Welcome to the latest Tax Telegraph covering major Israeli/international tax developments.

In this edition:

  1. Doing Business in Israel – 2022
  2. Taxpayer Beats Persecution by Tax Officials.
  3. Crypto Currencies and NFTs in Israel.
  4. Ukraine and Israel.
  5. UAE and Israel
  6. USA and Israel – Tricky Israeli Tax Rulings
  7. Israeli Stealth Tax on Digital Products.
  8. Foreign Workers Levy Repealed.
  9. Disability Pension Forfeited Because Living Abroad.
  10. Fake Invoices.

These are news items not detailed advice. Please feel free to send comments and questions to: [email protected].  Experienced advisors should be consulted in each country at an early stage in specific cases.

© All rights reserved.

1.    Doing Business in Israel – 2022

It’s perfectly possible to make money in Israel and keep most of it. According to the OECD, Israeli tax revenues amounted to 29.7% of GDP in 2020, which was better than the OECD average of 33.5%. You are probably doing taxable business in Israel if you conduct business activities in Israel or operate in Israel via an agent who can commit you. Israel’s tax treaties and the OECD Multilateral Instrument refine these criteria for foreign companies.

Business Tax Rates:

For 2022, the regular company tax rate is 23%. The regular dividend tax rate is 30%-33% for 10%-or-more shareholders, 25%-28% for other shareholders, resulting in a combined tax burden on distributed corporate profits of 42.25%-48.41%, subject to any tax treaty.

Preferred income derived by preferred industrial and tech enterprises is liable to company tax of 7.5% in development area A, 16% elsewhere in Israel. Dividends are generally taxed at 20%. The resulting combined tax burden on distributed profits is generally 26% – 32.8% subject to any tax treaty. Lower rates are possible for certain large enterprises with annual revenues over NIS 10 billion. R&D grants, typically 50%, are also available.

The VAT standard rate is 17%.

International Agreements:

Israel has income tax treaties with 61 countries.

Israel is a party to US FATCA and OECD CRS information exchange arrangements and the Multilateral Instrument (MLI). Remittances to/from Israel are subject to tax compliance checks by the Israeli banks.

Israel has free trade agreements with: the USA, EU, UK, Canada, Columbia, EFTA, Mercosur Mexico, Panama, Turkey and Ukraine.

National Insurance (Social Security):

National Insurance (Bituach Leumi) rates include:

  •       Resident employees: 3.5%-12%;
  •       Employers of resident employees: 3.55%-7.6%;
  •       Freelancers: 5.97%- 17.83% (52% is tax deductible);
  •       Not working: 9.61%-12% (52% is tax deductible);
  •       Payment if no income: NIS 179 per month;

The above is subject to any applicable social security (“totalization”) treaty.


New residents and senior returning residents (lived abroad 10 years) are generally exempt from Israeli tax on non-Israeli source income for 10 years. The exemption does NOT apply to income for work done in Israel.

Reduced benefits may apply to returnees after 6 years’ residence abroad.

Olim also enjoy an exemption for 5 – 20 years regarding interest on Patach foreign-currency time deposits of three months or more at an Israeli bank.
On Israeli source income, new immigrants receive extra personal credits which reduce taxes by NIS 223 – 669 per month for three and a half years.

Foreign Expatriates in Israel

Israel’s tax treaties sometimes grant an income tax exemption for employees resident in those countries but working in Israel.

Otherwise, non-residents working in Israel lawfully in their field of expertise for an employer as “foreign experts” who are paid at least NIS 13,600 per month, may enjoy a deduction for accommodation expenses and  daily living expenses  of  NIS 340 for up to 12 months, provided they are invited by an Israeli employer that is not an employment agency.

Tax Registrations:

A business must register for Israeli tax purposes immediately the business activity starts

Pay Tax As You Go:

Every year, a business or investor will receive demands to pay VAT, payroll taxes, income tax, and tax installments on profits (Mikdamot).

Essential Paperwork:

There are strict bookkeeping and customer billing rules – approved Israeli software or printed books must be used.

Employees and Freelancers:

Salaries and freelancers pay taxes at rates ranging up to 50%.

