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Does an Israeli nonprofit association (amuta) pay VAT, and what is the salary tax it pays instead?

An amuta registers with the VAT authorities as a nonprofit institution (mosad lelo kavanat revach) rather than as a dealer. It charges no VAT on its activity and, in exchange, cannot reclaim the input VAT it pays on purchases. Section 4(a) of the Value Added Tax Law 5736-1975 imposes salary tax (mas sachar) on the wages it pays instead, currently 7.5 percent. A nonprofit that also runs a genuine commercial operation may have to register that side of its work separately as a dealer.

The Israel Tax Authority assigns every registered body to one of three categories: a dealer (osek), a financial institution, or a nonprofit institution. The classification follows the substance of the activity rather than the legal form, so an amuta that operates like a business can be reclassified, and a company limited by guarantee can be treated as a nonprofit. For a body in the nonprofit category the VAT chain simply stops: no output VAT is charged to donors or beneficiaries, and the 18 percent VAT charged by suppliers becomes an absolute cost. Salary tax is reported and paid monthly to the VAT office in the same way a dealer reports its periodic VAT.

Foreign organizations setting up an Israeli arm regularly underbudget on this point. Model the real cost as payroll plus 7.5 percent, plus non-recoverable VAT on rent, equipment and professional fees. Note also that the two tax questions an amuta faces are separate: classification for VAT purposes has nothing to do with income tax exemption as a public institution under Section 9(2) of the Income Tax Ordinance, or with Section 46 approval, which is what allows Israeli donors to claim a credit for their donations. Section 46 status is granted later and on its own conditions. The registration process itself is covered in the guide to registering an amuta in Israel.

⚖ In Practice
  • Governing law: Section 4(a), Value Added Tax Law 5736-1975; Sections 9(2) and 46, Income Tax Ordinance [New Version]
  • Competent authority: Israel Tax Authority VAT department (Rashut HaMisim); the association itself is supervised by the Registrar of Amutot
  • Rates: salary tax 7.5 percent of wages paid; standard VAT 18 percent (2026), which a nonprofit cannot reclaim on its inputs
  • Filing: salary tax is reported and paid monthly, generally by the 15th of the following month
  • Donation credit: Section 46 approval is granted separately by the Israel Tax Authority and in practice follows a period of operation and a certificate of proper management

From the full guide: Registering an Amuta (Nonprofit Association) in Israel: A Complete Guide for Foreign Organizations

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