Preparing for the VAT Increase from 17% to 18%

Tax Update - Preparing for the VAT Increase from 17% to 18%

On February 28, 2024, the Value Added Tax (VAT) Order (Tax Rate on Transactions and Import of Goods) (Amendment), 2024, was published in the Official Gazette, announcing an increase in the VAT rate from 17% to 18%, effective January 1, 2025.

On April 14, 2024, the Value Added Tax (VAT) Order (Tax Rate on Non-Profit Organizations and Financial Institutions) (Amendment), 2024, was published in the Official Gazette, amending the VAT Order (Tax Rate on Non-Profit Organizations and Financial Institutions), 1992, to raise the wage tax and profit tax applicable to financial institutions operating in Israel from 17% to 18%, effective January 1, 2025.

We deem it necessary to inform you of the implications of this change so that you can prepare accordingly. Assuming the change takes effect on January 1, 2025 (hereinafter referred to as the "Effective Date"), the new tax rate will apply to all transactions for which the tax liability arises from that date onward.

1. Transactions Involving the Sale of Goods:

1.1. In principle, the tax liability for the sale of goods arises at the time the goods are delivered to the customer. Therefore, it is advisable to consider advancing the delivery of products in cases where you have committed to a price with a final consumer (a non-business buyer) without the ability to pass on the additional tax. It is important to note that if a customer orders a product and pays the full or partial price before the product is delivered, and the product is delivered after the Effective Date, you will be required to pay the VAT at the new rate, even if you issued an invoice and paid the VAT before the legal deadline.

1.2. Goods delivered to customers before the Effective Date will be subject to VAT at the rate of 17%, even if the payment or part of it has not yet been made or will be paid in installments after the Effective Date.

1.3. Notwithstanding the above, in transactions involving the sale of goods by the following entities, the tax liability arises upon receipt of the payment and only for the amount received - cash basis:
a. A business whose annual turnover does not exceed NIS 2 million;
b. A business that meets the conditions set forth in item 2(c) of Appendix A to the Income Tax Regulations (Bookkeeping), 1973;

For businesses mentioned in section 1.3 above, the tax liability is based on a cash basis. Therefore, it may be advisable to receive payment before the Effective Date to benefit from the 17% VAT rate instead of 18%.

2. Transactions Involving the Provision of Services:

2.1. When providing services, there are two possible dates that determine the tax liability and, consequently, the applicable VAT rate.

2.2. Section 24 of the VAT Law stipulates that the tax liability for providing services arises upon receipt of the payment and only for the amount received - cash basis. This means that the date of payment determines the applicable VAT rate. Payments received before the Effective Date will be subject to VAT at 17%, while payments received on or after the Effective Date will be subject to VAT at 18%. Therefore, where the price of a transaction was agreed upon with a final consumer (a non-business entity) to include VAT, it may be advisable to agree with the service recipient on advancing payments before the Effective Date or, alternatively, notify the customer that payments made after the Effective Date will incur an additional 1% VAT.

2.3. However, Section 29(1a) of the VAT Law stipulates that in cases where services are provided in a transaction influenced by special relationships between the parties, or where no price is set, or where the consideration is partially or fully in-kind, and where the service is provided by a business with an annual turnover exceeding NIS 15 million that is required to maintain accounting records according to Appendix XI of the Bookkeeping Regulations, the tax liability arises when the service is rendered - accruals basis. For continuous services where the individual parts cannot be separated, the tax liability arises upon the completion of the service or upon receipt of payment, whichever occurs first. Therefore, in such cases, the service provider can reduce the price for consumers by advancing the payment.

3. Transactions Involving the Sale of Real Estate:

3.1. The tax liability for the sale of real estate arises upon the transfer of possession of the property to the buyer, the use of the property by the buyer, or the registration of the property in the buyer’s name in a legally maintained register - whichever occurs first. However, any payments made before this date will be subject to VAT at the time of payment.

