Quick Answer: Israel's VAT rate is 17%, levied under the Value Added Tax Law 5736-1975 (*Chok Mas Erech Musaf*, חוק מס ערך מוסף, תשל"ו-1975). A foreign business must register with the Israel Tax Authority's VAT division (known as Maam, מע"מ) if it supplies goods or services in Israel above an annual turnover threshold of NIS 120,093 (2026 figure). Foreign providers of digital services directly to Israeli consumers must register under a simplified scheme regardless of turnover. B2B supplies to Israeli VAT-registered businesses are generally covered by the reverse charge, meaning the Israeli customer self-accounts for the tax and no Israeli VAT registration is needed by the foreign supplier.

For a US software company adding Israeli subscribers, a German manufacturer shipping goods directly to Israeli distributors, or a UK consulting firm billing Israeli clients, the Israeli VAT system creates obligations that are easy to miss. The Israel Tax Authority audits non-resident businesses and assesses back-VAT from the date registration should have begun, plus CPI linkage and statutory interest — penalties that compound fast on a growing revenue base. Getting the classification right before you start trading in Israel costs a few hours of professional time; getting it wrong typically costs much more.

This guide covers who must register, how to do it, the mechanics of filing and payment, the special digital services scheme, and how to recover input VAT you have paid. It also covers the reverse charge mechanism that eliminates the registration requirement for many B2B foreign suppliers.

1. What Is Israeli VAT (Maam)?

Israeli VAT is a consumption tax charged on the supply of goods and services in Israel. It is collected at each stage of the supply chain, with each registered business charging VAT on its sales (output tax) and deducting the VAT it has paid on its own purchases (input tax). Only the net amount is remitted to the ITA.

The legal framework is the Value Added Tax Law 5736-1975 (*Chok Mas Erech Musaf*), supplemented by the Value Added Tax Regulations 5736-1976 and a series of administrative circulars issued by the VAT Commissioner. The standard rate is 17%, a figure unchanged since May 2015. There is no reduced rate applicable to everyday goods — Israel has no equivalent of the EU's reduced VAT bracket for food or children's products.

Zero-rating applies to:

  • Exports of goods from Israel to destinations outside Israel.
  • Services provided to non-Israeli residents and consumed outside Israel (subject to conditions under Section 30 of the VAT Law).
  • Hotel accommodation and ancillary services provided to tourists holding non-Israeli passports who pay in foreign currency.
  • Certain transactions involving the Palestinian Authority and Eilat Free Trade Zone goods.

Exempt supplies include financial services provided by licensed financial institutions, sale of residential property (in most circumstances), and educational services by recognized institutions. Exempt suppliers cannot register for VAT or recover input VAT.

In Practice — Where VAT Is Administered

VAT in Israel is administered by the Israel Tax Authority (ITA) through a network of regional Maam offices. Foreign companies typically file through the VAT Office for Large and Foreign Enterprises in Tel Aviv (Rechov Shaul HaMelech 8). This office handles non-resident registrations and has English-speaking staff. The formal contact is the Memuneh Maam (VAT Commissioner), who is a senior official within the ITA. All VAT filings are now submitted online through the ITA's Shaam portal (shaam.gov.il); paper returns are no longer accepted for most business types.

2. Who Must Register for VAT in Israel

The VAT registration obligation depends on whether you are:

  • An Osek Murshe (licensed dealer) — a business whose annual turnover from taxable supplies in Israel exceeds the annual threshold.
  • An Osek Patur (exempt dealer) — a small business below the threshold that can trade without VAT registration but cannot recover input VAT.
  • A foreign digital services provider subject to the 2018 simplified scheme.

The general rule under Section 52 of the VAT Law is that any person who carries on a business in Israel with an annual taxable turnover exceeding the indexed threshold must register as an Osek Murshe within 30 days of crossing it. The 2026 threshold is NIS 120,093 per year (updated each January 1 by the Central Bureau of Statistics cost-of-living index).

