VAT, GST and Sales Tax in Israel


Name of the tax Value-added tax (VAT)
Local name Mass erech mussaf (Ma’am)
Date introduced 1-Jul-76
Trading bloc membership None
Administered by Israel Tax Authority (ITA) Department of Customs and VAT ( Pages/HomePageENG.aspx)
VAT rates
Standard 17%
Other Zero-rated and exempt
VAT number format XXXXXXXXX
VAT return period
Bimonthly Taxable persons with annual turnover below ILS1,510,000
Monthly General rule
Registration Annual turnover of ILS99,006; for lower turnover registration as an “exempted VAT-registered entity” is required
Recovery of VAT by non-established businesses No

Scope of the tax

VAT is charged on the following transactions:

  • A sale of an asset including real estate, if the asset is located in, delivered in or exported from Israel (Delivery from a location outside Israel to another location outside Israel is out of the scope of the Act; this has implications for the input VAT 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)
  • 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 to 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 include entities that make occasional transactions. An entity that has annual turnover not exceeding ILS99,006 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 his or her 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.

Who is liable

A taxable person is liable for VAT on the sale of assets or the supply of services.

Several exceptions to the above rule exist, such as the following:

  • For supplies of services or intangible property by non-Israeli suppliers to Israeli customers, see below under Reverse charge.
  • Similarly, for certain purchases of real estate, the purchaser is liable to reverse charge the VAT.

For imported goods, the importer of record is liable for VAT.

Group registration. Registration as a VAT group is possible for two or more VAT-registered entities that are the following:

  • A company and its subsidiaries
  • Two or more subsidiaries owned by the same parent company
  • A partnership and a partner that holds 50% or more of the rights in the partnership
  • Entities whose bookkeeping is done jointly

The group members share a group VAT number and submit a single monthly or bimonthly VAT report. In addition, each mem­ber must submit an annual detailed digital VAT report, detailing the annual sum of output VAT and input VAT with respect to intra-group supplies and also the sum of output VAT and input VAT with respect to third parties. VAT is not charged on supplies made between group members, unless the VAT is not deductible as input tax. Group members are jointly and severally liable for each other’s VAT liabilities. In practice, they may also be liable for other tax liabilities in certain circumstances.

Non-established businesses (foreign residents). 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” (see Section D).

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 has to appoint a local representative, being both an Israeli citizen and resident, that would be liable to the tax authorities jointly and severally with the foreign resident.

Registration procedures. Online registration is not possible for overseas taxable persons, though it is for Israeli taxable persons. Hard copies – for some documents, the original is required – must be submitted. Relevant documents include appropriate forms, articles of association, proof of registration with the Israeli Companies Registrar as a foreign resident corporation car­rying on business in Israel, etc.

Late-registration penalties. These may be up 1% of the taxable turnover, on top of the VAT itself, plus interest, and adjusted for inflation.

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.

As for domestic reverse charge, this 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 draft circular regarding internet activity of foreign entities in Israel. According to the draft, if it has been established that 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 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 (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. Please note that the bill has yet to pass and is not yet enacted and enforced.

Deregistration. Israel has no separate registration and deregistra­tion thresholds. A business whose turnover falls below the regis­tration threshold may be deregistered.

VAT rates

VAT at the standard rate of 17% (reduced from 18% as of 1 October 2015) applies to the supplies of goods and services that fall within the scope of VAT as well as to the importation of goods, unless zero-rate VAT or a specific exemption applies.

Moreover, profit tax and salary tax at the rate of 17% apply to financial institutions, and salary tax at the rate of 7.5% applies to nonprofit organizations.

Zero-rate VAT allows input VAT deduction, but an exemption does not allow input VAT deduction.

Examples of zero-rated transactions

  • Exports of goods
  • Supplies of intangibles to foreign residents
  • Supplies of services to foreign residents, subject to broad use and enjoyment restrictions (for example, the services do not relate to assets in Israel, and the services are not also provided to an Israeli resident in Israel)
  • Hotel accommodation for tourists
  • Leasing private cars to tourists
  • Tourist transportation
  • Supply of monitor services, as well as inspection and coordina­tion services, with regard to clinical trials conducted in Israel

For the purpose of zero-rate VAT relief on the provision of ser­vices or the sale of intangibles to foreign residents, the term “foreign resident” is defined as an individual who permanently resides outside Israel or an entrepreneur that is registered or incorporated outside Israel, provided that the individual or entre­preneur is not engaged in a business activity in Israel.

