Article Summary
In Position Paper 09/2026, the Israel Tax Authority ruled that every check-discounting transaction constitutes a sale subject to full VAT, and that the exemption under Section 31(5) of the VAT Law — applicable to a loan from a dealer to a financial institution — does not apply. In a Calcalist article from September 2026, Adv. (CPA) Shlomi Vaknin and Adv. Adir Morad agree that publishing a position in advance is a commendable practice, but argue that the conclusion is broader than the reasoning supports and that each transaction should be classified based on who bears the risk.
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Arguments Against the Blanket Rule
The position paper relies on Sections 19(b) and 9(b) of the Law, which deal with the sale of negotiable instruments, without examining the underlying transaction behind the check. The definition of "service" in Section 1 of the Law also encompasses credit transactions.
In most check-discounting transactions in the non-bank market, the financier has recourse against the client, along with guarantees and collateral, and the pricing is structured as interest for the term. According to the authors, this constitutes a loan, and under IFRS 9 as well, the asset remains on the books of the party that transferred the check.
HCJ 5305/10 David Avigdor, on which the position paper relies, did not address classification for VAT purposes, and the description of discounting in that case includes the absence of recourse.
The Fair Credit Law and the Regulation of Financial Services Law treat discounting as credit, and Sections 65 and 125C of the Income Tax Ordinance classify discounting fees as interest.
Double Taxation and the Cost of Credit
According to the article, Section 31(5) was designed to prevent double taxation: a financial institution pays payroll tax and profit tax and cannot deduct input tax, so VAT on credit extended to it becomes a final cost. In the non-bank market, credit passes through a chain of entities, the tax accumulates at each link, and the result, according to the authors, is more expensive credit for small and medium-sized businesses.
The Test Proposed by the Authors
A transaction without recourse, guarantees, or collateral is a pure discount — i.e., a sale — and Sections 19(b) and 9(b) apply. A transaction with recourse, guarantees, and interest-based pricing is credit, and when extended to a financial institution, the exemption under Section 31(5) applies. In the authors' view, a reclassification affecting an entire industry should have undergone public consultation and should apply only prospectively.
