TA 21657-11-19 Hagshama Cosmi Project Management Ltd. v. Director of Value Added Tax Tel Aviv and Central District
The Tel Aviv District Court held on 10.7.2022 that hostess services provided by an Israeli company to foreign cosmetics manufacturers at the duty-free shop in Ben Gurion Airport are subject to zero-rate VAT under the proviso of Section 30(a)(5) of the VAT Law, as their consideration is included in the value of the imported goods. The appeal was allowed, and the VAT Director was required to issue amended assessments. Adv. Shlomi Vaknin represented Hagshama.
Court: Tel Aviv-Jaffa District Court, Judge Harry Kירש (Kirsh).
Proceeding: TA 21657-11-19, judgment dated 10.7.2022.
Counsel for the Appellant: Adv. Shlomi Vaknin.
Assessment: May 2013 through December 2017. Tax in dispute on this issue: approx. NIS 9.01 million (principal).
Result: The appeal was allowed. The Respondent was ordered to pay litigation costs of NIS 36,000.
Full judgment: On the Israel Tax Authority website at gov.il.
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What Were the Facts?
At the duty-free shop in Ben Gurion Airport, operated by James Richardson, each cosmetics and fragrance brand has its own designated area staffed by hostesses who promote sales. The hostesses are funded by the foreign manufacturers — the brand owners — who contract with Hagshama to recruit and employ them.
Hagshama reported the service as subject to zero-rate VAT, as a service rendered to a foreign resident. The VAT Director assessed it at the full rate. He argued that it was not proven that the cost of the hostesses was embedded in the product prices, and that the statutory exception applies only where actual VAT payment further along the supply chain has been demonstrated.
What Does Section 30(a)(5) Provide?
The section prescribes zero-rate VAT on services rendered to a foreign resident. A service that is also effectively provided to an Israeli resident in Israel, or a service rendered in respect of property located in Israel, is not considered a service to a foreign resident — unless its consideration forms part of the value of the goods under Sections 129 through 133T of the Customs Ordinance. The service in this case was rendered in respect of products located in Israel, and therefore the discussion focused on this exception.
What Did the Court Hold?
No Requirement for Actual Tax Payment
Judge Kirsh held that, according to the statutory language, "there is no requirement whatsoever, not even by implication," that the exception be conditioned on actual VAT payment upon the import or sale of the goods. It suffices that the consideration for the service is included in the value of the goods.
Hostess Costs Are Embedded in the Price
On the factual question, the court was satisfied that product prices also reflect hostessing expenses. The manufacturers' representatives present the retailer with a "package deal" that includes both discounts and required investments, including hostessing. Such expenses form part of the value of the goods under Sections 130(1) and 132(a) of the Customs Ordinance, even if they were negotiated separately.
What Does This Mean for Service Providers to Foreign Companies?
The judgment is relevant to Israeli companies that provide a foreign manufacturer with sales promotion, marketing, or advertising services in connection with its products sold in Israel.
Verify that the agreement is with the foreign manufacturer and that it is the party paying the consideration.
Retain evidence that the cost of the service is factored into the pricing of the products, for example in the negotiation terms between the manufacturer and the retailer.
The situation differs where the service falls under the import of services rather than the value of goods. In the Applause judgment proof that the tax had been paid was required, and the appeal was dismissed.
A district court judgment is not binding on other courts, but it illustrates how the court examines the claim. To verify eligibility in advance, a tax ruling may be requested; see VAT Opinions and Tax Rulings. The question of the value of goods under the Customs Ordinance is also relevant to customs valuation. In the media: The Hagshama case on Ynet. The rule, the restriction, and the exception in Section 30(a)(5) are explained on the page Zero-Rate VAT on Services to Foreign Residents.
