Digital economy. The Israeli tax authorities have published a circular regarding internet activity of foreign entities in Israel. According to the circular, if it has been established that where a foreign entity provides services via the internet to Israeli customers and the services are connected to Israel, it is required to register for VAT purposes in Israel. In these circumstances, the foreign entity will be subject to the provisions of the Israeli VAT law. Such a position may be established via certain indicators, such as the fact that the services are directed and aimed at Israeli customers, it has been established that the foreign entity has a permanent establishment in Israel for income tax purposes, the foreign entity has a business mechanism in Israel, economic presence in Israel, etc.
It should be noted that if a foreign entity that provides internet services to Israeli customers is required to register for Israeli VAT in accordance with the circular, it will not be considered as a “foreign resident” for certain VAT issues, and therefore services rendered to it by Israeli service providers, as well as intangibles sold to it by Israeli vendors, will be subject to VAT at the full rate.
In general, a foreign service provider that meets all the conditions specified in the circular is requested to register for VAT purposes is Israel. However, it should be noted that according to the Israeli Court ruling, the tax authorities currently do not enforce the registration duty.
In addition, the Israeli Ministry of Finance has published a draft bill to amend the Israeli VAT law, according to which foreign companies that provide “digital services” (as defined in the bill) to nontaxable persons, i.e., private consumers that are not business/nonprofit organizations/ financial institutions (business-to-consumer (B2C) transactions), will be required to register in Israel. The registration will not be a “regular VAT registration” but rather a special designated registration only regarding this specific activity. Note that at the time of preparing this chapter the bill has yet to pass and is not enacted and enforced. However, if the service is provided by the foreign supplier to the dealer, nonprofit or financial institution, the recipient of the service will be the taxpayer, in accordance with the current legal framework. There are no other specific e-commerce rules for imported goods in Israel.
At the time of preparing this chapter, the government plans to levy VAT at the standard rate on sales of electronic services to customers by nonresident businesses. The new tax will be applicable
Goods sent on approval for sale or return. There are no special time of supply rules in Israel for supplies of goods sent on approval for sale or return. As such, the general time of supply rules apply (as outlined above), and the time of supply is when the delivery of goods takes place.
However, in cases of consignment, if agreed in writing that not more than 10% of the consideration (or a higher percentage set by the Minister of Finance) shall be paid before the sale of the goods, and if not sold they can be returned, the time of supply will be deemed when the goods are sold by the consignee.
Reverse-charge services. Both for supplies of services received from overseas and those that fall within domestic reverse-charge rules, the chargeable event takes place upon each payment in respect of the amount paid, or on completion of the services, whichever happens first.
Leased assets. Leasing of assets is included within the definition of a “sale.” However, the chargeable event takes place on a cash basis, i.e., upon each payment, in respect of the amount paid.
Imported goods. VAT on imported goods is due when the goods are cleared through customs. A tax clearance mechanism is in place between Israel and the Palestine Autonomous Areas for transfers of goods between their territories. VAT, purchase taxes and import taxes are based on the actual transfer of goods (not on the reported transfer of goods).
Real estate transactions. For real estate transactions, VAT is due when the possession of the asset is transferred to the purchaser or when the asset is registered in the name of the buyer, whichever is earlier. For construction work, the tax is due when the work is completed or when the possession of the asset is transferred to the customer, whichever is earlier.
In addition, with respect to the above rules, if a payment is made before the above dates, VAT is due for that payment on the date of payment.
F. Recovery of VAT by taxable persons
A taxable person may recover input tax, which is the VAT charged on assets (purchased locally or imported) or services supplied to that taxable person for business purposes, if such items are used or will be used for taxable transactions. This excludes, for example, private expenditure and expenditure that is used for out-of-scope transactions or exempt transactions.
A taxable person generally recovers input tax by deducting it from output tax, which is the VAT charged on supplies made by it, provided that the proper tax invoices or importation documents are received in support of the input tax deduction and that the deduction is claimed within the time limit of six months after the date of issuance of these documents (a procedure for an extension is available).
The time limit for a taxable person to reclaim input tax in Israel is six months. However, there is an option to apply for an approval for late deduction up to five years (60 months).
Nondeductible input tax. As mentioned above, input tax can only be deducted if purchases are used for taxable transactions, provided all technical requirements are fulfilled. Accordingly, nondeductible input tax includes among other things, certain types of business and staff entertainment, and input tax attributable to transactions such as costs related to share transactions, out of scope transactions, certain pre-registration costs (see below), etc.
