Media Centre

New proposed legislation – Israel vat law for foreign digital services

5 August 2021

New proposed legislation – foreign companies that provide digital services to an Israeli resident shall be liable to Israel vat law

Dear Clients and Friends,

Included as part of the Memorandum for The Law of Economic Efficiency (Legislative Amendments to Achieve the Budget Targets for the Budget Years 2021 and 2022), 5721-2021 (the “Memorandum”), which was published this week, is a proposal to introduce new VAT obligations with respect to the import of digital services to Israel.

In accordance with the Memorandum, a foreign resident who operates an online store, through which a digital service is provided to an individual resident in Israel, will be required to register for VAT purposes in Israel, and to report and pay VAT in Israel.

For the full Memorandum (in Hebrew) >> click here

Under current law, where a foreign resident (who 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 intangible goods is liable to pay VAT in Israel.

However, where the service recipient or the purchaser of the intangible goods is an individual who does not report his transactions to VAT on a regular basis, there is significant difficulty in enforcing the collection of VAT. As a result, for the most part, no VAT is collected with respect to transactions that are subject to VAT between a foreign resident who is not required to register and report for VAT purposes in Israel, and an individual resident of Israel. The Memorandum seeks to change this, by amending the law with respect to transactions between foreign residents (services provider and/or seller of intangible goods) and individuals (Business to Consumer transactions, or B2C).

The Memorandum provides that with respect to the provision of a digital service via an online store, by a foreign resident operator of the online store through which the service is provided, shall be liable to pay VAT in Israel. On the other hand, with respect to the provision of a digital service by a foreign resident to a “dealer,” a “not-for-profit organization” or a “financial institution,” as these terms are defined in the VAT Law (Business to Business transactions, or B2B), the law will remain unchanged and the recipient of the digital service will be liable to pay the VAT in Israel.

We note that a foreign resident will be required to register for VAT purposes in Israel, and report and pay VAT, from the “first dollar,” and the foreign resident will not be entitled to register as an “exempt dealer,” even where he meets the turnover requirements, unlike Israeli resident service providers.

Furthermore, the Memorandum proposes to amend Section 30(a)(7) of the VAT Law in order to provide that a transaction in which a dealer, whose main place of business is in Israel, provides a digital service outside of Israel shall no longer be entitled to zero rate VAT.

Alongside the obligation to pay tax, the Memorandum also addresses the requirement to register for VAT purposes in Israel and to report to the Israeli Tax Authority. According to the Memorandum, every foreign resident who is liable for tax in Israel for the provision of a digital service to an individual resident of Israel shall be required to register, report and pay the tax in respect of such services.

The registration and reporting obligations are not entirely clear. The Memorandum stipulates that a designated registry for foreign residents shall be established and that reporting requirements with respect to such registry shall be introduced, so we can expect that certain reliefs will be provided. Although the Memorandum does not fully specify the mechanism that will apply with respect to registration of and reporting by foreign residents, a draft of a proposed government decision, which was published on July 27, 2021, provides some guidance regarding some of the significant reliefs that may be enacted with respect to the registration process.  For example, a foreign resident shall not be required (1) to open a company in Israel; (2) to open a bank account with an Israeli bank; or (3) to appoint a representative in Israel (as required under Section 60 of the VAT Law).

Although the Memorandum is the result of a process that has been ongoing for several years, it still is only a draft, that is expected to change during the legislative process. We will continue to follow the developments on this issue, and we will update you on an ongoing basis. We emphasize that the proposed law is expected to come into effect on January 1, 2022, at the earliest.

We are at your disposal to answer any question on this matter and to provide any assistance. The new registration and reporting obligations require foreign residents that provide digital services to Israeli residents to prepare in advance, and we encourage our clients to contact us for advice on how to mitigate exposure while allowing them to comply with the new legal provisions, if and when enacted.

The above is intended to present the main provisions of the Memorandum and it does not constitute an opinion or legal advice.

Herzog Fox & Neeman


Meir Linzen | Chairman
Head of Tax Department
Yuval Navot | Partner
Tali Azriel | Partner
Ofer Granot | Partner
Eldad Chamam | Partner
Iris Weinberger | Partner

Tax Department

Amir Cooper | Partner
Mor Goldschmidt | Associate


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