VAT and Sales Tax in Israel

What is Israel's current VAT rate and what is Ma'am?

Israel's Value Added Tax is known as Ma'am (an acronym from the Hebrew Mas Erech Musaf). The standard rate is 18%, effective 1 January 2025, raised from 17% as part of the government's fiscal response to the post-October 2023 conflict deficit, which had widened to approximately 8.1% of GDP [1]. The rate applies to most supplies of goods and services made in Israel and to the importation of goods by any person.

Israel operates a single-rate model with no reduced positive rates. Transactions are either taxed at the standard 18% rate, zero-rated at 0%, or exempt. The legal basis is the Value Added Tax Law 5736-1975 (the VAT Law), administered by the Israel Tax Authority (ITA). Financial institutions pay an equivalent wage-and-profit tax at 18% in lieu of standard VAT [2].

Which supplies are zero-rated or exempt?

Zero-rated supplies (0% output tax, with input-tax-credit recovery preserved) include:

• Exports of goods from Israel under Section 30(a) of the VAT Law [2]
• Certain services supplied to non-residents, broadly where the service benefit is consumed outside Israel (the "destination rule")
• Inbound tourism accommodation and qualifying services to foreign tourists visiting Israel [3]
• Fresh fruits and vegetables, zero-rated since a 2024 amendment to encourage food-price relief [3]
• Transactions within the Eilat Free Trade Zone (discussed below)

Zero-rating differs from exemption: a zero-rated business charges no output VAT but retains the right to deduct input VAT on its costs. An exempt business charges no output VAT but cannot reclaim any input VAT, so that cost is absorbed into pricing.

Key exempt categories (no output VAT, no input VAT recovery) include residential rental income, most banking and insurance services, healthcare services, and formal education [3].

How does the Eilat Free Trade Zone VAT exemption work?

Eilat, Israel's southern Red Sea resort and port city, is designated as a Free Trade Zone (FTZ) under the Free Trade Zone in Eilat Law. Qualifying supplies of goods and services consumed within the Eilat municipal boundaries are VAT-exempt, making Eilat effectively a zero-VAT retail and hospitality market.

The exemption is not automatic upon trading in Eilat. A business must formally register with the ITA as an Eilat VAT dealer - courts have confirmed this registration is a mandatory prerequisite for the benefit, not a formality [4]. Businesses with activity both inside and outside Eilat must maintain separate accounting for each territory. Goods physically sold to an Eilat-registered buyer carry the exemption; the same goods subsequently transported to mainland Israel attract 18% VAT on their movement because the destination and consumption location - not the seller's address - determines eligibility [4].

Certain categories are specifically excluded from the Eilat exemption even for registered Eilat dealers, including private passenger vehicles, motorcycles, televisions, cigarettes, and high-value jewellery [4].

Who is an osek patur (exempt dealer) versus an osek murshe (licensed dealer)?

Israeli VAT registration creates two principal dealer categories:

The NIS 120,000 threshold (approximately ILS 120,000, or roughly USD 33,000) is the 2025 figure confirmed by the ITA, raised from NIS 107,692 in 2023 [5]. An osek patur does not collect VAT from customers, does not remit VAT to the state, and cannot reclaim input VAT on purchases. The tradeoff is reduced administrative burden and a single annual turnover declaration to the VAT office in January each year [5].

Important: certain professions cannot register as osek patur regardless of turnover. Lawyers, accountants, architects, engineers, doctors, dentists, psychologists, insurance agents, translators, and several other licensed professions must register as osek murshe and collect VAT from the first shekel of revenue [5].

When a business exceeds the NIS 120,000 threshold mid-year, it must notify the ITA immediately and convert to osek murshe status from the date the threshold was crossed.

How often must licensed dealers file VAT returns?

An osek murshe must file periodic VAT returns (Form 83) and remit net VAT (output tax minus input tax credits) by the 23rd of the month following the end of the reporting period [6]. Reporting frequency depends on annual turnover:

• Bimonthly returns (every two months): the default for businesses with annual turnover below approximately NIS 1,490,000 [7]
• Monthly returns: required for larger businesses exceeding the NIS 1,490,000 threshold, and mandatory for certain categories of business regardless of size (such as VAT-registered financial institutions)

Returns are filed electronically via the ITA's Shaam online portal. Late filing attracts a penalty of NIS 239 per two-week period of delay [8]. Failure to maintain adequate records carries an additional penalty of 1% of tax liability with a minimum of NIS 359 [8].

What is the invoice allocation number (clearance model) requirement?

From 5 May 2024, Israel began phasing in a Continuous Transaction Controls (CTC) clearance model requiring licensed dealers to obtain a unique allocation number from the ITA's Shaam system before issuing a tax invoice to a VAT-registered business customer above specified thresholds [9]. This model prevents fraudulent invoices and limits fictitious input-tax-credit claims.

The allocation number is obtained in real time via API: the seller submits invoice data (both parties' VAT numbers, transaction date, invoice number, and pre-VAT amount) and the ITA returns a nine-digit number that must be printed on the invoice. A buyer cannot deduct input VAT based on an invoice that lacks the required allocation number [9].

The threshold is being reduced progressively:

Note: this is a data-clearance requirement. E-invoicing in a structured format (XML or equivalent) remains optional in Israel as of 2026 [9]. The clearance mandate applies to B2B tax invoices where the buyer is a licensed dealer and VAT is charged; it does not currently apply to B2C receipts.

Consult Israel country overview for related filing deadlines and corporate-tax interaction. For practical compliance steps, a qualified tax professional familiar with ITA Shaam system integration can guide implementation.

How are foreign digital service providers treated?

Foreign providers of digital services to Israeli consumers (B2C) must register for Israeli VAT with no minimum threshold - registration is required from the first sale [6]. Digital services subject to Israeli VAT include audio and video streaming, software-as-a-service, e-books, app stores, online advertising, and intermediation platforms. The rate is the standard 18% [6].

Foreign providers typically register under the Foreign Supplier Regime (Form 22) and are required to appoint a local fiscal representative in Israel. Returns are filed bimonthly (or monthly for large providers) in Israeli new shekels (NIS) with payment due by the 23rd of the following month [6].

For B2B supplies (where the Israeli customer is a licensed dealer), a reverse-charge mechanism applies: the Israeli business self-accounts for the VAT, removing the registration obligation from the foreign supplier on those specific supplies. Capturing the Israeli customer's VAT registration number at point of sale is therefore essential for foreign SaaS and digital-service providers to determine which mechanism applies. Reach a qualified tax professional for registration and ongoing compliance support.