Tax Update | October 2020

Subject: New VAT Ruling

Services Provided to a Foreign Resident, even if Provided to an Israeli Resident as well, may be Subject To Zero-Rate VAT

A recent ruling was issued by the District Court, Tax Appeal 15803-02-18, in the proceedings of Applause App Quality Ltd., which dealt with the question of VAT liability at zero-rate with respect to services provided to a foreign resident in accordance with the provisions of Section 30(a)(5) of the VAT Law.

The aforementioned ruling concerned an Israeli resident private company that was registered as a “Dealer” for VAT purposes, which reported zero-rate VAT transactions with respect to marketing and sales services provided to a US resident parent company on a cost plus accounting basis, including with regard to customers in Israel.

As is known, Section 30(a)(5) of the VAT Law establishes a benefit of zero-rate VAT with respect to the provision of services to a foreign resident, whereas if the services are also provided to an Israeli resident and/or in relation to an asset located in Israel, the zero-rate VAT benefit will not be available.

Exception – import of goods into Israel – The above-referenced rule has an exception, set forth in Section 30(a)(5) of the VAT Law, which provides that services included in the value of goods imported into Israel will not be considered services provided to an Israeli resident and therefore, the zero-rate VAT benefit may be available. However, in order to qualify for this exception, additional requirements must be met.

We note as an example, that there is a taxation decision issued by the VAT Authority, pursuant to which even in the case of services provided to a foreign resident and indirectly provided to an Israeli resident, if it is proven that the value of the services includes the import of intangible goods, e.g., the import of software to Israel, zero-rate VAT may be applicable.

Exception – Import of Services (which was extended in the ruling) – The court ruled that there is a missing element to the exception of the import of goods and accordingly, explicit language should be inserted into such exception extending its applicability to services that are a component of the value of services imported into Israel.

Therefore, in the event that an Israeli company provides services to a foreign resident, and the services are provided (indirectly) also to an Israeli resident, then as long as the services are imported and consumed back in Israel and the price paid by the Israeli end customer includes the price of the services to the foreign resident, in accordance with the extension set forth in the Applause ruling, the applicability of zero-rate VAT should be examined..

The following diagram illustrates the zero-rate VAT discussion:




For further information regarding this update, please contact Adv. Oren Biran, Partner, Head of Tax Practice – 

Gross, Kleinhendler, Hodak, Halevy, Greenberg, Shenhav & Co. (GKH), is one of the leading law firms in Israel, with over 170 attorneys. GKH specializes, both in Israel and abroad, in various fields of law including Mergers and Acquisitions, Capital Markets, Technology, Healthcare and Life Science, Banking, Real Estate, Project Finance, Litigation, Antitrust, Energy and Infrastructure, Environmental Law, Intellectual Property, Labor Law and Tax.
This alert is prepared as an informational service to clients and colleagues of Gross, Kleinhendler, Hodak, Halevy, Greenberg, Shenhav & Co. (GKH) and the information presented is not intended to provide legal opinions or advice. Readers should seek professional legal advice regarding the matters about which they are particularly concerned.

Oren Biran

Phone +972-3-6074547

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