Indirect tax - Israel

Value Added Tax (VAT) is the main type of indirect taxation in the Israel.

Section 2 of the Israeli VAT Law (hereinafter: ‘The VAT Law’) states that: ‘Value Added Tax shall be imposed on transactions in Israel and on the importation of goods’.

Although VAT is ultimately borne by the consumer by being included in the price paid, the responsibility for charging, collecting and paying it to the tax authority at each stage of the process rests with the business making the supply, ie the sale.

A dealer will charge VAT (output tax) on its sales or service, and incur VAT (input tax) on its purchases (including any VAT paid at importation). The difference between the output tax and the deductible input tax in each accounting period will be the amount of VAT payable by the dealer to the tax authority. Where the input tax exceeds the output tax, a refund can be claimed.

A dealer is defined as ‘a person, other than a non-profit organization or a financial institution, who sells any asset or renders any service in the course of his business, and also a person who effects an occasional transaction’.

A transaction is within the scope of Israel VAT if the following conditions are met:

• the sale of an asset or the performance of a service by a dealer in the course of his business, including the sale of equipment
• the sale of any asset, if the input tax imposed on its sale to the seller or on its importation by the seller was deducted
• an occasional transaction
• it takes place in Israel

Section 14 of the VAT Law, addressing ‘sales’ type transactions, states that: ‘An asset shall be deemed to have been sold in Israel, if the asset was in Israel at the time of its delivery to the purchaser, or if it was exported from Israel and the asset is intangible – if the seller is an Israel resident’.

Section 15 of the VAT Law, addressing ‘service’ type transactions, states three alternatives, whereby it is sufficient for one of them to exist to determine that the service will be seen as a service rendered in Israel. Below are the three alternatives:

• it was rendered by a person whose business is in Israel; whoever has an agent or branch in Israel will be deemed, in this respect, as a person who has a business in Israel
• it was rendered to an Israeli resident
• it was rendered in respect of properties located in Israel

Usually, a transaction in Israel and import of goods are subject to VAT at a standard rate of 17%. There is some exception which zero VAT applied or exempt.

Deduct input tax:

• a dealer is entitled to deduct from the tax to which he is liable the input tax included in a tax invoice lawfully issued to him or in an import entry or other document approved by the Director for this purpose, on condition that the import entry or other document name the dealer as owner of the goods and that the deduction be made within six months after the invoice, the entry or the document was issued
• input tax shall not be deducted, unless the input is to be used in a transaction liable to tax.

Businesses that make exempt supplies are unable to claim all of the input tax that they incur, so the VAT paid to suppliers will be a ‘real’ cost.

The ‘person liable to tax’ – a dealer, a non-profit organisation or a financial institution, even if exempt of paying the tax or if all his transactions are exempt of tax, except for:

• a person all whose transactions are exempt of tax under section 31(1) or 31(2) of the law (rentals for residential purposes for a period of not more than 25 years, giving possession of real estate against key-money)
• a person, the tax on all of whose transactions is paid by the recipient of the service under regulation 6A of the VAT regulations
• a person, for whose tax on real estate sold by him is paid under regulation 6B of the implementation regulations and who is not a non-profit organization, a financial institution, or a dealer within the meaning of sub regulation (d) of the said regulation.

Yes. Obligation to register:

• dealers, non-profit organisations and financial institutions must register at the time and in the manner prescribed
• a person liable to tax who is a foreign resident who has business or activity in Israel shall – within thirty days after he began to carry on business or activity in Israel – appoint a representative whose permanent place of residence is in Israel, and he shall so inform the Director, attaching the representative’s written consent
• a representative appointed under this section, shall, for purposes of the VAT Law, be treated like the person liable to tax.

Proposed legislation – It is proposed that for the supply of electronic services, communication services and radio and television services to a private individual (not to a dealer, non-profit organization, financial institution) by foreign resident will be subject to VAT in Israel, the tax liability shall be on the foreign resident and he will oblige to register for vat in Israel.

Yes. Section 60 of the VAT Law determined as follows: A person liable to tax who is a foreign resident who has business or activity in Israel shall – within thirty days after he began to carry on business or activity in Israel – appoint a representative whose permanent place of residence is in Israel, and he shall

so inform the Director, attaching the representative’s written consent.

A representative appointed under this section, shall, for purposes of the VAT Law, be treated like the person liable to tax.

Monthly basis. However, the period for a dealer’s return shall be two months, if his business turnover in the determining year did not exceed NIS 1,510,000.

Yes.

• Fine for delay in filing return – if a person liable to tax did not file a periodic return when it must be filed, then he shall be liable to an arrears fine of NIS 219 in respect of every two weeks or part
• Fine for not keeping books – in a person liable to tax did not keep account books or records as prescribed, or if he kept them in substantive deviation from the provisions of this Law or of the regulations thereunder, then the Director may impose a fine equal to 1% of the total price of his transactions or of the total amount of his wages and profit, as the case may be, for the tax year in which books or records were not kept as
• Fine for failure to pay on time – if tax was not paid at the prescribed time, then – in addition to linkage differentials and interest under section 97 – an arrears fine 0f 25% of the overdue amount shall be added to it in respect of every week or part thereof in a period of delay of up to six months, and of 0.5% in respect of every week or fraction thereof in the period of delay after six months.

Yes. A range of penalties can be imposed where businesses do not comply with the VAT rules.

No.

A VAT invoice must show:

• the seller’s name (dealer name) and address
• the title ‘Tax invoice’
• the word ‘original’
• the word ‘authorised dealer’
• the dealer VAT registration number
• the invoice date
• the customer’s name and address and is VAT registration number
• delivery note number and date, except if the invoice was held at the goods delivery
• a description sufficient to identify the goods or services supplied to the customer
• amount of the goods
• value of the transaction without VAT
• amount of the VAT and the words ‘Value-added tax’ and the tax rate (17%, 0%).
• total amount include VAT

For each different type of item listed on the invoice, the following must be shown:

• the unit price or rate, excluding VAT
• the quantity of goods or the extent of the services
• the rate of VAT that applies to what’s being sold
• the total amount payable, excluding VAT

Where a VAT invoice includes zero-rated or exempt goods or services, it must:

• show clearly that there is no VAT payable on those goods or services
• show the total of those values separately