For foreign companies, the critical question is whether they are "carrying on a business in Israel." Israeli VAT law follows a presence-based rather than destination-based approach for most non-digital services:

  • A registered branch in Israel must register for VAT unconditionally.
  • A fixed establishment in Israel — a local agent with authority to bind the company, a warehouse, or a regular order-taking office — is treated as carrying on business in Israel and requires registration above the threshold.
  • No Israeli presence, selling to Israeli VAT-registered businesses: generally no registration required because the reverse charge applies (see Section 7 below).
  • No Israeli presence, selling digital services to Israeli consumers: registration required under the digital services scheme regardless of turnover (see Section 5 below).
In Practice — The NIS 120,093 Threshold in Context

The annual registration threshold of NIS 120,093 (2026) is approximately USD 33,000 at current exchange rates. For a foreign company with a small but growing Israeli customer base, crossing this threshold can happen faster than expected. The threshold counts all taxable supplies made in Israel — goods physically delivered here, services performed here, and any other Israeli-source revenue — but excludes zero-rated exports and exempt supplies. Once you cross it, registration is mandatory within 30 days under Section 52; voluntary registration is possible below the threshold and may be commercially sensible if you are incurring significant Israeli input VAT that you want to recover.

3. The VAT Registration Process

To register as a foreign business, you must file an application with the relevant regional Maam office (usually the Tel Aviv Large and Foreign Enterprises office for non-resident entities). There is no online registration route for foreign entities without an Israeli tax file — you must file in person or through a licensed Israeli tax representative.

Required documents for a foreign company registration:

  • Certificate of incorporation or equivalent proof of legal existence, apostilled and certified-translated into Hebrew.
  • Memorandum or articles of association (or equivalent constitutional document), apostilled and translated.
  • Proof of the applicant's identity and authority to act for the company (board resolution or power of attorney).
  • Description of the business activity in Israel and how it is conducted.
  • Sample invoices or contracts showing the nature of supplies made to Israeli customers.
  • Passport copies of the authorized representative.
  • Bank account details for the Israeli bank account into which refunds will be paid (if applicable).

The Maam office will schedule a registration meeting (*pegisha*) at which an inspector reviews your file and may ask follow-up questions. After the meeting, the VAT registration number (*mispar osek*) is typically issued within 2 to 4 weeks. From that date, you are required to issue Israeli tax invoices (*heshboniyot mas*, חשבוניות מס) and to charge VAT at 17% on all taxable supplies.

In Practice — The Mandatory Israeli Tax Invoice

Once registered, every supply you make must be supported by a heshbonit mas (tax invoice) issued through a VAT-approved invoicing system. The invoice must include: your VAT registration number, the customer's VAT number for B2B transactions, a sequential invoice number, date, description of the supply, the net amount, VAT at 17%, and the gross total in NIS (or the foreign-currency equivalent with the Bank of Israel exchange rate on the transaction date). The ITA requires invoicing systems to be connected to its Chasbanit e-invoicing platform for invoices above NIS 25,000 from January 2024 onward, and the threshold drops further in subsequent years. Foreign companies using billing software should check compatibility with the Israeli requirements before registration.

4. Returns, Filing, and Payment Deadlines

Registered VAT dealers file periodic VAT returns (*doch tkufa*, דוח תקופה) and pay the net VAT liability to the ITA. The filing frequency depends on annual turnover:

  • Monthly filing: Businesses with annual turnover above NIS 1.5 million file a return and pay by the 15th of the following month.
  • Bi-monthly filing: Businesses below the NIS 1.5 million threshold file every two months, also by the 15th day after the period ends.
  • Annual filing: Certain small businesses and non-profit associations can apply for annual filing — this is rarely granted to foreign businesses.

Returns and payments are submitted through the Shaam portal (shaam.gov.il). Payment can be made by bank transfer from an Israeli bank account, credit card, or through the Masav electronic clearing system. Foreign businesses without an Israeli bank account typically open one before registering — the major Israeli banks (Bank Hapoalim, Bank Leumi, Mizrahi-Tefahot, Discount) all have international business banking units, though the process for a foreign entity can take 4 to 8 weeks due to AML verification requirements.