Once employees have worked 3 – 6 months at a firm, they are entitled to mandatory pension and severance funding. The minimum pension fund contribution is 18.5% of gross salary. The employer generally pays 6.5% towards pension funding and 6% towards severance funding. The employee pays 6% towards pension funding.

Under approved ESOP plans, employees pay only 25%-28% tax if various conditions are met.

Real Estate:

Home rental income of up to NIS 5,196 per month is exempt for individuals. Thereafter, several possibilities exist – regular tax on net income, flat rate tax of 10%. Companies pay tax at regular rates.

Real estate acquisition tax rates range up to 10%. For an Israeli resident purchaser with no other home in Israel, the first NIS 1,805,545 may be exempt from acquisition tax.

The gain from the sale of an only home in Israel by a resident individual may be exempt from tax provided its value does not exceed NIS 4,603,000. Otherwise, real estate sales are generally taxed at 25%-50%.


Passive income derived by individuals from securities are taxed at rates of 25%-33%. Traders and companies pay tax at regular rates.

Estates, Inheritances and Gifts 
There is no tax in Israel on estate or inheritances, nor on gifts to Israeli residents.

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

Next Step:

Please contact us if you contemplate starting up in Israel: [email protected]


2.    Taxpayer Beats Persecution By Tax Officials

A returning resident taxpayer has scored a resounding victory in the District Court against nasty heavy-handed tactics applied by the Israeli Tax Authority (ITA)(Yaron Meir Vs Eilat Assessing Officer, Civil Appeal 21579-01-20, April 17, 2022).

Main facts:

The taxpayer left Israel in May 2007 to live in Kenya, then Tanzania, with his family. He went into business with three other non-residents to exploit in Tanzania a license from an unrelated Canadian public company to dye gasoline in order to prevent black market dealings. The operation in Tanzania had 80 employees. It was organized as a Tanzania as a company held by a BVI company in which the taxpayer had a 16.33% interest (rising to 24% when one of the other three shareholders died). The taxpayer returned to reside in Israel in July 2013 after living abroad over 6 years.

The main issue:

Section 14(c ) of the Income Tax Ordinance (ITO) grants an exemption from Israeli tax to returning residents who resided abroad at least 6 years. The exemption runs for 5 years regarding pensions, royalties, rent, interest and dividends derived from assets acquired while they were residing abroad (and for dividends and interest on foreign securities lodged in a specific bank account while they resided abroad). This is not as generous as the 10 year exemption for any foreign income or capital gains had they resided abroad at least 10 years.

In 2016 the ITA national assessment division began investigating the case in depth. In 2018 the taxpayer felt so persecuted by the ITA that he moved from Israel to live in New Zealand with his family and didn’t return.

The ITA persecution apparently included freezing the taxpayer’s assets, inaccurate recording of answers in negotiations, demanding documents (which he claimed he didn’t have) with a threat of fines or prosecution, followed a day later with a surprise visit by ITA officials at his home. They were looking for files showing management of the BVI company, as the taxpayer claimed a deduction of home expenses against fortnightly dividends from that company.

The ITA claimed: (1) the dividends from the BVI company were really business income (because of the expenses) which was ineligible for the 5 year exemption, and (2) the taxpayer didn’t really reside abroad for 6 years

Court Judgement:

The Court accepted the taxpayer’s appeal against an ITA tax assessment for NIS 9 million, awarded him costs of NIS 100,000 (a high amount that sends a message) and criticized the ITA on many grounds, including the following:

  •        Claiming an unconditional exemption for returning residents under Section 14(c ) of the tax law was legitimate tax planning intended by the Knesset.
  •        Claiming a legislated exemption does not justify a surprise home visit, asset freeze and reclassification as business profit.
  •        Disproportionate and unreasonable use of search powers while assessment procedures were still in progress after the taxpayer already provided the information needed (financial statements, bank statements, dividend confirmations, etc).
  •        The surprise visit contravened Tax Circular 21/2001 that says home visits must be with prior approval from the taxpayer, to inspect book-keeping, not other things.
  •        The ITA could not use a surprise home visit bypass the taxpayer’s accountant (ITO Section 135(1)(a)). The accountant had requested all communications be through him only the day before.
  •        The Court ruled the payments were dividends factually and legally. The taxpayer didn’t provide any services for them. Directors don’t have to be paid directors’ fees.
  •        Dividends are recognized in the Israeli tax system.
  •        The frequency of payments here evidences the profitability (of the Tanzanian operation).
  •        The ITA changed its mind what the payments were – first earned income, then business profit, making it difficult for the taxpayer to respond.
  •        If the ITA thought the home office expenses were disallowable, the ITA could have disallowed them.
  •        The ITA conceded later in the process that the taxpayer resided abroad over 6 years.
  •        The ITA didn’t even try to claim taxable “control and management” over the BVI company (presumably as the taxpayer was a minority shareholder).


