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Foreign Residents’ VAT Liability with respect to Importing Digital Services to Israel – New Memorandum of Law Published in the Context of the 2023-2024 Budget Talks

26 February 2023

Dear friends and clients,

We would like to update you about a new memorandum of law regarding the provision of online digital services that was published on February 15th, 2023 in the framework of the bill of Law for Economic Efficiency (Legislative Amendments to Obtain the Budgetary Goals for Budget Years 2023 and 2024), 2023.

This memorandum is very similar to the bill of Law for Economic Plan (Legislative Amendments to Implement the Economic Policy for Budgetary Years 2021 and 2022), 2021 (the “2021-2022 Bill“), which was issued on August 31st 2021 but did not mature into law.

Public comments on the memorandum can be filed until March 4th, 2023.

According to the provisions of the bill, a foreign resident that operates an online store through which a digital service is provided to an Israeli resident will be required to register for Israeli VAT purposes and report and pay Israeli VAT.

The full memorandum is available >> click here

According to current law when a foreign resident (that is not required to register in Israel under Section 60 of the VAT law) provides services or sells intangible goods to an Israeli resident, the service recipient or purchaser of goods is liable for Israeli VAT.

However, if the service provider or purchaser of intangible goods is an individual, who is not required to report its transactions to the VAT authority, there is significant difficulty in enforcing the VAT collection. As a result, in most cases these transactions are not subject to VAT at all. The memorandum wishes to change this situation and to also prevent discrimination of Israeli resident dealers that are subject to VAT on similar transactions, by changing the legal provisions with respect to transactions between foreign residents (service providers and/or sellers of intangible goods) and individuals (Business-to-Consumer transactions, also known as B2C). the memorandum notes that it is consistent with the regulation common in other OECD countries.

The main provisions of the memorandum are as follows:

  • A Digital Service is defined as including, inter alia, a service provided through the internet or another electronic network which allows for brokering transactions between sellers or service providers and buyers and also a sale of intangible goods, which includes the provision of visual or auditory content, remote teaching, sale and upgrade of applications, sale of book contents, music, games and etc. Additional Digital Services include television or radio broadcasting services and services related to the transfer or receipt of signals, words, sounds, images and etc. through a fiber optic cable, radio transmission or other electromagnetic system.


  • The memorandum provides that the operator of an “Online Store” will be liable for Israeli VAT with respect to the provision of such Digital Services by a foreign resident to an Israeli resident that is not subject to tax (B2C) through an Online Store. The memorandum defines an “Online Store Operator” as a person that operates a Digital Area, and if there is no Digital Area – the service provider itself. A “Digital Area” is defined in the memorandum as “an online system used to carry out transaction between Digital Services providers and recipients of Digital Services.”


  • The tax is charged on a cash basis, i.e., it is payable when and with respect to consideration received.


  • With respect to Digital Services provided by a foreign resident to a “dealer”, a “not-for-profit organization” or a “financial institution”, as such terms are defined in the VAT law (B2B transactions) – the recipient of the Digital Service will be liable to pay the Israeli VAT.


  • We note that, in contrast with the law that applies to Israeli resident service providers, a foreign resident will be required to register for Israeli VAT purposes, report and pay VAT with respect to the first dollar received and could not registered as an “exempt dealer” even if the overall turnover allows for such registration. We believe that there is a strong likelihood that this issue will be amended during the legislative discussions in the Knesset.


  • Along with the requirement to pay the tax, the memorandum sets out a VAT registration and periodical reporting requirements. According to the memorandum, every foreign resident that operates a Digital Area, and absent a Digital Area – the person providing the Digital Service to an Israeli resident, will be required to register, report and pay the tax on the sales to individuals. The details regarding the registration and reporting requirements are not specified in the bill, which will be determined by the Minister of Finance. The memorandum provides that a designated registry for foreign residents will be established and reporting obligations with respect to such registry shall be determined so it is expected that certain lenient arrangements will be provide (with respect to details to be provided in the registration, the reporting frequency and the tax payment and currency arrangements), and that foreign residents will not be required to establish an Israeli company, open a business account in an Israeli bank or appoint an Israeli representative (as required under Section 60 with respect to foreign corporations conducting businesses in Israel).


  • We also note that the according to the bill, a service recipient that is an “Israeli Resident” is only a person that was identified by the Digital Store operator as an Israeli resident according to one or more of the criteria set out in the law, which are place of residence, means of payment, equipment or fixed infrastructure through which he received the service or according to the rules that will be set out by the Director of the Tax Authority.


  • We further note that the memorandum provides that a “Foreign Resident” will be required to manage books and records and retain documentation for a period of 7 years. In addition, data and documents relating to the provision of the Digital Services to an Israeli resident will need to retained for a period of 7 years from the date in which the periodical report was submitted, in such a manner that will allow backup and available production of them within 30 days from the date of a demand from the Director of the Tax Authority. The Director shall be allowed to issue an assessment to the foreign resident with respect to reports filed during the 7 years after the periodical report was filed by the “foreign resident.”


Foreign Residents that Have a Business or Activity in Israel

We emphasize that the proposed bill does not change the existing law with respect to foreign residents that have a business or activity in Israel. I.e., they are required to register as dealers by appointing a representative in Israel and the provisions of the law with respect to Israeli resident dealers with everything this entails, including with respect to reporting obligations and the eligibility to deduct input tax.

Effective Date

The memorandum does not include an effective date, and accordingly it will come into effect upon its legislation into law, unless determined otherwise in the law itself. The explanatory note states that the law is expected to increase tax collection by NIS 360m in 2023 and NIS 500m annually starting in 2024. This may imply that the intention is for the law to come into effect during 2023.

Although the bill is the product of a process that has been undergoing for several years, it is still in draft form, which is expected to change during the legislative process. We will continue to monitor developments and changes and will keep you routinely updated.

We will be happy to answer any specific questions on this subject and assist as may be required. The new registration and reporting obligations require foreign residents that provide Digital Services to Israeli residents to be prepared in advance, and we recommend to our clients to approach us to receive consultation that will allow them comply with the provisions of the new legislation, if and when it will be enacted.

The above is meant to summarize the main points of the memorandum and does not constitute an opinion or legal advice.



Herzog Fox Neeman

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