A VAT return that shows input VAT exceeding output VAT (i.e., a refund position) is filed normally. The ITA is required to process refunds within 30 days under Section 39 of the VAT Law. In practice, refunds to foreign entities often trigger an ITA audit, particularly in early periods, and can take 60 to 90 days. The ITA pays CPI-linked interest on refunds paid after the 30-day deadline.

In Practice — Refund Audits for Foreign Businesses

The Maam regularly audits the first refund application from a foreign business. The inspector will request copies of all sales invoices issued and purchase invoices received during the period, plus evidence of payment for claimed input tax. For a foreign company that has invested in Israel before generating Israeli revenue — paying for local office fit-out, equipment, or local staff — the refund in early periods can be substantial, which increases audit scrutiny. Keeping a clean and contemporaneous invoice file from day one (both digital and paper originals for paper invoices) is essential. The ITA has a 5-year audit window under Section 77 of the VAT Law, so records must be retained for at least 7 years to give a margin of safety.

5. Foreign Digital Services Providers: The 2018 Simplified Scheme

The most significant change to Israeli VAT in recent years is the introduction of the special registration scheme for foreign digital service providers, which came into force on 1 October 2018 under an amendment to the VAT Law and accompanying regulations.

The scheme applies to any foreign business (with no Israeli fixed establishment) that supplies digital services directly to Israeli consumers who are not VAT-registered. "Digital services" is defined broadly under the 2018 Regulation to include:

  • Streaming video, audio, and games.
  • Software as a Service (SaaS), cloud storage, and hosted applications.
  • E-books, downloadable software, apps, and mobile content.
  • Online advertising and marketplace facilitation services.
  • Subscription-based digital content of all kinds.
  • Online education platforms and webinar services consumed by Israeli users.

The scheme removes the turnover threshold entirely. A foreign company that makes even a single sale of a digital service to an Israeli consumer must register and account for Israeli VAT at 17%. The obligation is triggered by the customer's location, determined using two or more of the following proxy indicators: billing address, IP address, phone country code, or bank country.

Registration under the simplified scheme is done online at a dedicated ITA portal and does not require an Israeli bank account, an Israeli tax file number, or the appointment of an Israeli tax representative. The quarterly return and payment process is also streamlined, with the option to pay by credit card in foreign currency (converted at the Bank of Israel rate on the payment date).

In Practice — Digital Services: Simplified vs. Standard Registration

The simplified scheme is administratively lighter, but it has one major limitation: businesses registered under it cannot recover Israeli input VAT. If your Israeli operations involve significant local costs — paying an Israeli agency, renting server space in an Israeli data center, employing Israeli staff — the input VAT on those costs is not recoverable under the simplified scheme. In that scenario, consider registering under the standard scheme as an Osek Murshe instead: it is more administratively burdensome (Israeli bank account, full invoicing requirements, periodic returns to the regular Maam office) but allows full input VAT recovery. Foreign digital companies with annual Israeli revenue above NIS 500,000 should almost always evaluate whether the standard scheme is financially superior. The ITA permits a switch from simplified to standard registration by filing a new registration application with the Tel Aviv VAT office and notifying the digital services unit.

6. Input VAT Recovery

A registered Osek Murshe can deduct input VAT paid on goods and services used in its taxable business activity in Israel. This is the mechanism that prevents VAT from cascading through the supply chain — each business recovers what it has paid, remitting only the tax on the value it has added.

To claim an input VAT deduction, the business must hold a valid Israeli tax invoice (*heshbonit mas*) addressed to its VAT registration number. The supply must be directly linked to taxable activity. Input VAT on the following is not deductible regardless of documentation:

  • Privately used vehicles and their running costs.
  • Meals and entertainment expenses (above the partial deduction allowed under the Income Tax Ordinance).
  • Goods or services for non-business personal use.
  • Purchases used exclusively for exempt supplies.

Where a business makes both taxable and exempt supplies, input VAT must be apportioned between the two activities using the ratio method set out in the VAT Regulations. Only the portion attributable to taxable activity is deductible.

For foreign companies, the practical limitation is documentation. Israeli suppliers issue paper invoices as a matter of course, and the ITA requires that the original — or a certified copy — be held. Invoices received by email must be printed and retained. The ITA's e-invoicing initiative (Chasbanit) will eventually make this easier, but for now documentation management is a real operational issue for foreign businesses with Israeli purchasing activity.

