Abstract
Israel’s Value Added Tax Law generally applies an expense multi-stage tax to the value added in respect of goods or services at every stage of the production, distribution and marketing process at the current rate of 17%. The final consumer is commonly understood as paying the tax on the full retail price, not being able to deduct paid tax. The added value of the business firm is principally the difference between its transactions (sales of goods and rendered services) and its relevant inputs. Although VAT may be imposed on loan intermediary services, generally, the financial institution granting the loans will be subject to Wage and Profit Tax (at the rate of 17%), on wages paid and profits earned; no VAT will be imposed on said services and the institution will not be allowed to deduct input tax. Dealers, who take loans from financial institutions, will not be able to deduct the Wage and Profit Tax that the financial institution has paid. Deposits made by a dealer with a financial institution or extension of loans by a dealer to a financial institution are exempt from VAT.
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Notes
- 1.
As defined in Value Added Tax Law, 1975 [VAT Law], s 1.
- 2.
Compare: Namdar and Nisim (1995).
- 3.
Essentially, registered business firms which are not exempt from VAT.
- 4.
VAT Law, s. 1 and subsidiary legislation.
- 5.
Compare: CA 767/87, Beshaaryich Jerusalem Association v. Director of VAT, 42(4) Court Rulings 800.
- 6.
On wages defined in VAT Law, ss. 1 and 4(a), and as Wage Tax imposed according to VAT Law, s. 4(a).
- 7.
Other taxes may be imposed on non-profit organizations, for instance VAT on the import of goods and services according to VAT Law, ss. 2 and 15 and the relevant subsidiary legislation.
- 8.
The Public Committee of Inquiry on the Israeli Tax System (Justice S. Asher, chair), Report on Value Added Tax (Jerusalem, 1972) [Asher Committee].
- 9.
Compare: Klugman (2003).
- 10.
Compare: Namdar (2013, vol. 1, pp. 339–363).
- 11.
Financial institutions may still be subject to VAT under certain circumstances, for instance on the importation of goods or services. Another example would be in cases of real estate transactions (or specific occasional sale of goods or performance of services, the sale or service being of a commercial character) as defined under the term ‘occasional transaction’ in VAT Law, s. 1.
- 12.
Under certain conditions and restraints, section 43a of the VAT Law allows financial institutions the deduction of input tax where a sale of real estate occurred under the definition of ‘occasional transaction’.
- 13.
Compare: Potchebutzky (2001, pp. 34–39).
- 14.
See, e.g., section 58 of the VAT Law discussed further in Sect. 9.3.5.
- 15.
Such a benefit fund is generally considered a non-profit organization.
- 16.
As in the case of the previous alternatives, there have again been inadequate corresponding changes to the VAT Law, although interpretation rules may be applied with regards to the change of laws.
- 17.
Compare: TC 282/91, Bondi Insurance Agency Ltd. v. Director of VAT, 7(4) Taxes (1993), e-26.
- 18.
CA 3840/98, Norwich Union Ltd. v. Director of VAT, 14(6) Taxes (2000), e-2.
- 19.
Sections 1 and 2 of the VAT Law apply VAT, inter alia, on the sale of goods by a dealer. However, the term ‘goods’ in section 1 excludes securities, negotiable instruments or rights therein. Thus, the ‘sale’ (as defined by the VAT Law) of securities, negotiable instruments or rights therein by a dealer is generally not subject to VAT. However, rendering services with regard to said goods may be subject to VAT.
- 20.
Compare: TC 1092/04, Dor Hen Commerce Ltd. v. TA 1 VAT; CP 5529/12 Ohev-Zion and others v. the State of Israel.
- 21.
Pre-ruling 4396/15, Classification of Nostro Account Activity for VAT Law Purposes. Compare: Interpretation Instruction 3/15, The Classification for VAT Law Purposes of Management Corporations of Sectoral Benefit Funds, which generally classifies said management corporations as non-profit organizations (in the same way as the benefit funds managed by them).
- 22.
The Director of the Israeli Tax Authority as defined in VAT Law, s. 1.
- 23.
For example, as in Interpretation Instruction 3/15, The Classification for VAT Law Purposes of Management Corporations of Sectoral Benefit Funds, discussed in n. 21 above.
- 24.
