Ynet on the Hagshama Case: Zero-Rate VAT for Hostess Services at Duty Free

Ynet reported in July 2022 that the Tel Aviv District Court accepted the appeal of Hagshama Cosmay Project Management against the Tel Aviv VAT Director, regarding an assessment of approximately NIS 9 million for the years 2013 through 2017. According to the article, the company was represented by Adv. Shlomi Vaknin and Adv. Raquel Scheinwald.

The company recruits and employs hostesses who staff booths for international cosmetics and fragrance companies at the Duty Free zone in Ben Gurion Airport. It reported the services provided to the foreign companies at zero-rate VAT under Section 30(a)(5) of the VAT Law. That section prescribes zero-rate VAT for services rendered to a foreign resident, but not where the service is also effectively provided to an Israeli resident in Israel — unless the consideration for the service forms part of the value of the goods. It was undisputed that the service was also provided to Israeli residents, and therefore the discussion focused on whether this exception applied.

The VAT Director argued that it was not proven that the cost of the service was factored into the price of the products, and that the exception applies only if VAT was actually paid further down the supply chain.

According to the article, the judge held that the statutory language contains no requirement that VAT actually be paid on the goods, and that even if it did, the purpose of the exception extends beyond the prevention of double taxation. Since the value of the service is embedded in the value of the goods, and their import and sale are taxed in Israel in any event, there is no justification for taxing the service separately. The company presented dozens of letters from the international companies confirming that the cost of the service is included in the price of the products.

The appeal was accepted, the VAT Director was required to issue amended assessments, and was ordered to pay costs of NIS 36,000.