Value-added tax in Israel

Value-added tax (VAT), known in Hebrew as *ma’am*, is an indirect tax imposed in Israel on transactions, the provision of services and imports of goods. The Israel Tax Authority administers the tax under the Value Added Tax Law, 1975. Israel applies a standard rate alongside zero-rated transactions, exemptions and special rules for particular sectors and locations. The standard rate is 18% from January 1, 2025. ^[1][2]

Legal basis and administration

Israel’s VAT system is principally governed by the Value Added Tax Law, 1975, and related regulations and orders. The law provides for VAT on transactions in Israel and imports of goods, with the rate set by order. The Israel Tax Authority (ITA), part of the national tax administration, is responsible for VAT registration, collection, reporting services and enforcement. ^[1][3]

The ITA describes VAT as applying to transactions executed in Israel, imports of goods and the provision of services. It also identifies certain commercial transactions by people who are not ordinarily registered dealers as potentially taxable—for example, a commercial sale of goods or real estate, or provision of services, to a registered dealer. The tax’s application therefore depends on the nature and circumstances of a transaction, not only on whether the seller routinely operates a registered business. ^[3]

The system is commonly described as a value-added tax because registered businesses account for VAT on their taxable sales and may generally deduct eligible VAT paid on business inputs. The resulting net amount is reported to the tax authority. This mechanism taxes value added through the supply chain while allowing qualifying businesses to offset tax paid on inputs against tax collected on sales. The deduction is subject to statutory documentation and eligibility requirements. ^[4]

Standard rate and rate history

The standard VAT rate rose from 17% to 18% on January 1, 2025. The increase was approved through amendments to the VAT orders covering domestic transactions and imports, as well as orders concerning nonprofit organizations and financial institutions. ^[1] The ITA’s historical rate table records that VAT began at 8% when the law took effect on July 1, 1976; it also lists numerous subsequent changes, including the move to 17% in October 2015 and the later increase to 18% in January 2025. ^[5]

The standard rate applies to the taxable transaction price, subject to rules governing how that price is determined. The ITA’s guide for new dealers says the calculation uses a fixed rate applied to the transaction price, including applicable expenses. Where a transaction price is influenced by a special relationship between the parties, the guide describes a customary-market-price or cost-plus approach. ^[2]

The rate applicable to a transaction can depend on the legally relevant time of supply and the type of transaction. The ITA’s guide states that, as a general rule for sales of goods, VAT liability arises when the goods are delivered, regardless of when payment is received. It also describes cash-basis treatment for certain dealers and small manufacturers below specified turnover limits. If a tax invoice is issued before payment, the guide says the invoice must still be included in the periodic report. ^[2]

Taxable persons and dealer categories

Businesses and individuals engaged in taxable commercial activity may be required to register with the VAT authorities. The ITA’s guide identifies activities such as selling assets, goods or real estate, and providing services, as examples of business activity for which registration may be required. The exact obligation depends on the applicable statutory rules and the nature and scale of the activity. ^[2]

Israeli VAT administration distinguishes between authorized dealers and exempt dealers. An exempt dealer is a VAT registration category for qualifying small businesses; the term does not mean that the business is outside the tax system altogether. The ITA publishes a turnover ceiling for this category. From January 1, 2026, the listed ceiling is NIS 122,833. Whether a business qualifies also depends on rules beyond the turnover amount, and the threshold may change over time. ^[6]

An exempt dealer generally does not charge VAT on its sales in the same manner as an authorized dealer and cannot deduct input VAT as a registered authorized dealer would. Authorized dealers charge VAT on taxable sales and report their transactions and eligible inputs to the ITA. Because classifications and obligations depend on current law and individual circumstances, the ITA’s published guidance and legislation are the controlling references. ^[2][6]

Input-tax deductions and reporting

A registered dealer may deduct eligible input tax—VAT paid on business purchases and imports—from VAT due on taxable sales, subject to statutory conditions. The ITA’s new-dealer guide states that a deduction requires a legally issued tax invoice, import declaration or other approved document; the relevant document must bear the dealer’s name, and the guide specifies a six-month period for making the deduction. ^[4]

Dealers submit periodic VAT reports and pay any net tax due. The reporting system includes both periodic and detailed reporting requirements, with applicable obligations and procedures varying according to the dealer and the rules in force. The ITA provides online services for periodic VAT reporting and payment, and maintains separate guidance and systems for detailed reports. ^[7][8]

