Media Centre

Israeli Tax Authority’s Reform on Solvents and Lubricating Oils

21 November 2021

Dear friends and colleagues,

Further to our client update from September 14, 2021 about the solvents reform (read here), we would like to bring to your attention that these orders will come into force on December 1, 2021 and, accordingly, the Knesset Finance Committee is expected to discuss the orders on November 23, 2021. Under the reform, a tax will be levied on “merchants” who possess inventories of solvents and lubricating oils for which taxes exceeding NIS 10,000 are owed.

You can read the Tax Authority’s announcement in this regard here.

Moreover, on November 8, 2021, the Tax Authority published the “Excise and Purchase Tax Procedure on Lubricating Oil and Fuel Substitution” in order “to establish the rules for the production and import of lubricating oil and a fuel substitute; to grant an exemption from excise duty and purchase tax to factories and users entitled thereto.”

You can access the procedure here.

The application of this procedure to consumers, importers and manufacturers of solvents and lubricating oils, as well as to recycling plants, is highly complex. This complexity stems, in part, from the fact that imported fuel substitutes will be governed by the Purchase Tax Law while local production will be governed by the Excise Law.

The procedure’s key provisions, as they apply to the various sectors that are subject to the reform, are explained below. Throughout this client update, we also will emphasize a number of important complexities.

Fuel Substitute Manufacturers

Oil and solvent manufacturers will be subject to certain requirements, including obtaining a fuel manufacturer license, paying a license fee, depositing guarantees and complying with additional conditions of the Tax Authority. Additionally, these factories will have to regularly report tax-exempt sales of fuel and pay taxes on non-exempt sales on an ongoing basis, as well as classify all products based on their HS codes (customs numbers). We note that the issue of using resellers for the sale of fuel substitutes instead of selling directly to tax-exempt factories is not regulated by the procedure and we anticipate that the Tax Authority may not allow this.

Moreover, the issue of factories importing fuel independently or carrying out production processes on imported fuel substitutes is particularly complex since both methods will be subject to the Purchase Tax Law and Excise Law simultaneously. As a result, these factories will have to obtain registered dealer certificates in accordance with the Purchase Tax Law (in addition to obtaining fuel manufacturer licenses) in order to import fuel substitutes that are exempt from purchase tax, so as to avoid double taxation.

Additionally, there are factories that intend on purchasing and importing fuel substitutes for trading purposes alongside their production activity. This activity must be coordinated with the tax authority in advance.

Finally, there are fuel substitute manufacturers who, alongside their production of fuel substitutes and trading in imported fuel substitutes, use fuel substitutes themselves for the purposes of the exemption. This issue is particularly complex since the imported fuel substitutes will be subject to three different regimes will apply simultaneously: a tax-exemption regime; a fuel-producer regime under the Excise Law and a purchase tax regime.


Tax-Exempt Factories

Tax-exempt factories will have a number of requirements, which include defining the identity of their “fuel substitute” supplier in advance; defining their tax-exempt usage and distinguishing it from non-exempt usage; providing a “Bill of Materials” (BOM) for each product that they manufacture while specifying the amount of fuel substitute included in each unit of the product; depositing guarantees; and submitting particularly detailed quarterly reports on usage of the tax-exempt fuel substitute.
Additionally, tax-exempt factories will be able to purchase tax-exempt fuel in three ways:

  • Using the “conditional exemption” on personal imports of fuel substitutes;
  • Purchasing from an importer with a registered dealer certificate;
  • Purchasing from an Israeli manufacturer.

The procedure requires storing fuel substitutes separately, and each one of these three methods must be documented and reported separately.

We note that special complexity exists in relation to factories that do not maintain a separation of the  fuel substitutes waste, especially between fuel substitutes that were purchased with a tax exemption and fuel substitutes that were purchased without a tax exemption.

Importers of Fuel Substitutes for Trade

These importers will have to obtain a “registered dealer certificate” to trade in taxable fuel substitutes without paying import tax. Certificate holders will be able to sell to exempt factories tax-free, but to regular customers with the payment of tax. Moreover, they will have to deposit guarantees and will be subject to a reporting regime under the Purchase Tax Law.

We note that the use of resellers for the sale of fuel substitutes, as opposed to directly to exempt factories can be problematic.
Recycling Plants and Disposal Plants

Recycling plants will have to obtain fuel manufacturer licenses, pay license fees, deposit guarantees, comply with additional conditions of the Tax Authority, as well as report regularly on sales of tax-exempt fuels and pay taxes for non-exempt sales on an ongoing basis.

Recycling plants will also be required to analyze, on an ongoing basis, the used solvents that they receive. Moreover, they will have to issue certificates confirming receipt of the material, including the amount, to solvent consumers who send used substitutes to the plants for recycling as proof for “closing the circle” regarding their tax exemption.

The procedure does not deal with the issue of disposal plants. Our understanding is that, similar to recycling plants, these plants will be required to analyze, on an ongoing basis, the used solvents that they receive. Additionally, they will be obligated to issue certificates confirming receipt of the material, including the amount to solvent consumers who send used substitutes to the plants for recycling as proof for “closing the circle” regarding their tax exemption.

The field of recycled or disposed solvents is particularly complex with respect to receiving used solvents that originate in solvent waste that was a mixture of different sources.

Considering the many complexities of this topic, many of which are discussed above, and in order to be prepared for the implementation of the reform, we recommend engaging the Tax Authority in advance about the unique complexities of your factory with the goal of reaching a mutually acceptable understanding on how the factory should function vis-à-vis the reform.

We believe that advance preparation will help prevent future mistakes and unforeseen tax charges.

We would be happy to assist and guide you through this process with the Tax Authority.

Kind Regards,
Herzog Fox and Neeman

Meir Linzen | Chairman
Chairman of the firm and Head of Tax Department​


Iris Weinberger | Partner
Tax Department


Moti Fogel | Associate 
Tax Department

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