It remains to be seen whether the ITA will appeal the decision.

In our experience, such rough stuff is avoidable by: (1) selecting an accountant with international experience, (2) forming an Israeli consulting company to pay tax on the Israeli portion of the activity only.

In a separate case regarding eligibility for a disability tax exemption, the Supreme Court ruled the ITA cannot impose taxes, change their rates or harm human rights except as expressly provided by law (Sarel Shabaton 8958/07 of August 18, 2011).

Next Step:

Please contact us if you need help taming the Israeli Tax Authority: [email protected]


3.    Crypto Currencies and NFTs in Israel

The Israeli Tax Authority (ITA) issued an announcement on March 6, 2022, saying that Non-Fungible Tokens (NFTs) are considered taxable assets, not exempt personal possessions. This was based on an earlier tax circular dealing with crypto (virtual) currencies such as bitcoins (Circular 05/2018). Let’s review both crypto currencies and NFTs.

The problems:

Crypto currencies aren’t issued by governments (fiat currency), they are “mined” by private sector parties using computers powered by a lot of electricity. So governments feel out-manoeuvred. Furthermore, due to lack of transparency on some online platforms, crypto currencies are allegedly sometimes used to facilitate crime and tax evasion.

According to Wikipedia and others, an NFT is a unit of data stored on a blockchain, a form of digital ledger, that can be sold and traded. Types of NFT data units may be associated with digital files such as photos, videos, and audio. Because each token is uniquely identifiable, NFTs differ from blockchain cryptocurrencies, such as bitcoins.

Banks in Israel are reluctant to accept bitcoins and unlikely to accept NFTs.

Virtual currencies – are they currencies?

According to ITA Tax Circular 05/2018, foreign exchange differences arising from changes in currency exchange rates may be exempt from Israeli tax under various sections in the Israeli tax law if certain conditions are met. The word “currency” isn’t defined in the tax law, but it is defined in the Bank of Israel Law, 2010, as the New Israeli Shekel. And “foreign currency” is defined in the same law as “bank notes or coins that are legal tender in a foreign country”.

Crypto currencies – Income / capital gains tax treatment:

Given the above, the ITA contends that distributed means of payments (=virtual or crypto currencies) do not count as “currency” or “foreign currency”. Therefore, the ITA claims that various exemptions for currency gains apparently do not apply to crypto currency gains.

Instead, the ITA says that crypto currencies, whether tangible or intangible, are taxable capital assets (ITO Section 88). Accordingly, the ITA contends:

  •        A sale of a crypto currency is generally subject to Israeli capital gains tax (up to 33%);
  •        But if the activity amounts to a business, based on case law criteria (business organization, expertise, frequency, etc) income tax is applicable (up to 50%);
  •        In particular, mining of crypto currencies (i.e. minting them) is a business activity;
  •        The tax treatment for barter transactions applies;
  •        Anyone selling an asset or service in consideration for a crypto currency is taxable twice: (1) on the profit from the asset or service; (2) on any subsequent increase in value when selling the crypto currency.

Crypto currencies – VAT treatment:

The ITA Circular says that VAT (17% generally) applies to transactions from business activities such as mining crypto currencies.

But the ITA Circular claims that business sales of crypto currencies are activities of a financial institution like a bank or insurance company – these may in principle be subject to 17% Wage and Profit Tax in lieu of VAT. If so, the purchaser cannot recover such tax as input VAT. In practice, this does not always happen….

NFT tax treatment:

The recent ITA Announcement of March 6, 2022, relates to “Taxation of Digital Assets” of the Non-Fungible Token (NFT) type.