Recordkeeping is part of compliance. The ITA’s guide states that dealers must maintain accounts under the applicable income-tax and VAT bookkeeping rules and retain relevant books, records and documents for seven years. The guide also describes cash-basis treatment for certain sales of goods by dealers and manufacturers below specified turnover ceilings, while emphasizing that issuing a tax invoice can trigger a reporting obligation even before the customer pays. ^[2]

Zero-rated and exempt transactions

A zero-rated transaction is taxable at a rate of zero rather than the standard rate. The distinction matters because zero-rating and exemption are not interchangeable categories: eligible zero-rated supplies may retain a connection to the taxable system and input-tax deduction rules, whereas exempt transactions are treated differently under the law. The ITA’s guidance and the governing legislation determine the treatment of a particular supply. ^[9]

The ITA identifies certain services provided to qualifying foreign tourists as zero-rated. Its guidance lists examples including hotel accommodation and specified additional hotel services, private motor-vehicle rentals for self-driving, certain tourist transport, some meals during tours, hospital services and participation in certain international conferences. Eligibility is conditional: the tourist’s immigration status, the nature of the service and the supplier’s supporting documentation can matter. Services that do not qualify remain subject to the applicable VAT rate. ^[9]

Exports of goods and certain services, along with other specified transactions, are also described as zero-rated in professional tax guidance. Separately, some transactions are exempt. The relevant classification is determined by law and transaction-specific conditions; not every transaction involving a foreign customer, an export-related business or an exempt sector automatically qualifies for zero-rating or exemption. ^[10]

Eilat and other special arrangements

Eilat is subject to a special free-trade-zone regime under the Eilat Free Trade Zone Law, 1985. The ITA’s guide describes rules affecting sales and imports connected with Eilat, including specified exemptions, zero-rated services and goods that remain subject to the full VAT rate. The treatment depends on the type of goods or service and the direction and circumstances of the transaction; Eilat is not a general VAT-free zone for every purchase. ^[11]

The law also provides distinctive VAT-equivalent taxes for certain institutions. Professional tax guidance reports that banks and other financial institutions pay VAT-equivalent taxes at 18% based on payroll and profits, and that qualifying nonprofit organizations pay wage tax at 7.5% of payroll. These arrangements differ from the ordinary method used by a standard VAT-registered trading business. ^[10]

Invoicing and digital controls

The ITA operates an invoice-allocation system, commonly referred to as Israel Invoices. For specified tax invoices above a legislated amount, an allocation number is a condition for the customer’s deduction of input tax. The threshold has been phased down: the ITA’s published guidance identifies NIS 10,000 before VAT from January 1, 2026, and NIS 5,000 from June 1, 2026. The authority may review or refuse an allocation request where statutory conditions are met. ^[12]

The allocation-number system links invoice information submitted by suppliers with input-tax deductions claimed by customers. It is part of a broader move toward digital VAT reporting and invoice verification. The applicable threshold and procedure are time-sensitive and should be checked against the ITA’s current notices and services. ^[12]

Economic role and context

VAT is an important source of government revenue and applies across many parts of the economy, including domestic consumption and imports. Its standard rate means that, for a fully taxable sale priced at NIS 100 before VAT, the VAT component at 18% is NIS 18, making the total NIS 118. The economic burden may be distributed between consumers, businesses and suppliers depending on prices, competition, contracts and the ability to deduct input tax.

Changes to VAT can affect tax-inclusive consumer prices, business cash flows and the cost of intermediate inputs. However, the effect of a rate change on prices is not mechanically identical across all products and services: the degree and timing of pass-through depend on market conditions and transaction terms. The VAT rate change effective in 2025 should therefore be distinguished from the treatment of zero-rated, exempt and specially taxed transactions, which follow their own legal rules. ^[1][9][10]

VAT is separate from income tax, corporate tax, customs duties and other indirect taxes, though the same business may have obligations under several regimes. The ITA administers VAT alongside other tax functions, while individual reporting and payment procedures depend on the applicable category and activity. ^[13]

This entry describes the general structure of Israeli VAT and is not a determination of the tax treatment of any specific transaction. Statutory provisions, current ITA guidance and transaction-specific facts govern the outcome; thresholds and administrative procedures can be amended over time. ^[6][12]