7. The Reverse Charge and B2B Supplies from Abroad

Under Section 22 of the VAT Law, when a foreign supplier provides services to an Israeli VAT-registered business, the Israeli customer self-assesses and remits the VAT directly to the Maam. The foreign supplier charges nothing and owes nothing to the Israeli tax authorities on that transaction.

This rule covers most cross-border B2B services: consulting, legal advice, IT services, marketing, accounting, and similar professional services consumed by Israeli businesses. It is the mechanism most foreign professional services firms rely on when serving Israeli corporate clients, and why many of them correctly conclude they have no Israeli VAT registration obligation at all.

The reverse charge does not apply to:

  • Supplies to Israeli consumers (private individuals) — the foreign supplier must register and charge VAT.
  • Supplies to exempt entities (banks, educational institutions) — these customers cannot self-assess VAT because they are not registered dealers.
  • Goods physically imported into Israel — customs handles VAT at the border regardless of who the customer is.
  • Construction and real estate services performed in Israel — these are subject to a specific sourcing rule that deems them supplied in Israel regardless of the customer's registration status.
In Practice — How Israeli Clients Account for Reverse Charge VAT

When an Israeli VAT-registered business receives a foreign invoice for services, it must file a separate self-assessment (*doch onai*) with the Maam and pay the VAT by the 15th of the following month. Simultaneously, it records the same amount as input VAT on its periodic return — so the net effect is zero for fully taxable businesses. This is why Israeli corporate clients routinely ask foreign suppliers for invoices net of VAT and handle the Israeli VAT themselves. Your invoice to an Israeli Osek Murshe should state "Reverse charge applies — Israeli VAT self-accounted for by the customer under Section 22 of the VAT Law 5736-1975." This formulation satisfies the ITA's documentation requirement and makes clear that neither party has overlooked the VAT obligation.

8. Penalties for VAT Non-Compliance

The ITA actively audits foreign companies with Israeli operations, and the penalties for VAT non-compliance are significant. The system applies both administrative fines and economic sanctions (linkage plus interest) that compound quickly on unpaid balances.

Late registration. Failure to register as an Osek Murshe within 30 days of crossing the threshold carries a monthly fine of up to NIS 3,500 under Section 95 of the VAT Law, running from the date registration was required. The ITA will also assess all VAT that should have been charged and collected during the unregistered period, plus CPI linkage and interest at the statutory rate (currently approximately 7.5% per year) from the date each payment was due.

Late filing. A return filed after the 15th deadline attracts a surcharge of 0.5% of the VAT due per week of delay, up to a maximum of 15% under Section 97, plus interest on the underlying liability.

Under-declaration. If an audit reveals that a taxpayer declared less VAT than was due, the shortfall carries interest and linkage, plus a civil penalty of between 10% and 30% of the additional tax assessed depending on the nature of the error (unintentional vs. negligent vs. deliberate).

Criminal sanctions. Deliberate evasion of Israeli VAT is a criminal offence under Section 117 of the VAT Law. Responsible officers (directors, authorized signatories) face personal liability. In 2026, the maximum fine under Section 117 is NIS 289,100 (index-adjusted from the base NIS 75,000 set in 1975), plus up to 5 years' imprisonment for the most serious cases.

In Practice — Voluntary Disclosure for Historic Non-Compliance

If your foreign business has been supplying to Israel without registration for some time, voluntary disclosure is far preferable to waiting for the ITA to identify you. The ITA operates a voluntary disclosure procedure (*giluy meidaot retzoni*) under a standing administrative circular. Under the procedure, a taxpayer who approaches the ITA before an audit begins and discloses the full outstanding liability — including all periods and all taxes (VAT, income tax, withholding tax) — is generally entitled to a waiver of criminal prosecution and a reduction in civil penalties. The ITA typically requires a payment plan for the arrears plus full registration going forward. Approaching the ITA through an Israeli tax lawyer or CPA ensures the disclosure is structured correctly and that you do not inadvertently admit to facts that could increase your exposure beyond the VAT liability itself.