VAT in Israel is going up

 

Your Taxes: The rules are complex. We all need to prepare.

By LEON HARRIS DECEMBER 20, 2024 22:38 Updated: DECEMBER 20, 2024 22:40

Illustrative image of doing taxes. (photo credit: PXHERE)

On January 1, the standard rate of VAT will increase from 17% to 18%. The Tax Authority has issued instructions on how the rate rise will be implemented for different types of transactions. (Interpretative Instructions 01/2025, dated December 5). Broadly, if the taxable event is after the end of 2024, the new rate of 18% will apply. This matters for individuals who cannot recover VAT on their purchases and for businesses that need to charge the right VAT rate.

Sale of goods: The taxable event for goods is generally the date of delivery. However, the taxable event is when payment is received (cash basis) in three cases: (1) if the seller’s annual sales are no more than NIS 2 million; or (2) a manufacturer whose annual sales are NIS 2,150,000-NIS 3,800,000; or (3) a manufacturer whose annual sales are below NIS 2,150,000 and employs 6-17 employees.

A private consumer will rarely know the seller’s sales or manpower but can play safe and get the lower rate by taking delivery of goods and paying for them before the end of 2024.

Imported goods: VAT will be imposed at 17% on goods released from Customs by the end of 2024. After that, VAT will be at 18%.

A man is seen at a crossroads between buying and renting real estate in this illustrative image. (credit: INGIMAGE)

Real estate

Sale of real estate: For real estate, the taxable event is the earlier event of either the handover or the registration in the purchaser’s name in the land registry (Tabu). But if amounts are paid on account, the VAT rate then in force applies.

For example, a builder sold a new home for NIS 3 million on August 1, with payments due as follows: NIS 500,000 on September 1, NIS 900,000 on December 1, NIS 1m. on March 1, together with the handover of the home, and NIS 600,000 on June 1.

Because the handover is in 2025 VAT will apply at the old 17% rate on the two payments on account in 2024, and 18% on the payments in 2025. Even if the builder issues an invoice by the end of 2024 for the 2025 payments, the new 18% VAT rate will apply to the 2025 payments (unless they are actually paid in 2024). The builder would need to invoice the extra 1% VAT for the 2025 payments.

Handover means for the purchaser’s possession or use – beware handover of unfinished and unusable homes by the end of 2024.

Home sales between private individuals not in business are generally exempt from VAT. Advertisement

Supply of services: The taxable event for services is generally the date of payment to the supplier. If payment is made in 2025, the 18% VAT rate applies.

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However, the taxable event is when the service is provided in: (1) the parties are related; (2) no price fixed; (3) payment in kind; (4) spot services such as transportation or towing; (5) if the seller’s annual sales exceed NIS 15m.

In the last case, if the service is provided in bits, VAT generally applies to each bit; but if the service is continuous, VAT applies when the service is provided or paid for, whichever is earlier. Continuous monthly services (sales over NIS 15m.) are taxable when provided, e.g. security, cleaning, maintenance, manpower, etc. For example, if these services were rendered in December 2024 but only billed on January 15, 2025, the old rate still applies.

Provision of credit: The interest and any adjustment for inflation or currency fluctuations are generally taxed like services: when they are paid – 17% VAT if paid by the end of 2024. In the case of loans to employees or directors, interest at market rates should be charged by the end of 2024 to get the 17% VAT rate.

Property rental: Residential property rentals not exceeding 25 years are generally exempt from VAT. But commercial property rentals are generally taxable when paid – 17% VAT if paid by the end of 2024.

Subscriptions:  Subscriptions are generally taxable when paid – 17% VAT if paid by the end of 2024. Subscription payments in 2025 will be subject to 18% VAT. Examples of subscriptions include newspapers, performances, and communication services in consideration for payment fixed upfront.

Credit notes: Credit notes are permissible if a transaction is partly or wholly canceled, or to fix a mistake. The VAT rate on the credit note will be the same as for the original transaction (17% in 2025 regarding a 2024 transaction) unless the same customer was billed again in that reporting period in 2025.

The rules are complex. We all need to prepare.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd. leon@hcat.co