The ITA reminds us that a taxable “asset” is defined (ITO Sec. 88 as above) as “any property, real estate or chattels….except chattels held by an individual for personal use..”.

So if an individual sells chattels (tangible personal possessions) such as jewelry or furniture used for non-business purposes, the sale is generally not liable to capital gains tax.

But the ITA says that since an NFT is a right to hold an intangible asset (even if it is a picture or virtual image), it isn’t a right to hold chattels for personal use. Therefore, the ITA says NFT sales are taxable.


The ITA wants tax, but the legislation need further clarification.

As for crypto currencies, the argument that crypto currencies aren’t legal tender is wearing thin, several countries are moving towards digital currencies. And most money is held electronically, not as tangible banknotes and coins.

As for NFTs, many people dispute the ITA’s argument that they aren’t personal chattels for personal use. The underlying asset may be a picture or other item for personal use. The blockchain technology used helps demonstrate historical ownership rights to capital assets just like the land registry (Tabu) and the companies registry.

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

Next Step:

Anyone holding crypto currencies or NFTs should obtain professional advice.


4.    Ukraine and Israel

While the Jews can never forget the Holocaust, Ukraine can never forget the Holodamor in which around 4 million people starved to death under the Stalin regime in 1932-1933.

The Ukrainian economy is varied and built on industry, agriculture mining, chemicals and hitech. There is said to be a good education system and highly trained labor. Israelis and others regularly outsource software writing to Ukraine.

The official currency of Ukraine is the Hryvnia (UAH). One US dollar is worth around UAH 30.

The standard rate of corporate income tax in Ukraine is generally 18%, and dividends distributed to non-Ukrainian residents are generally subject to 15% withholding tax. Individuals generally pay income tax at a rate of 18% and a defense levy of 1.5% dating back to 2014. Companies also pay social security contributions of 22% of employment income, employees don’t pay this. Inheritance tax ranges up to 18%. Annual wealth taxes are imposed on real estate and certain cars . VAT rates range up to 20%. Ukrainian tax advisors should be consulted.

Ukraine-Israel trade reportedly exceeds $1 billion annually.

Israel-Ukraine Free Trade Agreement

An Israel-Ukraine free trade agreement went into effect on January 1, 2021. It aims to eliminate or reduce tariffs on exports from each country to the other. In Israel, this is applicable to Ukranian products such as wheat, fish and processed foods, sweets, nuts, juices, baked products, poultry, dairy products, vegetable oils, eggs, honey as well as raw materials such as iron, steel and oils. In Ukraine, this should apply to Israeli products such as medical equipment, plastics such as irrigation pipes, rubbers, chemicals, machinery, wines, avocadoes, peppers, other fruits and vegetables and other food products.

The two countries also committed to simplify their customs procedures to the greatest extent possible and make use of information and communications technology in their customs procedures (Article 3.2). The agreement also facilitates advance rulings (Article 3.7) and Authorized Economic Operators (AEOs) (Article 3.9).

Each side reaffirms its obligation to conserve and protect the environment under national laws and international agreements (Chapter 7). Dispute resolution procedures are specified including, consultation, conciliation and good offices, mediation, arbitral tribunals and WTO procedures.

Israel-Ukraine Tax Treaty:

The Israel-Tax Treaty went into effect on January 1, 2007.

The treaty definition of a taxable permanent establishment (branch) includes a warehouse or other structure used as a sales outlet.

The Treaty specifies reduced withholding tax rates for payments from one country to residents of the other country. For dividends, the treaty withholding rate is generally 5% if the recipient is a company holding at least 25% of the dividend payor company, 10% (not 5%) if the payor is an Israeli company enjoying lower than normal tax rates, 15% in other cases.

For interest payments, the treaty withholding tax rate is generally 5% on bank loan interest, 10% in other cases.

For royalties, the withholding tax rate is generally 10%.

Artistes and sportspersons resident in one country who visit the other country and are not supported by public funds may be taxed in the other country on their activities there even if the income accrues to a company they control. More lenient rules apply to visiting independent service providers and employees. Pensions in consideration of past employment are only taxable in the country of residence. Visiting students are not taxed in a country on payments from sources outside the country visited for education or training.

