VAT Refunds and Input Tax Deductions

A VAT refund is issued to a dealer whose input tax for the reporting period exceeds the tax on his transactions. Input tax is deducted from a tax invoice lawfully issued to you, within 6 months of its issuance date (Section 38(a) of the VAT Law), and the surplus is generally refunded within 30 days of receiving the return (Section 39(a)). From 1.6.2026, an invoice exceeding NIS 5,000 before VAT requires an allocation number.

If the assessor disallowed input deductions or delayed your refund, send us the letter. We will review the deadlines and the appropriate course of action with you.

Usually after receiving a letter from the assessor, and sometimes before filing a return with a large refund:

• The assessor notified you that he is auditing the books before paying the refund, thereby extending the refund deadline to 90 days (Section 39(a)(1)). How to handle such an audit is explained on the VAT Audit and Withholding Tax Audit Support.

• You received a notice that the Director intends to determine that a supplier issued you an unlawful invoice, and consequently to disqualify your books or impose double tax.

• A supplier did not obtain an allocation number for an invoice exceeding NIS 5,000, and payment has already been made.

• You discovered invoices that were not deducted within the 6-month period.

• The assessor denied a deduction for employee welfare expenses, a vehicle, or an asset that also serves a private purpose.

• You are a developer in an evacuation-reconstruction (Pinui-Binui) project, and the VAT authority disputes the input deductions you claimed for services provided to residents.

When the dispute escalates to a criminal suspicion — for example, an investigation involving fictitious invoices — different rules apply. These are explained on the Representation in VAT Investigations.

The right to deduct input tax is established in Section 38 of the Value Added Tax Law, 5736-1975, and the VAT Regulations restrict it for several categories of expenses.

Conditions for Deduction

• A tax invoice lawfully issued to you, or an import declaration in your name (Section 38(a)).

• Deduction within 6 months of the invoice date. The Director may extend this period, but not beyond 5 years (Section 116(a)).

• An allocation number on an invoice whose pre-VAT amount exceeds NIS 5,000 (Section 38(a1), effective 1.6.2026; from January through May 2026 the threshold was NIS 10,000). A supplier may request a number even after issuing the invoice, but this does not extend the 6-month period (Section 47(a2)(4)). Details are provided in the article on Israel Invoices and Allocation Numbers.

Expenses Restricted by the Regulations

• No deduction is allowed on the purchase or import of a private vehicle, and the definition includes a commercial vehicle with a gross vehicle weight of up to 3,500 kg (Regulations 1 and 14 of the VAT Regulations).

• For an asset or service used for both business and other purposes, the deduction is proportional. Where the Director has not set a ratio, two-thirds may be deducted if the primary use is business-related, and one-quarter if it is not (Regulation 18).

• Entertainment expenses are not deductible, except for hosting a person from abroad (Regulation 16).

• An input intended for an employee's personal benefit — such as a meal, accommodation, or a gift — is deductible only if it was sold to the employee and reported as a transaction (Regulation 15a). Where the line is drawn was determined in the Amdocs and Mobileye cases, described below.

An Unlawfully Issued Invoice

Such an invoice may lead to a determination that your books are inadmissible for that tax year (Section 77b(b)) and to double tax (Section 50(a1)). Under both provisions, the defense is to prove that you did not know the invoice was unlawfully issued. What this means in practice is explained in the FAQ below. The entire process, both civil and criminal, is explained on the Fictitious Invoices Attorney.

1. You send us the assessor's letter, the periodic returns, and the disputed invoices. We identify the deadlines applicable to your case.

2. We examine each invoice against the conditions of Section 38: who issued it, whether it bears an allocation number, when it was deducted, and whether the Regulations restrict the expense.

3. When the claim involves an unlawfully issued invoice, we gather evidence before the hearing to demonstrate that the transaction took place and that you were unaware of the problem: purchase orders, delivery notes, bank transfers, and correspondence with the supplier.

4. We present our position to the assessor in writing and at a meeting. If an assessment is issued, we file a reasoned objection within 30 days, as explained on the Objection to a VAT Assessment.

5. When there are invoices that were not deducted on time, we submit a reasoned application to the Director for an extension under Section 116, with an explanation for the delay.

Three court rulings in which the dispute centered on what may be deducted.

Amdocs: Employee Dining Halls, CA 2180/21 (30.1.2023)

The VAT Director argued that the rent, electricity, and water costs for the dining hall areas constitute part of a "meal" for employees under Regulation 15a, and are therefore non-deductible. The Supreme Court dismissed the Director's appeal and upheld the District Court judgment allowing the deduction. Adv. Shlomi Vaknin represented Amdocs. The Amdocs Ruling.

Mobileye: Employee Benefits, TC 10835-01-22 (27.5.2025)

The Jerusalem District Court allowed the deduction of tax on the construction of a gym, a music room, and a spa facility, as well as on accounting services, and dismissed the appeal regarding employee transportation and pension consulting. Adv. Shlomi Vaknin and Adv. Ariel Epstein represented the company. The Mobileye Ruling.

Neve Gad: Residents' Attorney Fees, TC 53560-11-21 (9.11.2023)

A developer in a Pinui-Binui project in Petah Tikva deducted the VAT on the invoice of the attorney who represented the residents. The Tel Aviv District Court held that representing the residents is part of the construction services and therefore the deduction is permitted. On the two other issues (the tax point and the calculation method), the appeal was dismissed, and the company was ordered to pay costs of NIS 90,000. Adv. Shlomi Vaknin represented the company. The VAT Director appealed the ruling to the Supreme Court, and the appeal is pending. The Neve Gad Ruling. VAT issues in Pinui-Binui and TAMA 38 projects are explained on the VAT in Real Estate Transactions and Urban Renewal.

This practice area is led by Adv. and CPA Shlomi Vaknin together with his firm's team. He served for nearly a decade as a national supervisor in the Professional Division of VAT at the Israel Tax Authority headquarters. The disputed invoices and returns in each case are also reviewed with an accountant's eye.