The latest budget for 2023-24 that has been approved by the Knesset contains various measures relating to e-invoice numbers, small businesses, rental income taxed at 10% and much more.
Below is a review of some income tax and VAT measures (Economic Efficiency Law (Legislative Amendments To Achieve Budgetary Goals for Budget Years 2023-2024), 2023, SH 3045 published May 31, 2023).
ITA Invoice Numbers
Commencing Jan. 1, 2024, invoices above NIS 25,000 before VAT must bear invoice numbers allocated by the Tax Authority (ITA) so that the customer may recover input VAT on the invoice. The supplier may apply online for the ITA invoice number and must do so if the customer demands it, unless 0% VAT applies. The supplier must record the ITA number on the tax invoice. This may be done in handwriting.
The aim is to counter fictitious invoices by denying customers input VAT recovery regarding (bigger) expense invoices that the ITA may not know about.
By January 2028, the above threshold amount for an ITA invoice number will decrease from NIS 25,000 to just NIS 5,000 before VAT. These rules expire at the end of 2028, unless renewed.
If the ITA suspects that an invoice will be issued unlawfully, it may immediately notify the supplier that no number is being issued and will invite the supplier to a hearing within two business days in person or by video conference (Currently, the ITA doesn’t hold meetings by Zoom or similar applications but hopefully, this is changing). In such a case, the ITA may also allow the customer to apply a reverse-charge (self-invoicing) procedure using the ITA invoice number.
For example, Avi is a freelancer who must pay Ben Ltd. NIS 25,000 plus 17% VAT (NIS 4,250) in 2024. Ben Ltd. must obtain an ITA invoice number from the ITA and state the number on its tax invoice to Avi and pay over the NIS 4,250 to the ITA (generally, monthly). Avi can only recover the NIS 4,250 input VAT if he has the tax invoice with the ITA invoice number.
In addition, the new budget allows a start-up business to recover input VAT on invoices paid before the business registered for VAT purposes if the invoice has an ITA invoice number and, in exceptional circumstances, even if it does not have such a number.
Detailed instructions are still pending. Amended accounting and invoicing software will be needed and certain real estate deals are also affected. Businesses should request ITA invoice numbers from their suppliers starting towards the end of 2023. We also await detailed rules for foreign e-commerce suppliers.
The budget tries to make things easier for small businesses and in years 2024-2026, the maximum annual revenue for an exempt dealer (Osek Patur) for VAT purposes will be NIS 120,000 per annum, up from NIS 107,692 in 2023.
Moreover, commencing 2024, a freelancer with annual revenue up to NIS 120,000 may elect to be a Small Dealer (Osek Zair) when filing an annual income tax return, and claim a flat expenses deduction of 30% of revenues for income tax purposes. This is instead of deducting actual expenses.
The 30% expense deduction will not be available if any of the following apply: employees, inadequate books, unearned business income (unclear, undefined), employer or ex-employer (in the three preceding years) also pays freelance income, part of income is from a transparent entity (house property or family company apparently), over 25% of freelance income is from a related party, 10%-or-more shareholders (in any company, apparently), anything else prescribed by the Finance Minister.
If an ex-small dealer disclaims this status in any year, the disclaimer generally covers the following two years as well.
If the small dealer sells a fixed asset such as real estate, depreciation not separately claimed under the 30% rule is still added to the taxable “sale value” (not deducted from index-linked cost).
Residential Rental Income
As many be aware, landlords of Israeli residential homes may elect to pay a flat rate of tax at 10% of gross rental income, with no deduction for expenses or depreciation. This is an alternative to paying regular tax rates of up to 50% on net rental profit after deducting expenses and depreciation.
Commencing in 2023, expenses of up to NIS 90,000 per year may be deducted if these expenses relate to the rental of an only home (generally) in Israel, and the landlord or their spouse resides in an old-age home or in a geriatric hospital. The expenses may not be paid to a relative.
The above is not exhaustive, so as always, consult an experienced tax adviser in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.