Double taxation should be avoided by a foreign tax credit. Information exchange is permitted between the respective competent tax authorities.

Tax treaty relief from one country is conditional on presenting a certificate of residency and income disclosure from the home country tax authority.

Both Israel and Ukraine are signatories to the OECD Multilateral Instrument which aims to strengthen tax anti-avoidance aspects of the bilateral treaty.

 Israel-Ukraine Social Security Agreement:

A draft social security agreement was apparently concluded in 2014 but never ratified. A copy of the draft is to be found in English on the internet, but not on the National Insurance Institute website in Hebrew. Once ratified, this may help avoid double national insurance liabilities for relocated employees and allow Ukranian Olim to receive Israeli old age pensions based on Ukranian contributions and Israeli contributions.

Israel-Ukraine Space Treaty:

In 2001, Israel and Ukraine signed an agreement for cooperation in the field of research and use of Space for peaceful purposes. This facilitates cooperative civilian programs relating to satellite instrument observations and measurements, ground-based observations, space related research using ground-based facilities, as well as students’ and scientists’ exchange programs and educational activity.

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

Next Step:

Please contact us if you contemplate Ukraine-Israel business: [email protected] 


5.    UAE and Israel

 On April 1, 2022, the Israeli and UAE Governments announced they have completed negotiations on a free trade agreement (the agreement) between the two countries.

This is reported to be a comprehensive agreement that includes issues regarding trade in goods such as regulation and standards, customs, trade in services, cooperation, government procurement, electronic trade and maintaining trademarks.

95% of the goods traded between the two countries are included in the agreement and will be exempt from customs either immediately or gradually: Food products, agriculture, cosmetics, medical equipment, drugs and more.

The agreement should also advance bilateral trade in services by assuring regulatory certainty in fields such as electronic trade, professional and business services, distribution services (wholesale and retail) and computers.

The agreement is expected to take effect after signature by Economy and Industry Ministers and ratification in the two countries.

This agreement follows the Abraham Accords, signed in September 2020, which are the basis for diplomatic relations between Israel and the UAE

Since the advent of the Abraham Accords, trade between the UAE and Israel has grown significantly and reached almost $900 million in 2021.

The potential for trade between the two economies is considered much greater and includes many fields such as energy, health, digitization, medical equipment, water (desalination, purification, conservation and smart management), agriculture, cyber, Fintech and diamond exports.

The UAE has the second largest economy in the Arab world after Saudi Arabia.

Israel-UAE Income Tax Treaty

The above free trade agreement deals with import taxes. On January 1, 2022, an Income Tax Treaty (the Treaty) also became effective between Israel and the UAE.

Currently the UAE generally does not enforce income tax collection except in the oil and financial sectors, so double taxation may not be an issue. But from June 1, 2023 the UAE is due to start imposing 9% corporate income tax on profits over AED 375,000 (around USD 102,000),

Persons covered:

The treaty generally applies to persons who are residents of one or both countries.

Taxes covered:

The Treaty applies to income tax and corporate tax in the two countries, Israeli real estate taxes and the petroleum profits levy of up to 50% which applies to Israel’s Mediterranean gas.

How is Israel defined?

The term “Israel” means the territory in which the Government of Israel has taxation rights, including its territorial sea and adjacent maritime areas.

Who is a resident?

An Israeli resident is any person liable to tax in Israel by reason of his domicile (not defined), residence, place of management or place of incorporation.

A UAE resident individual is someone present in the UAE 183 days or more in each tax year concerned and the previous tax year, provided such individual can prove that he is a domicile of the UAE and his personal and economic relations are closer to the UAE than to any other State.

This means it may be hard for ex-Israelis to become UAE residents for treaty purposes. If they succeed, Israel is expressly allowed to impose its exit tax (really capital gains tax up to 33%). Israel may also tax their Israeli pensions. And they are not entitled to benefits under the treaty for at least 5 years!

Partnership, trust or controlled foreign affiliate (not defined):

Israel may impose tax “on amounts included in the income of a resident of Israel with respect to a partnership, trust or controlled foreign affiliate in which that resident has an interest”.

