Taxation of Financial Institutions and NPOs

Many mistakenly believe that non-profit organizations (NPOs) and financial institutions (banks, insurance companies) enjoy "immunity" in the world of VAT. In practice, the reality is quite the opposite and far more complex. While these entities do not charge VAT to their customers, they are subject to a unique taxation regime – payroll tax and/or profit tax. The greatest danger lurks at the "seam line": the Tax Authority frequently re-examines the activities of associations and institutions, reclassifying them as ordinary business activity ("authorized dealer"). Such a reclassification is a dramatic financial event that can result in retroactive assessments of millions of shekels for uncollected transaction VAT.

The VAT Law specifically defines who qualifies as a "financial institution" and who qualifies as an "NPO," stipulating that they must pay tax based on wages paid to employees (rather than on turnover). The key legal issues requiring attention are:

1. Classification disputes: Defense against VAT Authority attempts to classify the entity (or part of its activity) as a "dealer," which fundamentally alters the entire tax liability.

2. Payroll tax base: Reducing tax liability through proper analysis of salary components (what is taxable and what is exempt).

3. Profit tax (for financial institutions): Handling complex assessments relating to the financial entity's profits.

Our firm advises public institutions, associations, and financial entities in routine operations and in times of crisis. We know how to identify in advance activities that may "raise a red flag" with the tax assessor and to construct a protective legal framework around them. In the event of an audit or assessment, we fight for your correct classification and to minimize your payroll tax base to the lowest amount permissible by law, utilizing up-to-date legal precedents.