Similar attempts were made by non-profit organizations and were usually—once audited—unsuccessful. Compare, for instance, CA 6301/99 H.L.R. The Company for Developing Rehovot Ltd. v. Director of VAT, 16(6) Taxes (2002), e-75.
- 25.
Under the terms and constraints of VAT Law, s. 43a.
- 26.
For instance, the sale of the real estate, according to the second alternative of the definition of ‘occasional transaction’ (which in itself is the third alternative of the definition of ‘transaction’) in VAT Law, s. 1.
- 27.
Including, inter alia, building, reconstruction, etc. of the real estate.
- 28.
VAT Law, s. 43a.
- 29.
Input tax paid by the financial institution.
- 30.
This is the VAT which the financial institution owes the Israeli Tax Authority, but hopefully is reimbursed by the purchaser of the real estate (if the purchaser is a dealer who concluded the purchase for business purposes, that purchaser may be able to claim a refund of the input tax the purchaser paid on the purchase transaction).
- 31.
TC 3317/98 A.B. Shaked Lavan (1997) Ltd. v. Director of VAT, 19/2 Taxes (2005), e-34.
- 32.
Since then, the Value Added Tax Regulations (Reporting of Tax Avoidance Schemes According to the Value Added Tax Law), 2006 have been enacted. According to these regulations, inter alia, similar cases and others should be reported to the Tax Authority in a specific and clear manner.
- 33.
Compare: TC 1183/91, Callmotrade Ltd. v. Director of VAT, 7/3 Taxes (1993), e-29.
- 34.
The entity pays interest to financial institutions and thus has no profits. Yet again, if the loans granted by said entity are to associated corporations, then the Israeli Tax Authority will probably review the amount of interest collected by said entity, the market value of that interest and the possible profits.
- 35.
Section 14 of the VAT Law applies to the sale of goods as legally understood in Israel. Section 15(a) of the VAT Law defines the meaning of rendering services in Israel as one of three alternatives: (1) a person whose business is in Israel which rendered it; if a person has an agent or branch in Israel, then—for this purpose—he shall be deemed a person whose business is in Israel; (2) the service was rendered to an Israeli resident, to a partnership most of the rights in which vest in partners resident in Israel or to a company which is deemed an Israeli resident for purposes of the Income Tax Ordinance; (3) it was rendered in relation to assets located in Israel. Section 6d of the Value Added Tax Regulations, 1976 further clarifies that if a transaction is performed in Israel, and the seller or performer of a service is a non-resident, the obligation to pay the tax rests on the purchaser, except where the purchaser holds an invoice on that transaction, i.e.,—the importer of the services is the tax payer.
- 36.
Financial institutions will also pay VAT on the import of goods (as well as on the import of services according to Section 6d mentioned in n. 35 above), as do non-profit organizations (subject to specific circumstances in different cases).
- 37.
Currently, 17%.
- 38.
Subject to all provisions of the VAT Law (including Chap. 8 of the VAT Law and the relevant Regulations) and case law.
- 39.
VAT Law, s. 31(5). Note that once a transaction is exempt, the dealer is not allowed to deduct the relevant input tax.
- 40.
According to section 15(b) of the VAT Law, an activity shall be deemed to have been carried out in Israel if one of the following applies to it: (1) it was wholly or mostly conducted in Israel; (2) it was conducted by a person whose principal activity is in Israel and it is within the scope of his activity; (3) it is that part of an activity mostly conducted abroad, which is conducted in Israel. Section 15(b) may be interpreted in an absurd manner, claiming that the VAT Law applies also to the activity situated outside of Israel (the same absurd interpretation is also possible regarding section 15(a)), however it is commonly perceived that the relevant activity is the one conducted within Israel. However, one should also note the possibility mentioned above (nn. 35 and 36, above) of paying VAT on the import of goods and the import of services.
- 41.
Currently, 17%.
- 42.
Evidently, the employer's obligation to withhold taxes (and if possible to deduct expenses), is also relevant.
- 43.
Compare: Alter (1991).
- 44.
Generally, the Income Tax Ordinance allows only for the set off of losses from previous years, however one should notice the recent Israeli Supreme Court Decision (which will be subject to further hearing) in CA 4157/13, Damary v. the Rehovot Assessing Officer, 29/2 Taxes (2015), e-6.