Permanent establishment (branch):

Detailed rules will apply e.g. Israel can tax a UAE company which has in Israel: a fixed place of business, an installation project or substantial equipment for more than 6 months; a warehouse that is more than preparatory or auxiliary in character; a cohesive business operation split among closely related enterprises; a person in Israel who plays a principal role in concluding contracts; or a closely related agency company (over 50% control). All this may hamper e-commerce.

Withholding taxes:

Israel generally withholds 20%-25% tax at source. The treaty should reduce these rates to:

  •        0%-15% for dividends and interest
  •        12% for royalties.

Capital gains:

Detailed rules are prescribed. Capital gains from real estate may be taxed.


Relocated employees present under 183 days in any 12 month period in the other country may be exempted by the other country if certain conditions are met.

Avoiding double taxation:

A foreign tax credit is prescribed.

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

Next Step:

Please contact us if you contemplate UAE-Israel business: [email protected]


6.    USA and Israel – Tricky Israel Tax Rulings

The Israeli Tax Authority (ITA) has just published a battery of anonymous rulings regarding the interaction between US and Israeli taxes. These are important when seeking to avoid double taxation.

The rulings matter if you are a US citizen or resident or an Israeli resident with US interests. And if you think a US LLC (Limited Liability Company) is okay, read on.

US LLC and Israeli exit tax:

In 2005 an Israeli citizen and resident acquired over 30% in a US LLC engaged in business in the US. In 2009 he and his family became US residents. In 2020, he sold around 80% of his LLC holding. The LLC was a transparent “flow-through” entity for US tax purposes, meaning US tax on the LLC owners not the LLC itself. Israel imposes an exit tax, really capital gains tax of up to 33%, on Israeli resident individuals who stop residing in Israel. The exit tax liability arises on the day before departure from Israel, but the individual may choose to pay it when selling the asset, on the pre-departure portion of the gain. The question here is whether US taxes on the actual sale qualify for a foreign tax credit against the Israeli exit tax?

Tax Ruling 8808/22 ruled no, the ITA will NOT allow a foreign tax credit for the US tax. This is because a flow-through LLC is not considered US resident according to the US-Israel tax treaty. Moreover, the ITA argues that US law does not contain any provision allowing the US to tax the individual when the Israeli exit tax liability first arose, the day before departure from Israel. The Ruling also says the ITA intends negotiating the matter with the IRS and if no agreement is reached, the ITA will apply a mechanism for dealing with double taxation. Comment: The Ruling does not spell out the mechanism. This perpetuates uncertainty. The taxpayer should have considered alternative action at the outset.

US LLC in an Israeli M&A deal:

In another Ruling (5559/22), a US resident corporation acquired an Israeli resident via a subsidiary LLC, and the two US entities filed consolidated US tax returns. The question was whether the LLC qualified for benefits under the US-Israel tax treaty? Unlike the above case (in ruling 8808/22) the ITA rule that the LLC did qualify for treaty benefits but only because the LLC had filed an election with the US to be opaque (not a transparent flow-through) for US tax purposes.

Big sting for Israeli resident CEO who is also a US citizen:

In Tax Ruling 2007/22, Mr A is a busy jet-setting Israeli resident and US citizen. He works in Israel and the US as President and CEO of a publicly traded group with a US resident parent corporation and an Israeli resident subsidiary.  He receives all his salary from the Israeli subsidiary, but a portion of the salary cost is re-charged to the US parent pro rata to days worked in the US. The Israel subsidiary withholds US taxes from the salary regarding days worked in the US, as required by US law. The Israeli subsidiary also withholds Israeli tax, apparently from worldwide salary. The question was whether a foreign tax credit is allowed in Israel for days worked in the US?

The Ruling decision starts off okay – it allows a foreign tax credit subject to limitations, but not exceeding the Israeli tax and not to the extent expense deductions are claimed under Israeli tax regulations. Deductions are available for accommodation, child education, health care, flights. There is also as a per diem meal allowance if the employer is not Israeli resident.

But there is a sting in the tail. The individual’s employment package includes securities, presumably stock options or restricted stock units (RSUs). The Ruling says US tax on securities would not qualify for a foreign tax credit in Israel if imposed merely because the individual is a US citizen.