3.2. Any real estate delivered to the buyer (transfer of possession or use) or registered in the buyer’s name in the Land Registry before the Effective Date will be subject to VAT at 17%. However, real estate delivered to the buyer after the Effective Date will be subject to VAT at 18%, although payments made before the Effective Date will still be subject to VAT at 17%.

3.3. Therefore, if you have sold real estate that will be delivered on or after the Effective Date, and you have included a clause in the sale agreement stating that any VAT changes will be borne by the buyer, you may approach the buyer and propose advancing payments to improve your cash flow.

4. Transactions Involving Construction Work:

4.1. According to the VAT Law, construction work is defined as: “Construction work - including excavation, demolition, sewage and drainage work, pipe laying, road paving, land preparation, and the like.”

4.2. In these transactions, the tax liability arises upon the completion of the work or the transfer of possession of the property where the construction work was performed to the customer - whichever occurs first. However, if payment is received before this date, the tax liability is advanced to the date of payment for the amount received.

4.3. As a result, VAT at 17% will apply to construction work if completed by the Effective Date, whether or not the work is delivered, and to all payments made before the Effective Date. On the other hand, for work completed after the Effective Date, VAT at 18% will only apply to payments made on or after the Effective Date.

4.4. Therefore, in construction work for a final consumer (a non-business entity) where the price agreed upon includes VAT, it may be advisable to complete the work by the Effective Date or try to advance the payment. If the VAT change will be borne by the buyer, you can approach them and propose advancing the payment to improve cash flow.

5. Transactions where the Tax Liability is Based on Cash Payments - Regulation 7 of the VAT Regulations:

5.1. Regulation 7 of the VAT Regulations provides a list of cases and types of transactions where the tax liability is based on cash payments, as follows:

 • Transactions of businesses required to maintain accounting records under one of the following appendices of the Bookkeeping Regulations: Appendix C (Retailers) as it pertains to businesses subject to subsections (c), (d), (e), (f), and (g) of section 2 of that appendix; Appendix E (Professionals); Appendix F (Physicians); Appendix G (Driving Schools); Appendix H (Schools); Appendix I (Real Estate Brokers); Appendix J (Vehicle Brokers);

 • Transactions involving the rental of assets;

 • Transactions as detailed in Regulation 6A of the VAT Regulations, where the tax is paid by the service recipient;

 • Transactions involving the provision of credit;

 • Transactions involving the sale of subscriptions to newspapers, periodicals, books, compilations and updates, shows, concerts, and the like.

It should be noted that in such transactions, the cash basis will not apply if the price of the transaction is influenced by special relationships between the parties, or where no price is set, or where the consideration is partially or fully in-kind. Accordingly, payments received before the Effective Date will be subject to VAT at 17%, while payments made on or after the Effective Date will be subject to VAT at 18%.

6. Non-Deductible Inputs:

6.1. In cases where inputs cannot be deducted for the purchase of assets or services, it is recommended to advance purchases (provided that the goods are actually received before the Effective Date) or to advance the receipt of services, or in certain cases where the seller/service provider is obligated on a cash basis (see previous sections), to advance the payments. For example, it is possible to advance:

a. The purchase of private vehicles;

b. Payments for services and assets whose inputs are not fully or partially deductible, such as vehicle maintenance expenses (repairs, fuel) or for maintenance companies, which according to the VAT approach are entitled to deduct only 25% of the general input tax (accounting, office, legal).

7. Importation:

In the importation of goods, the tax is paid according to the day of release from customs. Therefore, if it concerns goods for which the inputs cannot be deducted, it is recommended to advance the release date from customs before the Effective Date.

8. Wage and Profit Tax on Financial Institutions:

As mentioned, in parallel with the increase in VAT from 17% to 18%, the wage tax and profit tax applicable to financial institutions will be raised from 17% to 18%. Therefore, if wage tax applies to the payer (financial institutions), it is advisable to consider advancing extraordinary salary payments (e.g., 13th salary, recuperation pay, bonuses) before the Effective Date.