Examples of exempt transactions

  • Leasing of apartments for residence purposes for a period that does not exceed 25 years
  • Transactions made by a business that is below the registration threshold
  • Sales of diamonds and precious stones

Option to tax for exempt supplies. Israeli law offers taxpayers no option to tax exempt supplies.

Time of supply

Supply of goods. Generally speaking, the chargeable event takes place upon delivery – except for qualifying small manufacturers; these use the cash basis.

Supply of services. The cash basis generally applies. However, the chargeable event takes place when the services are supplied in the following circumstances:

  • The consideration of services is affected by the fact that the transaction is between related parties.
  • The consideration has not been agreed.
  • At least some of the consideration is not in cash.
  • The services are supplied by certain businesses whose annual turnover is over ILS15 million.

Where the services are supplied in parts, a chargeable event occurs in respect of each part. Where services cannot be said to be made up of different parts, a chargeable event takes place upon each payment being made, in respect of that amount, or on completion of the services, whichever happens first.

These are general rules; specific rules apply to particular types of transactions.

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.

Imported goods. VAT is due when the goods are cleared through customs.

Effective 1 January 2013, a new tax clearance mechanism has been agreed 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, as previously).

Recovery of VAT by a taxable person

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 expenditures, and expenditures that are used for out­of-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 VAT deduction and that the deduction is claimed within six months after the date of issuance of these documents (a procedure for an extension is available).

Nondeductible input tax. This includes certain types of business and staff entertainment, input tax attributable to particular trans­actions such as costs related to share transactions, certain prereg­istration costs (see below), etc.

Refunds. If the amount of VAT recoverable exceeds the amount of VAT payable in a reporting period, the excess amount may be refunded within 30 days. A refund can be obtained by submitting the periodic VAT report, the additional detailed digital report and copies of the tax invoices exceeding the relevant amount if requested by the authorities. The authorities may postpone the refund and conduct an examination or audit.

Partial exemption. Partial exemption is generally calculated on a pro rata basis. Unless rebutted, it is presumed that where most of the taxpayer’s turnover is taxable, two-thirds of input tax is used for making taxable supplies, and is therefore deductible; whereas, if the taxable person’s turnover is mostly nontaxable, only one quarter of input VAT may be deductible.

Preregistration costs. Input tax on such costs is generally nonde­ductible. However, on application by a taxpayer, the tax authori­ties may allow input VAT incurred before registration to be deducted, where the authorities are satisfied that the relevant inputs are set-up costs, i.e., inputs bought at a time when the busi­ness was being set up, and used for that purpose.

Recovery of VAT by non-established businesses

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.


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 (see Section F). The invoice must be issued within 14 days.

The authorities intend to assign invoice numbers to each VAT-registered entity.

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 or an agreed reduction in the value of the original supply. 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 of the regulation requirements are fulfilled.

Foreign-currency invoices. The taxable amount must generally be stated in New Israeli Shekels. A foreign currency may be shown in addition, provided that the exchange rate on the day the invoice is raised is also shown. Alternatively, businesses may apply to the authorities for permission to raise foreign-currency-only invoices.

Electronic invoices. These may be used subject to strict technical rules concerning digital signature, electronic delivery, record-keeping, etc.

Proof of export. The export declaration issued by Israeli Customs and the commercial invoice are generally enough.

Reports and payments

Reports. VAT reports must be submitted on a monthly basis if annual turnover exceeds ILS1.51 million or on a bimonthly basis if annual turnover does not exceed ILS1.51 million. Reports must be submitted by the 15th day of the month following the end of the reporting period. Payment in full is also due by the same date.

Electronic filing. An online detailed digital report is required if annual turnover exceeds ILS2.5 million or if the taxable person is required to keep his books in accordance with the dual accounting system.

Special schemes. 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. There is no obligation to file an annual return applying to all taxable persons. That said, VAT group members must file a certain type of annual return (see Section C above) as to taxable persons in the Eilat free trade zone.


Penalties for noncompliance with VAT obligations include fines and imprisonment.

A VAT-registered entity that fails to submit a report when required is liable to pay a fine of ILS217 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 may also apply in certain other circumstances.