- 45.
As will be further explained in Sect. 9.5.2.
- 46.
Up until 2008 the definition of ‘Profit’ stated that it would be calculated before the deduction of Wage Tax (specifically, during the year 2008, the definition allowed for deduction of 50% of the Wage Tax). Obviously, the previous definition, which excluded said tax while calculating the financial institution’s Profit, gave rise to the question whether it caused double taxation (although chargeable income is calculated before income tax expenses, it is argued that it takes into account Wage and Profit Tax, and thus the definition of ‘Profit’ should adhere to the meaning of chargeable income).
- 47.
The financial institution in question has already paid the Wage and Profit Tax on the dividends now being distributed. Were the dividends not excluded, said profits would be double taxed.
- 48.
Such changes may be exempt from income tax if they meet the relevant criteria and uphold all the relevant conditions as specified.
- 49.
For this purpose, ‘unit’ is this term within its meaning in the Joint Investment Trusts Law, 1994.
- 50.
An argument was made, that given the opportunity to set off losses from previous years it could have resulted in allowing a refund of VAT that was not actually paid previously. However, even if that were true (and it seems that this possibility is quite remote), then applying a mechanism to avoid such an eventuality seems simple enough and definitely more just.
- 51.
In this respect calculating the financial institution’s added value is different from the calculation of the National Product per year, since the reasoning for each calculation is different.
- 52.
- 53.
Currently, 17%.
- 54.
Compare: Ben-yehonatan (2004).
- 55.
Allowing the deduction (and actually the refund) of input tax while actually not charging VAT.
- 56.
A service shall not be deemed rendered to a foreign resident if the subject matter of the agreement is the actual rendering of the service, in addition to a foreign resident, is also to an Israeli resident in Israel, to a partnership most of the rights of which vest in Israeli resident partners, or to a company, which—for the purposes of the Income Tax Ordinance—is deemed an Israeli resident, unless it is a service the consideration for which forms part of the value of the goods determined as specified in sections 129 to 133i of the Customs Ordinance, as the case may be. Compare CA 7142/10, A. Gamish Manpower Services Ltd. v. Ashdod VAT Director, 26/6 Taxes (2012), e-4.
- 57.
Sections 12 and 12a of the Value Added Tax Regulations, 1976. For instance, if the service is related to an asset situated in Israel the zero rate VAT is generally not allowed.
- 58.
Subject to Wage and Profit Tax.
- 59.
Subject to VAT.
- 60.
See above, n. 40, with regard to section 15 of the VAT Law. Note also that with regard to imposing Wage and Profit Tax, the term ‘Profit’ is based on the meaning in the Income Tax Ordinance, the tax base of which is international. The contradiction of terms between the VAT Law (which refers to activity in Israel as defined in section 15) and the Income Tax Ordinance (which has a much wider tax base with regard to relevant cross-border implications) may lead to the conclusion that the specific implementation of the VAT Law (section 15) should prevail, but may also give rise to debate.
- 61.
For instance, the possibility in some cases to legitimately incorporate foreign corporations that will endeavour to have a basis of activity outside of Israel. Possibilities such as this one and others may be subject to the Israeli Tax Authority’s scrutiny.
References
Alter, Avraham, Calculating Profit Tax to Financial Institutions according to the VAT Law (1991) 5(12) Taxes a-12
Ben-yehonatan, Isaya, Value Added Tax on Financial Institutions – a comparison to VAT on Dealers (2004) 31(122) The Quarterly Israeli Tax Review 50
Klugman, Gideon, Consumption taxation and financial services: Israel (2003) 88b Cahiers de Droit Fiscal International 467
Namdar, Aharon, Value Added Tax ([Hoshen l’Mishpat Ltd.], [Kiriat Ono, Israel], 2013)
Namdar, Aharon and Nisim, Ariel, Taxing the added value of a commercial bank: review and recommendations (1995) 9(5) Taxes a-23
Potchebutzky, Jacob, Value Added Tax ([Zoor Rimon Ltd.], [Tel-Aviv, Israel], 2001)
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Goldman, D. (2017). Loan Intermediary Services: Israel. In: van Brederode, R., Krever, R. (eds) VAT and Financial Services. Springer, Singapore. https://doi.org/10.1007/978-981-10-3465-7_9
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