Fictitious Invoices: Penalties, Case Law, and Director Liability Under the VAT Law

The penalty for fictitious invoices under Section 117(b) of the Value Added Tax Law is up to 5 years of imprisonment, or a fine of up to NIS 452,000. In aggravating circumstances — for example, where the tax evaded exceeds NIS 452,000 — the penalty increases to 7 years of imprisonment or a fine of up to NIS 1,130,000. The offense applies both to the person who issued the invoice and to the person who deducted input tax based on it. When the offense is committed by a company, Section 119 allows the active director to be charged as well, unless he or she can prove lack of knowledge or that all reasonable measures were taken.

The term "fictitious invoice" does not appear in the Value Added Tax Law. The offenses are found in Section 117, at two levels of severity, and what distinguishes them is intent.

The Substantive Offense: Section 117(b)

Section 117(b) applies to anyone who acted "with the purpose of evading or escaping payment of tax." The maximum penalty is 5 years of imprisonment or double the fine prescribed in Section 61(a)(4) of the Penal Law. As of October 2026, that fine is NIS 226,000, making the ceiling under Section 117(b) NIS 452,000. In a fictitious-invoice case, the following alternatives typically arise:

• Issuing a tax invoice, or a document resembling an invoice, without a transaction having taken place and without an obligation to carry one out (Section 117(b)(3)).

• Deducting input tax without a lawful document as required by Section 38 (Section 117(b)(5)). This is the provision that applies to the buyer who recorded the invoice in its books.

• Preparing or maintaining false books of account, or authorizing another person to maintain them (Section 117(b)(6)).

A person who neither issued the invoice nor deducted it, but acted to help another person evade tax, falls under Section 117(b1), which carries a penalty of 5 years of imprisonment. For example, a broker who connects the invoice issuer with the buyer and whose name does not appear on any document.

Aggravating Circumstances: Up to 7 Years of Imprisonment

Under Section 117(b2), an offense under Section 117(b) or 117(b1) committed in aggravating circumstances carries a penalty of 7 years of imprisonment or a fine of 5 times the fine prescribed in the Penal Law, i.e., up to NIS 1,130,000. The law lists three circumstances, and any one of them suffices:

1. The offender has already been convicted of such an offense, and fewer than 3 years have elapsed since the conviction.

2. More than 6 charges for such offenses have been filed against the offender within a 3-year period.

3. The tax evaded through the offender's actions exceeds double the fine prescribed in the Penal Law, i.e., NIS 452,000.

A person convicted under Section 117(b) within 3 years of a prior conviction faces an additional sanction: under Section 117(c), the court may prohibit that person from continuing in his or her occupation for a period it determines.

The Technical Offense: Section 117(a)

Without intent to evade tax, issuing a tax invoice when you were not entitled to do so, or after you were prohibited from doing so, constitutes an offense under Section 117(a)(5). The penalty is one year of imprisonment.

A fictitious invoice typically triggers a monetary demand from the VAT director, and sometimes a criminal investigation as well. The two proceedings are separate, and Section 123 of the Law provides that a conviction does not exempt the offender from other tax liabilities.

The Financial Track: Double Tax

Under Section 50(a1), a dealer who deducted input tax from an invoice issued unlawfully is exposed to double the tax stated on it. The defense mentioned in the section is to prove, to the director's satisfaction, that you did not know the invoice was issued unlawfully. A person who issued an invoice without being authorized to do so is liable for double the tax under Section 50(a). An appeal against a double-tax demand is filed with the District Court, and filing the appeal stays payment unless the court orders otherwise.

For example: a company deducted VAT from 10 invoices of a supplier, each for NIS 150,000 before VAT. The VAT on each invoice is NIS 27,000, totaling NIS 270,000. If it turns out that no transaction took place, the double tax under Section 50(a1) is NIS 540,000. On the criminal side, NIS 270,000 is below NIS 452,000, so the aggravating circumstance based on the tax amount is not met. With 20 such invoices, the tax reaches NIS 540,000, and the aggravating circumstance is met.