Comment: This is a coded message. Under the US-Israel treaty, Israel gets a first right to tax securities in a US corporation of an Israeli resident holding under 10% of the voting power throughout the year preceding a sale. This means no foreign tax credit for US tax on such securities’ gains. This is notwithstanding a “saving clause” in the US-Israel tax treaty allowing the US to keep taxing US citizens.

Concluding remarks:

Israeli residents should treat LLCs with extreme caution. And if you are a jet-setter, check your taxability and foreign tax credit rights in each country concerned, not only in Israel.

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

Next Steps:

Please contact us if you have or contemplate having a US LLC, stock options or stock in a US corporation.


7.    Israeli Stealth Tax on Digital Products

The Israel Tax Authority (ITA) has quietly started making Israeli banks withhold 17% VAT on imported digital products, such as digital books, movies and music, causing shock waves.

This affects international exporters and Israeli importers of digital products.

The good old days:

The Israeli VAT Law dates back to 1976 when digital products didn’t exist.

If an Israeli company imports physical products, such as books made from paper, such items pass through Israeli Customs at the port or airport. Israeli Customs then collect import taxes at applicable rates and VAT at the standard rate of 17%.

If the importer is a consumer (B2C, business to consumer) that person swallows the taxes.

If the importer is a business (B2B or business to business), it will generally pay the import taxes and VAT, and recover the VAT on import as input VAT on its next VAT return.

Enter the Internet:

If the importer buys a digital product, the product is zapped over the internet and the importer downloads it to his or her computer. No Israeli customs, no import taxes, no VAT.

Importers that are businesses typically want to be compliant, so they are allowed to issue themselves invoices on behalf of an unregistered foreign supplier. This is known in Europe as the “reverse charge” mechanism and is allowed in Israel under VAT Regulation 6C if no Israeli bank is involved. The business importer pays 17% Israeli VAT on behalf of the foreign supplier, and then immediately (or within 6 months) claims the same VAT back as input VAT on its next VAT return.

Enter the ITA:

The ITA has quietly issued an instruction to the Israeli banks requiring them to disregard “reverse charge” invoices issued under VAT Regulation 6C.

This is under VAT Law Section 26(b) which was amended in 1998 (not just now) to read: “Upon import of intangible (=digital) products, as well as newspapers, written documents and other printed matter, imported by mail, VAT shall apply when purchasing foreign currency at a financial institution to pay for their purchase, or upon transferring foreign currency to the seller, or…when giving the consideration”.

So the ITA is apparently interpreting “mail” to include email and downloads from the internet.

And Israeli banks are now starting to withhold 17% VAT from payments for imported digital products.

How does a B2B importer of digital products recover the VAT?

Section 38(a) of the VAT Law allows a business to claim input VAT on lawfully issued Tax Invoices, import declarations or “Other Documents” approved by the ITA Director. So the Israeli banks have started issuing “Other Documents” and stopped recognizing reverse charge invoices.

More issues:

In our view, the law needs clarifying at the Knesset. And the ITA or the Israeli banks should inform the public of any updated procedure.

There is a question who bears the VAT withholding. If it is the Israeli purchaser, VAT refunds take time. If it is a foreign supplier not registered for Israeli VAT purposes, that supplier may forfeit the VAT altogether.

Worse still, what happens if the bank needs to withhold income tax (typically up to 25%) in addition to 17% VAT? Is that 25% of 117% of the price? We don’t yet know.

This matters because some digital products are licensed not sold outright and may have a royalty element. For example, if you download a digital book or software to duplicate and circulate within Israel, there may be income tax to withhold of up to 25% because of the copyright.

Is there a solution?

Check out tax treaties. For example, in the case of a Hollywood movie, the US-Israel tax treaty limits the withholding tax to 10% (or 15% for other industrial royalties). Israel’s other tax treaties also contain royalty withholding tax limits.

Do tax treaties override VAT withholding on top of income tax? That is an open issue. Tax treaties usually say which taxes they cover. For example, the US-Israel tax treaty covers: “taxes imposed by the Israeli Income Tax Ordinance, by the Land Appreciation Tax Law… and other taxes on income administered by the Government of Israel”.

