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Taxation of Foreign Residents Supplying Digital Services in Israel 

by Anat Shavit

Published: December, 2016

Submission: January, 2017


As part of its continuing efforts to develop legislation regarding the taxation of non-Israeli persons providing digital services in Israel, the Israel Tax Authority recently published a proposed amendment to the Value Added Tax Law (the “Proposed Amendment”). The Proposed Amendment would impose VAT on non-Israeli companies that sell or supply electronic services and products, communications services and radio or television broadcasts in Israel (the “Digital Services”).

The Proposed Amendment follows an Israel Tax Authority tax circular, published earlier this year that considered the taxation of foreign companies in Israel through the internet. The circular referenced OECD surveys that described the difficulties encountered by tax authorities in collecting VAT from individuals (in contrast to companies) in the context of the OECD’s Base Erosion and Profit Shifting project.

The Proposed Amendment is intended to facilitate more efficient tax collection from digital businesses based outside Israel, and to impose on them a tax burden equal to the burden imposed on local suppliers.

The Existing Rules

Under the Israeli VAT law, VAT applies to any sale or service transaction effected in Israel. A transaction is deemed effected in Israel if the buyer or service recipient is an Israeli resident or if the asset being sold is located in Israel or the service is rendered in connection to an Israeli asset.

Currently, under Israeli VAT regulations, if a transaction is effected in Israel, and the seller or the provider of the service is a foreign resident (who does not otherwise have to be registered in Israel), and then the obligation to pay the tax will apply to the purchaser or the service recipient (i.e. the Israeli resident).

Since it is practically impossible to collect VAT from private customers (i.e., customers who do not utilize the Digital Services in their business or for business purposes) the purpose of the Proposed Amendment is to enable the collection of Israeli VAT from the non-Israeli Digital Service provider.

Principal Provisions

Registration and Reporting - Under the Proposed Amendment, non-Israeli companies providing Digital Services to Israeli private customers would be obligated to pay VAT that applies in connection with such services.

For that purpose Digital Service Providers would be required to register with the Israel Tax Authority and to maintain a special registration number for VAT purposes in Israel. The registration will be designated specifically for paying and reporting the VAT applicable to Digital Services rendered to Israeli residents. This registration will be separate from standard registrations maintained by nonIsraeli entities doing business in Israel.

The Digital Service providers will also be required to submit periodic returns to the Israeli Tax Authority that will include details of all transactions during the relevant period. The Proposed Amendment would authorize the Israel Tax Authority to review and challenge such periodic reports.

The Definition of "electronic services" included in Digital Services is very broad and includes the sale of intangible goods, through the internet or electronic network including, inter alia, the supply of software, entertainment products, books, music, gambling, games, television shows, movies, internet broadcasts and remote educational services.

In addition, the definition of "Israeli resident" for the purpose of the imposition of VAT on Digital Services will include any person that is identified as an Israeli resident by place of residence, methods of payment or the equipment through which it receives the Digital Services. This definition places the burden on the supplier of the Digital Services to analyze whether the person with whom it is contracting is an Israeli resident, based on the facts and circumstances relating to the particular customer.

Payment of Tax - The tax liability will be due upon payment for the Digital Services by the Israeli customer.

The internet revolution created and continues to create a new and developing reality that raises difficult tax questions. The State of Israel is aiming to make its laws compatible with the new reality, to address the tax issues described above and to increase its revenues. Under the Proposed Amendment, any entity that sells electronic books, supplies viewing services or streaming services or that sells electronic advertising space, among other activities, will be required to pay Israeli VAT, even if in practice it has no physical presence in Israel.

Please note that Proposed Amendment is subject to the review and approval of the Israeli Knesset and no assurance can be provided whether, or in what form, it will be adopted.








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