The Criminal Track: Investigation, Compounding, or Indictment

Section 121 allows the director to close a case by way of a compounding payment, with the suspect's consent, in an amount not exceeding the maximum fine for the offense. After an indictment has been filed, compounding is possible only with the consent of the Attorney General or a person authorized by the Attorney General. The procedure is detailed on the page about compounding proceedings and administrative fines. Anyone who has received a summons for investigation will find their rights in the article on summons for investigation by the Israel Tax Authority.

In a large-scale case, the Prohibition of Money Laundering Law also comes into play. Under Item (17) of the First Schedule to the Law, issuing an invoice without a transaction in aggravating circumstances, or deducting input tax from such an invoice in aggravating circumstances, is a predicate offense. Dealing in funds derived from such an offense in order to conceal their origin constitutes an offense under Section 3(a) of the Law, punishable by 10 years of imprisonment.

What the Case Law Says About Sentencing

The Supreme Court has repeatedly held that in tax offenses the public interest in imposing severe sentences prevails, particularly when fictitious invoices are involved. In CrimA 2636/12 Estate of Shalosh v. State of Israel (5.3.2013), the Court wrote that the use of fictitious invoices "has long since become a national plague."

For buyers, another important principle emerges from the case law. In CrimLApp 1054/07 Tzameret Aviation (6.2.2007), the Court held that a person who relies on an invoice that does not reflect a genuine transaction in order to deduct input tax thereby intends to unlawfully reduce VAT, which constitutes intent to evade tax.

Both of these rulings were cited by the Supreme Court in CrimA 5783/12 Galam v. State of Israel, when it dismissed the appeal of a metals dealer. He was convicted, among other things, of issuing invoices and deducting input tax in aggravating circumstances and of money laundering, and the Be'er Sheva District Court sentenced him to 10 years of imprisonment and a fine of NIS 5 million. According to the indictment, the false invoices were used to evade VAT of approximately NIS 52.4 million.

When a company commits an offense under the VAT Law, Section 119 provides that officeholders in the company are also guilty of the offense. The list in the section includes: an active director, secretary, trustee, representative, active partner, comptroller, accountant, and any other responsible officer who held the position at the time the offense was committed.

The burden is reversed: to be relieved of liability, the officeholder must prove one of two things. First, that the offense was committed without his or her knowledge. Second, that he or she took all reasonable measures to ensure compliance with the law. A director who can present a supplier-approval procedure and documentation of due-diligence checks is in a very different position from a director who signed off on payments without asking questions.

Section 120 operates in the same manner with respect to the dealer. An offense committed by a clerk, employee, or agent in the course of business allows the dealer to be charged as well, subject to the same defense. Section 117(b) itself includes alternatives directed at those who enabled others to act: a person who "authorized another" to maintain false books of account, and a person who failed to prevent another from forging, concealing, or destroying a document.

A conviction also has business implications. Under Section 52(d), the director may require security as a condition for registration as a dealer from anyone who was convicted by a final judgment of an offense under Section 117(b) within the five years preceding the application. For this purpose, a company is also deemed to have been convicted if an active director, a substantial shareholder, or a partner in it was convicted.

It is advisable to review your situation before the authority reaches out, and certainly in any of the following scenarios:

1. You received a notice of intent to impose double tax under Section 50(a1). This is the stage to gather everything that shows the transaction took place and that you vetted the supplier: purchase orders, delivery notes, correspondence, and proof of payment.

2. A supplier you worked with has disappeared, shut down, or is under investigation, and you deducted input tax from its invoices. For invoices dated 1.6.2026 or later exceeding NIS 5,000 before VAT, verify that an allocation number exists.

3. You are a director of a company and there is no written procedure specifying who approves a new supplier and who verifies that payment is made to the account of the entity that issued the invoice. Under Section 119, the measures you took are the director's defense.

4. You have been summoned for a cautioned interview at a Customs and VAT investigations unit. Consult with an attorney before the interview.

In representation in VAT investigations and double-tax proceedings involving fictitious invoices, the firm of Adv. and CPA Shlomi Vaknin, who served for about a decade as a national supervisor in the Professional Division of VAT at the Israel Tax Authority.