So a business importer of a movie or other digital products from the US might claim that Israeli banks can only withhold 10%-15% tax at source, whatever the tax is called….

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

Next Step:

Please contact us if you are engaged in e-commerce, this is a dynamic subject and there are various issues to address. Check with your bank before paying for digital products.


8.    Foreign Workers’ Levy Repealed

For a change, here’s some good news on the Israeli tax front. On February 2, 2022 the Knesset passed a law repealing the foreign workers’ levy with effect from January 1, 2022 (Israeli Economic Recovery Law (Amendment 20) 2022, Book of Laws 2956).

The foreign workers levy was a payroll tax over and above income tax and national insurance. The levy was imposed on employers generally at the rate of 20%, but at 15% for foreign workers in industry, construction or certain restaurants and at 0% in agriculture.

Now this levy won’t apply starting with the January 2022 payroll.

The same law also repealed the requirement for employers to provide medical insurance for foreign “workers” who visit Israel on a “working vacation” for up to 12 months of which up to 3 months is spent working. This applies to Israeli government arrangements with the governments of Australia, New Zealand, Germany, Korea.

Comment: Please be sure to arrange private medical cover if you are not already covered.

9.    Disability Pension Forfeited Because Living Abroad

The regional labor court has rejected a claim by an individual to receive disability social security payments from the National Insurance Institute,  because she resided abroad for around 13 years (Case BL 18436-01-19 Yafa Amzaleg vs. National Insurance Institute, January 15, 2022).

In this case, the individual apparently received a general disability pension from the National Insurance Institute for 17 years up to the end of 2009. In the years 2004-2016 she spent most of the time in the US but spent around 5.5 months per year in Israel with a view to to preserving health fund (Kupat Holim) rights. In 2010, the National Insurance Institute decided she was a foreign resident having regard to her center of living from 2004 and ruled she was retroactively ineligible for the disability pension payments. This meant she to repay of around NIS 150,000. She returned to reside in Israel in 2017 more than half the year.

She appealed the National Insurance Institute decision and got 75% of the repayment balance cancelled in 2017 and a further 10% in 2018. She appealed the remaining 15% repayment liability in this court case, but her claim was rejected by the Court. Why?

She claimed she tried for 40 years without success to get medical treatment in Israel, so she was forced to seek the treatment abroad. She claimed she never intended to stop residing in Israel, she stayed with friends and lived off pensions and loans. She was born in 1955.

But she failed to prove she received medical treatment abroad and it emerged she received treatment in Israel.

Also, in 2004-2016 she spent most of her time abroad, and could not prove family or social ties to Israel, nor a bank account. She was not told to seek foreign medical treatment, and she did not notify the National Insurance Institute she would be away more than 183 days to seek medical treatment. This would have helped her case under Section 324A of the National Insurance Law.

In short, the court held she was foreign resident in the relevant years so her appeal against refunding the last 15% of the overpaid pension was turned down.


The national insurance rules regarding residency (center of living) are less detailed than the income tax rules (which are also open to alternative interpretation sometimes). Returning residents are usually denied health care for 6 months unless they pay a lump sum for it – NIS 12,210 in 2021. The National Insurance Institute will only “insure” (i.e. provide pensions, allowances and heath care) to Israeli residents based on the overall facts and circumstances over a number of years.

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

Next Steps:

Please be sure to arrange private medical and pension cover for and your family if your case is borderline.

10.                     Fake Invoices

The Israeli District Court rejected an appeal by a fire extinguisher supply company which claimed input VAT on expense invoices (Ayin Mem 65014-11-18 handed down on December 23, 2021). The VAT Office hired a graphologist who testified the expense invoices were issued unlawfully by the company. Then the VAT Office traced the printer of the fake invoices and found the company itself paid for them. The fake invoices proved costly: double the VAT on the fake invoices, books held to be unacceptable (meaning VAT and income tax estimated by the Tax Authority in 2012-2017) and NIS 100,000 in legal costs.

Comment: Only a registered Authorized Dealer can issue legal tax invoices in a prescribed format. Don’t fake them.

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

Next Step:

Please contact us if you require accounting assistance or advice regarding billing customers. 

[email protected]

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

(c) 23.5.22

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