1. Overview
Value Added Tax (VAT) — known in Hebrew as Mas Erech Musaf (MEM, מע"מ) — is Israel's consumption tax, governed by the Value Added Tax Law 1975. It applies to the supply of goods and services in Israel and to imports. The system closely resembles European VAT, with input tax credits allowing businesses to recover VAT paid on their purchases against the VAT they charge on their sales.
For foreign nationals and businesses dealing with Israel, VAT raises several practical questions: when is Israeli VAT charged on transactions with them, when are they required to register, what zero-rating and exemptions apply, and how to recover VAT overpaid.
2. The VAT Rate
The standard Israeli VAT rate is 17% (as of 2024). This rate applies to most taxable supplies of goods and services in Israel. There is no reduced rate — unlike many EU countries — but there are specific zero-rated supplies and exempt supplies.
VAT is charged by VAT-registered businesses on their outputs and recovered (as input tax) on their business inputs. The net VAT is remitted to the Israel Tax Authority on a monthly or bimonthly basis.
3. VAT Registration for Foreign Businesses
A business that makes taxable supplies in Israel above the registration threshold (currently approximately NIS 120,000 per year in annual turnover) must register for Israeli VAT. This applies to:
- Israeli companies and sole traders conducting business in Israel
- Foreign companies with a permanent establishment or fixed place of business in Israel
- Foreign companies selling goods located in Israel
- Foreign digital service providers selling to Israeli consumers (see section 7)
VAT registration is done through the VAT Authority (Misrad MEM), and a registered business receives a VAT number. Registered businesses must issue proper tax invoices (heshbon mas) for all taxable supplies, file periodic VAT returns, and remit the net VAT collected.
A foreign business that only makes zero-rated supplies (see section 4) in Israel generally does not need to register — or may register voluntarily to reclaim input VAT.
4. Zero-Rating for Non-Resident Businesses
One of the most important VAT provisions for international transactions is the zero-rating of services supplied to non-resident foreign businesses. Under the Israeli VAT Law, services provided to a foreign business (not a foreign individual consumer) that is not VAT-registered in Israel are charged at 0% VAT — rather than 17%.
This zero-rating applies to:
- Professional services (legal, accounting, consulting) provided by Israeli service providers to foreign business clients
- Technology and software services exported to foreign businesses
- Marketing and management services provided to non-resident companies
The zero-rating is a significant benefit for Israeli technology and service companies exporting services abroad — it avoids Israeli VAT on their exports and allows them to reclaim input VAT on their Israeli costs.
Important limitation: The zero-rating does not apply to services whose benefit is consumed in Israel — e.g., real estate services related to Israeli property, services to a foreign company but with the benefit received in Israel (such as services to a foreign parent company for use by its Israeli subsidiary). The distinction between "benefit consumed abroad" and "benefit in Israel" requires careful analysis.
5. VAT on Real Estate Transactions
Israeli VAT treatment of real estate varies significantly by the type of transaction and the parties involved:
- New residential apartments sold by a developer: Subject to VAT at 17%. The developer is the VAT registrant and charges VAT on the sale price. First-time homebuyers and new olim may receive partial rebates under specific programmes.
- Sale of a residential apartment between private individuals: Generally VAT-exempt. A private seller who is not in the business of selling real estate does not charge VAT.
- Commercial property (offices, shops, warehouses): Subject to VAT at 17%, whether sold by a developer or by a VAT-registered business. Input VAT paid on purchase is recoverable if the purchaser is also VAT-registered and uses the property for taxable business purposes.
- Rental of residential property: Generally VAT-exempt — landlords renting out private apartments do not charge VAT and cannot recover input VAT on related costs.
- Rental of commercial property: Subject to VAT at 17% — VAT-registered landlords charge VAT on commercial rents.
The VAT treatment of a real estate transaction must be determined before closing — it affects the total cost to the buyer and the VAT recovery position.
6. VAT on Imports
Goods imported into Israel are subject to VAT (and customs duties where applicable) at the point of importation. The VAT is calculated on the customs value of the goods (including insurance and freight). Importers who are VAT-registered can recover the import VAT as input tax on their periodic VAT return.
Low-value imports (small parcels from abroad) are generally subject to VAT above certain thresholds — the rules for e-commerce imports have been tightened in recent years to align with international practices.
7. Cross-Border Digital Services
Israel has introduced rules requiring foreign digital service providers selling to Israeli consumers (B2C) to register for Israeli VAT and charge 17% on their supplies. This applies to:
- Streaming services (video, music)
- Online software and apps
- Cloud services and SaaS platforms
- Online gaming and gambling
- Digital content downloads
Foreign digital service providers that exceed the registration threshold (approximately NIS 120,000 per year in Israeli consumer sales) must register with the Israeli VAT Authority, charge 17% VAT on Israeli consumer transactions, file quarterly returns, and remit the VAT collected.
This applies regardless of whether the provider has any physical presence in Israel. Major platforms (Netflix, Spotify, Amazon, etc.) are already registered and compliant.
8. VAT Refunds for Tourists and Non-Residents
Tourists and non-resident visitors to Israel can claim a VAT refund on goods purchased in Israel and taken out of the country, subject to the following conditions:
- The purchase must be from a store participating in the "VAT Refund for Tourists" scheme
- The minimum purchase amount per store is NIS 400 (as of 2024)
- The goods must be taken out of Israel within 90 days of purchase
- The refund is processed at the airport through authorised refund companies
The refund is processed in cash or credited to a credit card, less a processing fee. Services (hotel, restaurants, tours) are not eligible for the tourist VAT refund — only tangible goods.