Your Taxes: EU VAT on Israeli exports

This article is aimed at Israeli companies that supply goods or spare parts and clear them through customs in a country in the European Union (EU). Those companies don’t always want to go to the expense of establishing a formal branch or subsidiary company in each country they sell to. Value Added Tax (VAT) in the EU can range up to 27 percent, so ignore it at your peril.

This article may be partly relevant to other non-EU companies, but not entirely, as explained below.

The simple EU approach: Export from afar

It may be possible for Israeli exporters to hire a local customs import agent to clear the goods through the customs of the country concerned and pay the local EU VAT upon importation under the agent’s own EU VAT registration number.

This EU VAT may be sometimes recoverable by the Israeli exporter, if certain conditions are met, under the EU 13th VAT Directive. However, reciprocity is often one of those conditions. Therefore, because Israel doesn’t refund VAT to foreign firms not registered for Israeli VAT purposes, many EU countries refuse to refund their VAT to Israeli companies not registered for EU VAT purposes. This appears to apply to: Bulgaria, Czech Republic, Greece, Hungary, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal and Romania.

Even if the 13th VAT Directive is available, the procedure can be slow and costly.

Second EU approach: Local VAT registration

Another procedure that may be available in some EU countries is to register the Israeli company as a local dealer for VAT purposes and thereby recover the VAT on imports and local expenses. It may even be possible to do so without creating a taxable permanent establishment for income tax purposes in the EU country concerned.

This is like having your cake and eating it, but it isn’t always easy.

Third EU approach: Reverse charge

There are some EU countries which stipulate a mandatory reverse charge approach companies from other countries (EU and elsewhere) in certain cases (usually business to business). This may apply to France (but see below), Italy, the Netherlands, Spain, and some Eastern European countries.

This means the local customer reports and pays the VAT instead of the Israeli exporter (“self assessment” by the customer). Therefore the Israeli exporter cannot recover VAT on imports and local expenses in those countries.

Latest: Can’t elect mandatory reverse charge mechanism

Until the end of September this year, France had a “repondant” procedure whereby a non-EU firm can opt to apply the reverse charge mechanism by voluntarily appointing a French fiscal representative to account for French VAT and then recover the VAT on imports into France and local French expenses.

However, the European Court of Justice ruled on December 16, 2011 that the French “repondant” procedure is contrary to EU VAT principles. Therefore, on June 7 the French Tax Administration issued a notice cancelling the “repondant” procedure commencing October 1.

It remains to be seen if other EU countries follow suit.

To sum up

Israeli exporters of goods and spare parts to EU countries should re-consider their EU VAT and income tax options. Taking no action may be an economic disaster.

As always, consult experienced tax advisors in each country at an early stage in specific cases.

leon@hcat.co

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.