VAT on Digital Services from Abroad: What Currently Applies to Businesses and What Is Proposed

Generally, no. As of October 2026, Israel has not enacted legislation requiring a foreign supplier of digital services to collect VAT from private consumers, and the so-called "Netflix Law" remains a proposal. Under current law, the Israeli customer bears the VAT liability on digital services purchased from abroad. A business purchasing cloud software or online advertising from a foreign supplier issues a self-invoice and reports it pursuant to Regulation 6D of the Value Added Tax Regulations, at a rate of 18% (effective January 1, 2025).

It issues a self-invoice. Regulation 6D provides that when a transaction takes place in Israel and the seller or service provider is a foreign resident, the tax payment obligation falls on the buyer, unless the buyer holds an invoice for the transaction. An authorized dealer issues an invoice in its own name, reports it in the periodic return, and pays the tax together with the return (Regulation 6C(d), applied with the necessary modifications).

In the same return, the dealer deducts the tax as input tax, provided the service is used for taxable transactions (Section 41 of the Law). For a business that deducts input tax in full, the net financial result is generally zero, but the reporting obligation itself is mandatory. Non-profit organizations (Malkar) and financial institutions that receive services from a foreign supplier are also liable for VAT in Israel.

Under existing law, a private individual who receives a service from a foreign resident is also technically liable for VAT. In practice, the tax is almost never collected from private consumers, which is the impetus behind the effort to shift the obligation to the foreign supplier.

Input tax may only be deducted from a tax invoice lawfully issued (Section 38(a) of the Value Added Tax Law). A foreign supplier that is not registered as a dealer in Israel does not issue an Israeli tax invoice; therefore, any amount it collects as VAT cannot be deducted, and the business may end up bearing it as a cost.

The situation is different when the foreign supplier is registered as a dealer in Israel and issues a lawful tax invoice. In that case, the buyer holds an invoice, and the tax shown on it may be deducted in the ordinary manner. For an invoice whose pre-VAT amount exceeds NIS 5,000, an allocation number must appear (Section 38(a1)).

What to check:

1. That the account with the supplier is registered as a business account, in the name of the business and with the dealer registration number.

2. If the supplier charged VAT in error, request that it reverse the charge and issue a corrected invoice.

3. If the supplier claims to be registered in Israel, request its dealer registration number and verify that the invoice meets all requirements.

4. Issue a self-invoice for every purchase from an unregistered supplier, even when the amount is small.

For more on input tax deductions and input tax disallowed in assessments, see Input Tax Deductions and VAT Refunds.

When it conducts business in Israel pursuant to Income Tax Circular 4/2016, "Activity of Foreign Corporations in Israel via the Internet" (April 11, 2016). According to the circular, a foreign corporation that provides internet-based services to customers in Israel and meets one of the criteria set out therein must register as a dealer and appoint a representative, under Sections 52 and 60 of the Value Added Tax Law. One of the criteria is "significant economic presence," evidenced, for example, by a substantial number of transactions with Israeli customers and a service tailored to the Israeli market, such as a Hebrew-language interface, billing in shekels, and local payment processing.

The circular applies to sales to businesses and to sales to consumers alike. Whether a particular supplier is required to register is determined according to the criteria set out in the circular; therefore, before paying a foreign supplier an amount presented as VAT, verify whether it is registered as a dealer in Israel.

The Israel Tax Authority has been seeking since 2016 to impose the VAT obligation on the foreign supplier. The Economic Efficiency Bill memorandum for 2021–2022 proposed that a foreign supplier providing digital services to a private individual resident in Israel would register in a dedicated registry and pay VAT from the first shekel. For transactions with dealers, non-profit organizations, and financial institutions, the law was to remain unchanged. The proposal was separated from the Arrangements Law, reappeared in draft Arrangements Law bills for 2023–2024, and was dropped again.

At the end of September 2026, the Chief Economist Division at the Ministry of Finance published an interim report on the impact of artificial intelligence on state tax revenues. One of the directions outlined in the report is the collection of VAT on digital services provided by foreign suppliers to private consumers, and according to reports, the Ministry of Finance seeks to implement it as early as next year. This requires legislation, and according to N12, the conclusions are expected to be brought before the next government for discussion. Based on the drafts published to date, the proposal does not alter the self-invoice mechanism for business-to-business transactions.

For questions regarding VAT on purchases from foreign suppliers, please contact our Value Added Tax practice. The practice is headed by Adv. and CPA Shlomi Vaknin, who served for nearly a decade as a national supervisor in the professional division of VAT at the Israel Tax Authority.