Zero-Rate VAT on Services to Foreign Residents

A service provided to a foreign resident is subject to zero-rate VAT under Section 30(a)(5) of the VAT Law, provided the service is not also rendered in practice to an Israeli resident in Israel. A foreign resident for this purpose is a person located outside Israel who has no business or activity in Israel (Section 30(c)). Under the zero rate, the business does not charge VAT to the client but still deducts its input tax.

Send us the agreement with the foreign client, and we will check whether the service meets the requirements.

When the client is foreign but the service has a connection to Israel. These are typical cases:

• An Israeli company provides development or marketing services to its parent company abroad, and the parent company has clients in Israel.

• The VAT Director issued a full-rate assessment, claiming the service was also provided to Israeli residents or that the foreign client is managed from Israel.

• The foreign client has a related company or employees in Israel.

• The service relates to an asset located in Israel, such as goods sold here or an apartment.

• A foreign company orders a service from you for its employee or client while that person is staying in Israel.

• You are drafting an agreement with a foreign client and want the structure and documentation to support zero-rate treatment.

The zero rate on services to foreign residents is established in Section 30(a)(5) of the VAT Law, and the Regulations add conditions and exceptions.

The Rule and the Exception

• The zero rate applies to the provision of a service to a foreign resident, except for services designated by the Minister of Finance (Section 30(a)(5)).

• A service is not considered provided to a foreign resident when the subject matter of the agreement is the actual provision of the service, in addition to the foreign resident, also to an Israeli resident in Israel, to a partnership in which the majority of rights are held by Israeli residents, or to a company deemed an Israeli resident under the Income Tax Ordinance. Under Section 1 of the Ordinance, this includes, among others, a company whose business control and management are exercised in Israel, even if it was incorporated abroad.

• The exception does not apply when the consideration for the service is part of the value of the goods determined under Sections 129 through 133T of the Customs Ordinance.

• A foreign resident is an individual who permanently resides outside Israel, or a body of persons registered or incorporated only outside Israel (Section 1), who is located outside Israel and has no business or activity in Israel (Section 30(c)).

What the Regulations Add

• The zero rate does not apply to a service provided in respect of an asset located in Israel, unless the service provider proved that the consideration is part of the value of the goods under the Customs Ordinance (Regulation 12A(a) of the VAT Regulations).

• The zero rate does not apply to a service to a foreign resident whose subject matter is a service to another foreign resident during that person's stay in Israel, unless it falls within the categories listed in Section 30(a)(8), such as hotel accommodation for a tourist (Regulation 12A(c)).

• To benefit from the zero rate, the transaction price, payment method, and currency must be recorded in the books, and a written agreement or other document confirming the transaction details must be kept (Regulation 12(a)).

Related Zero Rates

The sale of an intangible asset to a foreign resident is subject to the zero rate under Section 30(a)(2), and a service provided abroad by a dealer whose principal place of business is in Israel is subject to the zero rate under Section 30(a)(7). A person to whom the zero rate applies is treated as a taxable person (Section 30(b)) and therefore deducts input tax.

1. You send us the agreement with the foreign client, sample invoices, and a description of who actually uses the service.

2. We examine who benefits from the service, where the client is managed, and whether it has any activity in Israel.

3. We review the documentation required by Regulation 12 and, where relevant, the evidence that the service consideration is included in the value of imported goods.

4. Before signing, we suggest amendments to the agreement, and in cases of doubt we consider a tax ruling. After an assessment is issued, we file an objection to the VAT assessment within 30 days, and proceed to appeal if necessary.

Two appeals that were accepted, and two rulings in which the appeal was denied but the boundaries of the zero rate were clarified.

Hagshama: TA 21657-11-19 (July 10, 2022)

An Israeli company employed promoters at the stands of foreign cosmetics manufacturers in the Duty Free at Ben Gurion Airport and reported the service at the zero rate. The VAT Director assessed it at the full rate. The Tel Aviv District Court held that the proviso of Section 30(a)(5) applies because the cost of the promoters is included in the value of the goods, and that there is no requirement to prove that VAT was actually paid on the goods. The appeal was accepted in a dispute involving approximately NIS 9 million in tax principal, and the VAT Director was ordered to pay costs of NIS 36,000. Adv. Shlomi Vaknin represented Hagshama. The Hagshama ruling.

Ram Pal Cellular Stockmarket: TA 27997-12-23 (October 10, 2024)

The company reported its transactions at the zero rate under Section 30(a)(5). The VAT Director issued an output tax assessment, and in the objection decision revoked it and instead assessed the company for input tax, claiming the transactions took place abroad. The Tel Aviv District Court accepted the appeal on a preliminary basis: an output tax assessment may be upheld, increased, or reduced, but a new input tax assessment cannot be issued in an objection decision (Sections 77(a) and 82(b) of the Law). The VAT Director was ordered to pay costs of NIS 12,000. Adv. Shlomi Vaknin and Adv. Ariel Epstein represented the company. The Ram Pal ruling.

Rulings That Clarified the Law

• Applause, TA 15803-02-18 (September 7, 2020): The Central District Court held that the proviso of Section 30(a)(5) contains a lacuna, and that the exception can in principle also apply to a service included in a service imported by Israeli residents. The company failed to prove that the Israeli clients paid VAT on the imported service, and therefore the appeal was dismissed and costs of NIS 50,000 were imposed. The Applause ruling.

• Easy Forex, CA 4149/15 (January 2, 2017): The Supreme Court held that a Cypriot company that had activity in Israel through an Israeli company is not a foreign resident for zero-rate purposes. The appeal was dismissed, and costs of NIS 15,000 were imposed.

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. He serves as co-chair of the VAT Committee of the Israel Bar Association and is a member of the Indirect Tax Committee of the Institute of Certified Public Accountants in Israel.