Shekels money 370.
(photo credit: Ariel Jerozolimski/Bloomberg)
The standard rate of value-added tax (VAT) in Israel is expected to go up from
17 percent to 18% shortly, perhaps on June 1. This is according to reported
proposals and is not yet final. Nevertheless, it is best to prepare as the
finalization of VAT rate changes is usually fast. Below we consider how to
prepare on the assumption that the proposed VAT rate increase indeed takes
Businesses in Israel that are “authorized dealers” for VAT
purposes will generally pass on the increase to their customers.
allowed to do so under Section 6 of the VAT Law, which says that if VAT is
imposed at a higher rate than was previously agreed for a transaction, a
business may demand payment of the additional tax from the purchaser, unless
Consequently, the main effect of the higher VAT will be
felt by “end consumers,” which means private individuals, charities, financial
institutions and companies that are not in business. An example of a company not
in business is one that invests in real estate for the long term, not as a
Since real estate is probably the hardest hit, here are
a few examples of what happens before and after the expected VAT rate
When renting out real estate, the date of VAT
liability is determined on a cash basis. If rent is actually received before the
VAT rate change, the old rate applies even if rent is paid in advance. If rent
is received after then, the new rate applies.
This applies to commercial
rentals, as residential rentals remain exempt from VAT.
• When selling
Israeli real estate (or shares in a property company), the VAT liability arises
when the real estate is placed at the disposal of the purchaser, or registration
in his name, or whenever an amount is paid on account of the purchase price if
earlier. Therefore, home buyers who brought forward a payment to a point before
the rate change may escape the VAT increase on that payment. This also applies
if they took early possession before the rate payment. However, when selling
secondhand homes, private sellers not trading in real estate are not required to
• As for building services, the VAT liability arises upon
completion of the work and placing the real estate at the disposal of the party
who ordered the work, or upon making any payment on account. So anybody who paid
for building services before the rate change will be entitled to pay VAT at the
• As for “combination” deals (barter deals; e.g., completed
units in a new building in exchange for land), according to case law, if the
land owners deliver possession of the land to the builder before the rate
change, the old VAT rate will apply. In practice, possession is usually only
given once planning permission is obtained.Goods and services
other cases not involving real estate? If goods are sold, the VAT liability
arises when the goods are delivered to the purchaser.
So the old VAT rate
applies if the goods are delivered before the rate change. If delivery takes
place in stages, the VAT liability arises when each part is sold.
manufacturers with no more than six employees and annual revenues no more than
NIS 1,950,000, the VAT liability on assets sold arises when consideration is
received on the amount received.
In the case of consignment deals, if not
more than 10 percent of the price is due to a supplier before an onward sale of
the goods concerned, the VAT liability will generally arise upon the onward sale
In the case of services, the VAT liability arises when
consideration is received on the amount received. If amounts are paid on
account, the VAT liability applies to each payment.
If the parties are
related, or if the service is given by a business whose revenues exceed NIS 15
million in the year concerned, the liability generally arises when the service
If the service is given in stages, each stage is liable to VAT.
If the service is indivisible, VAT arises when each payment is made or upon
completion of the service, whichever is earlier.
As always, consult
experienced tax advisers in each country at an early stage in specific cases.