Duty-free VAT lessons - opinion

A district court has just issued a judgment clarifying when zero-rate VAT applies to services for foreign residents.

 Illustrative image of doing taxes. (photo credit: PXHERE)
Illustrative image of doing taxes.
(photo credit: PXHERE)

We all know about duty-free shops at Ben-Gurion Airport, but few know about the related Israeli value-added tax rules, including the Israeli VAT Authority, it seems.

A district court has just issued a judgment clarifying when zero-rate VAT applies to services for foreign residents (Hagshama Cosmic Project Management Ltd vs Tel-Aviv & Central VAT Director, 21657-11-19, of July 10, 2022).

Main facts

The taxpayer supplied personal sales promotional services at sales counters to foreign producers of international branded products sold at the Ben-Gurion Airport duty-free store managed by James Richardson Pty Ltd.

The main issue was whether the sales promotional services were properly billed out since 2013 as export services with zero-rate VAT. Zero rating is not the same as exemption; it means no VAT on sales, but input VAT may be recovered on local Israeli expenses. However, the legislation surrounding VAT zero rating is long-winded.

The zero-rate VAT conditions

VAT Regulation 12A says zero-rate VAT will not apply to a service given regarding an asset in Israel. But there is an “exception to the exception” – zero-rate VAT applies if it is proven to the satisfaction of the VAT director that the consideration for the service represents part of the import value of goods fixed for Israeli customs purposes.

In this case, it was claimed that the foreign producers pay for services brought into account the cost of the sales promotional service in pricing their products to James Richardson, so zero-rate should apply to those services. The amount of VAT at stake over the period 2013-2017 was around NIS 9 million (before interest, etc.).

The Israeli VAT Authority claimed it was not satisfied that the service was in practice included in the supply chain. The problem revolves around VAT Commentary 2/96, which says the purpose of zero-rating services included in the import value of goods for customs purposes is to avoid double taxation – VAT on the services and VAT on the goods imported into Israel. If there is no double taxation, why should the services be zero-rated?

There was no dispute about the producers being foreign residents or about the services relating to assets in Israel, nor even that the duty-free store counts as part of Israel.

The court judgment

The court ruled decisively against the VAT Authority’s interpretation, saying: “To sum up this issue, I don’t think it is possible to interpret the language of the exception to the exception – the prevailing law – to require payment of actual tax upon import or sale of the products. Furthermore, in the present case, the legislature and the secondary legislature (the Knesset Finance Committee, which issues regulations) designed arrangements that benefit the duty-free sector (including zero-rate VAT) to incentivize the purchase of various products while the passengers are still in Israel rather than when they are abroad. Acceptance of the position (of the VAT Authority) would diminish this incentive, not just indirectly, with no basis in the law.”

In other words, zero-rate VAT is not limited to cases of double taxation; it can apply to duty-free goods.

The court rejected the VAT Authority’s claim it was not satisfied that the cost of the sales service was indeed included in the price of products and ruled that the taxpayer had satisfactorily proved that the service cost had been brought into account in the import value of the products for Israeli VAT purposes. Therefore, the court ruled zero-rate applied to the duty-free sales services.


Israeli VAT rules generally follow VAT principles in other countries. But Israeli VAT rules are stricter for export services than in most other countries. The fear is that Israelis will try to engage in “round tripping” – trying to bill someone abroad at zero-rate VAT when it is possible to bill a party in Israel with the addition of standard rate VAT, currently 17%.

How does the VAT Authority detect problematic cases? By making inquiries when monthly VAT returns reflect zero-rated sales.

What can be done? Use this case for imported goods, or consider invoicing business customers in Israel with the addition of 17% recoverable VAT.

As always, consult experienced lawyers and tax advisers in each country at an early stage in specific cases. The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. [email protected]