Dr. Avi Nov, Adv.
The Israeli Tax Authority may not treat internet companies as foreign residents for Value Added Tax (VAT) purposes. Treating internet companies not as foreign residents is an interpretation by the Israeli Tax Authority of the VAT law.
According to this interpretation of law, internet companies may need to register for VAT in Israel and they may incur VAT on services they receive in Israel. This issue may have great consequence to companies with branches or subsidiaries in Israel.
Two VAT issues
The two VAT issues that may arise for foreign companies who provide services in Israel are:
In principle, a foreign company or other foreign resident is not required to register for VAT purposes in Israel. In addition, services supplied to a foreign resident by an entity resident in Israel may benefit from VAT zero-rate.
A foreign resident is defined in the Israeli VAT law as an entity which is registered or incorporated exclusively outside Israel, and, in addition, has no business or activity in Israel. A business or activity in Israel may exist when a transaction in Israel is undertaken. According to the VAT law, transactions undertaken in Israel include supplying services to “an Israeli resident; to a partnership most of the rights to which are held by Israeli resident partners or to a company that is deemed an Israeli resident for purposes of the Income Tax Ordinance.
The Israeli Tax Authority started recently to assert that if an internet company who is a foreign resident provides services to Israeli clients - in that case it does not satisfy the definition of foreign resident.