Allocation number requirement. Starting in 2024, any tax invoice that meets the criteria below must include a number allocated by the VAT authorities for the VAT included in the invoice to be deductible by the customer receiving it. This process will be managed through a digital system operated by the VAT authorities.
Bad debts. VAT paid by a taxable person in connection with bad debts (i.e., if a supply was made and the VAT was declared, but the customer did not pay the consideration agreed) may be recoverable by issuing a credit note, provided all conditions and requirements stipulated in the VAT regulations as well as in the VAT authorities’ guidelines are met.
The main conditions for issuing a credit note and reclaiming VAT paid on bad debts includes insolvency or liquidation of the customer, as well as proof of reasonable collection efforts. Such a reclaim requires notice to the authorities. Such a reclaim may be submitted not earlier than six months from the date on which a tax invoice was issued and not later than three years from that date (however, an extension is available under certain conditions).
Noneconomic activities. Input tax incurred on purchases that are used for noneconomic activities is not recoverable in Israel.
G. Recovery of VAT by non-established businesses
Input tax incurred by non-established businesses that are not registered for VAT in Israel is not recoverable. While Israeli law has no mechanism that allows for this per se, i.e., any equivalent to the EU’s 13th Directive, the scope of certain types of relief under Israeli law is broader than under EU law, with the result that non-established businesses may not incur VAT on supplies that would attract VAT in their home jurisdictions. One example of this is hotel accommodation supplied to foreign resident persons, including incidental supplies such as catering.
H. Invoicing
VAT invoices. Only a taxable person may issue a tax invoice and it must do so if requested by the customer. A tax invoice is required to support a claim for input tax deduction. The invoice must be issued within 14 days.
Credit notes. A VAT credit note may be used to reduce the amount of VAT charged on a supply. The credit note must reflect a genuine mistake, an overcharge, an agreed reduction in the value of the original supply or cancellation of the transaction. A credit note may also be used in a case of bad debts if all reasonable efforts have been exhausted to collect the debt and if all the regulation requirements are fulfilled.
Electronic invoicing. Electronic invoicing is allowed in Israel, but not mandatory.
Scope of electronic invoicing. For B2B, B2C and business-to-government (B2G) supplies, electronic invoicing is allowed but not mandatory in Israel. It may only be used subject to strict technical rules concerning digital signature, electronic delivery, record keeping, etc. A taxable person who wishes to send computerized documents must notify the tax authorities by registered mail, before sending the first computerized document, and receive the customer’s approval before sending the first computerized document and save such approval as part of its bookkeeping. However, it is recommended that the taxable person examines whether the computerized documents meet all the tax authorities’ requirements before it starts working with such documents.
As of 31 March 2024, each tax invoice (whether electronic or paper) above NIS25,000 (for 2024) will require an approval, as well as “authorized serial number” by the Israeli tax authorities. The authorized serial number is required to deduct the input tax included on the tax invoice, and therefore required for tax invoices that include VAT at the standard rate and are issued to dealers who wish to deduct such income tax, subject to the threshold mentioned. Note that by 2028 the authorities plan for this requirement to apply to invoices over NIS5,000, and the process will occur gradually.
Simplified VAT invoices. In general, simplified tax invoices are not permitted. However, for retail supplies, the cashier slip might be used as an invoice, subject to certain conditions.
Self-billing. Self-billing is not allowed in Israel.
Proof of exports. The export declaration issued by Israeli Customs and the commercial invoice are generally sufficient evidence for export.
Foreign currency invoices. The taxable amount must generally be stated in the domestic currency, which is New Israeli shekel (NIS). A foreign currency may be shown in addition, provided that the exchange rate on the day the invoice is raised is also shown. Alternatively, taxable persons may apply to the authorities for permission to raise foreign currency-only invoices.
Supplies to nontaxable persons. There are no special rules regarding invoices issued for supplies made by taxable persons to private consumers.
Records. In Israel, examples of what records must be held for VAT purposes include invoices, receipts, inventory lists, fixed assets registrar and more. The Israeli tax regulations dictate format, nature and timing of each document recorded in the books. The use of an electronic record system is permitted if the bookkeeping software is approved by the tax authorities. The accounting records language can be either Hebrew or Arabic but using English may be permitted if an approval is obtained in advance from the tax authorities. The accounting records should be maintained in the domestic currency (New Israeli shekel) unless a special approval is received from the tax authorities.
In Israel, VAT books and records must be held within the country. Records should be kept in Israel unless a special exemption is obtained by the tax authorities.
Record retention period. VAT invoices and other bookkeeping records must be kept for a period of seven years from the end of the year, to which the records relate, or six years from the day on which the tax return for the relevant year was submitted, whichever is later.
