Dear Clients and Friends,

We would like to bring to your attention the latest updates in the field of value-added tax that will come into effect on January 1, 2025.

• Increase in the VAT rate to 18%

As of January 1, 2025, the VAT rate in Israel will increase by one percentage, from 17% to 18%. Accordingly, the rate of wage and profit tax paid by financial institutions will also increase by one percentage, from 17% to 18%.

It should be noted that the wage tax imposed on non-profit organizations will remain in place. For the interpretation provision published by the Tax Authority regarding the increase in the VAT rate to 18%, click here.

• “Israel Invoices Reform” – Reducing the transaction amount required to receive an allocation number from NIS 25,000 to NIS 20,000.

1. As of January 1, 2025, dealers (taxpayers for VAT purposes) (hereinafter: “Dealers”) will be required to receive and indicate the allocation number on tax invoices exceeding NIS 20,000 without VAT (it should be clarified that these are tax invoices whose billing date is as of January 1, 2025). It should be noted that in 2024, dealers were required to apply for allocation numbers when the amount of the tax invoice without VAT exceeded NIS 25,000.

2. In 2024, the Tax Authority was obligated to grant an allocation number for each applicant. However, as of January 1, 2025, the Tax Authority will be entitled to refuse a request to assign a number to tax invoices, if there is a concern that the invoice will be issued illegally. In such a case of refusal to allocate an invoice number, the dealer may act in one of the following ways: (1) Withdraw the request for an invoice allocation;( 2) Transfer the tax liability to the buyer (by issuing a self-invoice by the buyer); (3) Issue the invoice without an allocation number (in this case the invoice will not be allowed to be deducted by the buyer); (4) Request a hearing. As part of the hearing process, the dealer has the right to present their arguments to the manager within two business days of receiving the denial notice. The manager will make a decision regarding the hearing within one business day after hearing the arguments. If the dealer is not satisfied with the manager’s decision, they can appeal it through an objection process (the results of the objection process can further be appealed to the District Court).

3. Regarding transactions that are subject to reporting on a cash basis, a dealer can request an “allocation confirmation” (approval in principle for future receipt of an allocation number) from the Tax Authority, for a preliminary document for a tax invoice or proforma invoice. It is important to note on the preliminary document that the “allocation confirmation” is not an allocation number and cannot be used to deduct input tax.

4. It should be noted that both financial institutions and non-profit organizations that purchase real estate in a random transaction or make improvements to it, are required to request an allocation number in order to be able in the future, if they sell the land, to deduct the tax paid due to the purchase of the real estate and its improvement from the tax they will be liable for, in accordance with the provisions of Section 43A of the VAT Law.

To read the new Executive Directive click here, to read the updated version of the Guidelines for Software Manufacturers click here.

 It should be emphasized that in the framework of the economic plan for 2025 that will be presented below, it is proposed to reduce the aforementioned amount from NIS 20,000 to NIS 5,000.

• The following is a review of the main changes proposed in the VAT Law in the framework of the Economic Plan Bill (Legislative Amendments to Achieve the Budget Targets for the 2025 Budget Year)-2024 (hereinafter: the “Economic Plan”):

1. Investment Funds – In order to provide the business sector in Israel with the opportunity to attract investments to Israel under better competitive conditions and thus encourage the high-tech industry and the growth of the Israeli economy, it is proposed to amend the VAT Law and determine that for management services provided to a fund in which foreign residents invest, consideration received from foreign residents for management services to the VAT fund will be subject to a zero rate. (It should be noted that this arrangement is currently implemented by the Tax Authority as part of a green track for venture capital funds that meet the conditions set by the Tax Authority). In addition, it is proposed to determine that success fees received by a managing partner in an investment fund, due to an investment in a financial asset, will be exempt from VAT. It should be noted that to date, the Tax Authority has refrained from ruling on this issue and has asked to examine each case on its own merits.

2. Cancellation of the Dealers’ Consolidation Arrangement – It is proposed to cancel the Dealers’ Consolidation Arrangement so that companies will no longer be able to register together for the purpose of VAT and submit one consolidated periodic report on all their transactions.

3. Enforcement of the Law for the Reduction of the Use of Cash – It is proposed not to allow the deduction of the input tax deriving from an invoice if there is a reasonable basis to assume that the payment for it was made in violation of the provisions of the Law for the Reduction of the Use of Cash, i.e., the consideration was paid in cash in an amount that exceeds the threshold set by the law. It should be noted that as of today, this is a sum of NIS 6,000 between dealers and an amount of NIS 15,000 between private individuals (except for such a transaction for the purpose of purchasing a vehicle, since in this case the amount that is allowed to be paid in cash is NIS 50,000).

4. Advancement of the Outline of the Israel Invoice Model – As stated above, it is proposed to cancel the mechanism that allows for the gradual reduction of the amount requiring an allocation number, so that it will be NIS 5,000 in 2025 (and not NIS 20,000 as enacted). In the original bill, the Minister of Finance was granted the authority to extend or change this clause in future orders. Now, given the proposal to fully implement the model, there is no longer a need for a clause granting the Minister of Finance this right. Therefore, it is proposed to repeal the aforementioned section of the law.

5. Digitization of invoices and reports to the tax system

Online I-Invoice – According to the proposal, Israeli dealers who conduct business with customers in the area (as defined in the VAT Law) and in the Gaza and Jericho territories will be obligated to issue I-Invoice online and deny the possibility of issuing I-Invoice offline, except for dealers who have received a permit to issue regular invoices.

Detailed Reporting Obligation – As part of the economic plan, it is proposed to apply the detailed reporting obligation as of January 1, 2025, to dealers whose turnover exceeds NIS 500,000. It should be noted that this obligation currently applies to dealers whose turnover exceeds NIS 1.5 million or NIS 2.5 million, in accordance with the conditions set out in Section 69A(g) of the VAT Law.

 To view the full bill, click here.

We will continue to update you on any developments on the subject.

We will be happy to be at your disposal for any questions or clarifications that may be required.

Indirect Taxes Team