SHEMESH CPA

The short answer: if you are an osek murshe or an Israeli company and you provide a service to a client who is a foreign resident, the invoice can often carry VAT at 0% instead of the standard 18%. The client pays no Israeli VAT, and you keep the right to reclaim the VAT on your own business expenses. But a foreign address on the invoice is not enough. The zero rate depends on who the client is, what the service relates to and where it is actually used.

This comes up constantly for English-speaking freelancers and small firms in Israel: developers, designers, writers, consultants and agencies whose clients sit in New York, London or Berlin.

Why Israel zero-rates exported services

Israel's VAT law is built to tax consumption in Israel, not exports. Section 30(a)(5) of the VAT Law sets a zero rate for services supplied to a foreign resident, subject to exceptions. Zero-rating keeps Israeli service providers competitive abroad: the client is not charged Israeli VAT, and the provider is not stuck with VAT on costs it cannot pass on.

Zero rate versus exempt: why the difference matters

A zero-rated sale is still a taxable sale, just at 0%. You issue a tax invoice, report the sale in your periodic VAT return, and deduct input VAT on your expenses as usual. An exempt transaction is different: no VAT is charged and, as a rule, the related input VAT cannot be reclaimed. For a business with real expenses, such as equipment, software, rent or subcontractors, zero rate is worth considerably more than exempt.

When the zero rate does not apply

The exceptions are where most mistakes happen. Expect standard-rate VAT when:

• The service relates to an asset in Israel. For example, work connected to real estate located here, even if the owner lives abroad.
• The client is foreign but has activity in Israel and the service relates to it. A foreign company with a branch, office or representative here is a common example.
• The service is really used in Israel. If the benefit of the service is consumed here, or the client comes to Israel and receives the service in person, the zero rate may not hold.

In each of these cases the invoice may be addressed to a foreign company and paid in dollars from an account abroad, and VAT at the standard rate can still apply.

What to keep on file

In a VAT audit, the burden of proof is on you. For every zero-rated client, keep:

• the agreement or engagement letter, showing who the client is and what you are providing;
• evidence that the client is a foreign resident, such as registration details from its home country;
• correspondence that shows where the work is used;
• payment records showing where the money came from.

Review the position whenever something changes. A client who opens an Israeli subsidiary, or a project that shifts to an Israeli property, can move you from 0% to the standard rate partway through an engagement.

Common mistakes

• Treating every client with a foreign address as zero-rated, including foreign companies that have a presence in Israel.
• Zero-rating work for a foreign resident that is tied to their apartment or business here.
• Issuing a receipt instead of a tax invoice, or leaving zero-rated sales out of the VAT return because no VAT was collected.
• Not keeping the documents until an auditor asks for them years later.

Where this fits in your setup

If most of your clients are abroad, VAT treatment is one of the first things to get right when you register. Our pages on switching from osek patur to osek murshe and accounting for an osek murshe explain the registration side, and our guide to taxes for the self-employed in Israel covers income tax and National Insurance.

Not sure whether a particular client qualifies? Book a consultation call or call +972-52-448-5784. Meetings are by appointment in the Tel Aviv area, and we work by phone and video across Israel.