Electronic archiving. Electronic archiving is allowed in Israel. Records may be stored electronically and must be updated quarterly. Note that there are specific requirements in this regard. The server on which the company’s accounting records are recorded should be located physically in Israel; however, the tax authorities may grant an authorization to hold the server outside of Israel if an accessible online backup is available at the company’s site for inspection purposes.
I. Returns and payments
Periodic returns. VAT reports must be submitted on a monthly basis if annual turnover exceeds NIS1.67 million or on a bimonthly basis if annual turnover does not exceed NIS1.67 million. Reports must be submitted by the 15th/19th/23rd day of the month following the end of the reporting period (the deadline depends on the taxable person’s turnover and reporting obligations). In addition, certain taxpayers are required to submit a detailed VAT electronic report (see the Digital tax administration subsection below).
Periodic payments. Payment of VAT due in full is also due by the same date as the VAT return submission deadline, i.e., by the 15th/19th/23rd day of the month following the end of the reporting period (depends on the reporting date). Payment can be made using an Israeli bank account.
Electronic filing. Electronic filing is allowed in Israel, but not mandatory. VAT reports are generally filled electronically via the Israeli tax authority’s website. The reports are due by the 15th/ 19th/23rd day of the month following the end of the reporting period (depends on the taxable person’s turnover and reporting obligations).
Payments on account. Payments on account are not required in Israel.
Special schemes. Profit margin. The taxable amount for certain types of supplies may only be the profit margin on the sale. This includes supplies of secondhand movable goods, works of art and certain residential properties where any of these supplies are made by a qualifying dealer.
Annual returns. Annual returns are only required for VAT groups. VAT group members must file a certain type of annual return as to taxable persons in the Eilat free trade zone.
Supplementary filings. Yearly VAT group report. This is only relevant for taxable persons who report in a VAT group (see above). It should be noted that if the VAT report is a return, additional information (e.g., copies of invoices) might be required.
Correcting errors in previous returns. If there is an error in the VAT report, it is possible to submit a “corrective report” and indicate the correct details. The corrective report should only be submitted to the regional VAT office where the dealer is registered. Such amendment may lead to additional charges (VAT, as well as interest, linkage differences, etc.).
Digital tax administration. VAT online detailed report. Certain taxable persons are required to provide a detailed electronic report, including all invoices issued and received in the relevant period including the following: dealers with an annual turnover over NIS2.5 million (it has been suggested to reduce to NIS0.5 million as of January 2025; however, the bill has not passed at the time of preparing this chapter), nonprofit organizations with an annual turnover over NIS20 million and financial institutions with an annual turnover above NIS4 million. Taxable persons are required to keep their books in accordance with the dual accounting system. In addition, a nonprofit organization or a financial institution should submit an online digital report as well.
As outlined above, an online detailed digital report is required if a taxable person’s annual turnover exceeds NIS2.5 million or if the taxable person is required to keep its books in accordance with the dual accounting system. Electronic reports must be submitted by the 23rd day of the month following the end of the reporting period. Payment in full is also due by the same date.
J. Penalties
Penalties for late registration. For the late registration of VAT, penalties may be up 1% of the taxable turnover, on top of the VAT itself, plus interest, and adjusted for inflation.
Penalties for late payment and filings. A VAT-registered entity that fails to submit a report when required is liable to pay a fine of NIS239 for every two weeks of tardiness.
If a VAT-registered entity fails to pay an amount of tax when required, linkage differentials (such amount multiplied by the rate of increase of the consumer price index during the period in question) and interest are payable on the amount unpaid.
Penalties for errors. If there is an error in recording any amount required in the report, it is possible to file a corrective report to state the correct details. The corrective report must be submitted only to the regional VAT office where the file is being handled. As a result, the taxable person may be charged with interest, linkage differences and fines.
The late notification or failure to notify the tax authorities of changes to a taxable person’s VAT registration details is treated as a violation of the VAT law and is subject to the general penalties listed in these sections.
Penalties for fraud. There are various offenses stipulated in the VAT law, such as making false statements submitted knowingly, or under circumstances amounting to gross negligence, omission of reporting, assistance in unlawful deduction of VAT, forgery, concealment or destruction of documents, the use of fictitious invoices, etc. These offenses may result in additional payment of interest, linkage differences and fines, including double tax, and may even result in imprisonment if the offense is characterized as criminal.
Personal liability for company officers. According to the VAT law, those who are liable for a company include: an active manager, secretary, trustee, proxy, active partner, accountant, bookkeeper and any other responsible clerk. Accordingly, a company’s officers might be held responsible