VAT increase to 18%

The expected increase in the rate of VAT (from 17% to 18%) was finally approved into law yesterday. The increase takes effect at midnight between 1 and 2 June 2013. Prices need to be updated at that time.

This is the second increase in just nine months, but you should be aware that the rate on Israel remains one of the lowest in Europe.

How does this affect a business' reporting requirements?

With regards to expenses, ensure that you take the VAT as shown on the tax invoice (חשבונית מס) - there are some situations whereby a single invoice will have both the lower and higher rates of VAT charged. The most likely examples are your electric and telephone bills.

Onto income reporting.

For those businesses reporting on a monthly basis, nothing really changes as your income for the month of June will all be charged at the higher rate. I am assuming that no income will be earned on 1 June (Shabbat).

However, for those reporting every two months, the rate change comes in the very middle of the month, and so you will be reporting income charged at differing rates. The VAT authorities will not be able to do a proper check of your calculations, other than to check that the average rate falls out somewhere between 17% and 18%. From the actual average percentage they can work out (subject to rounding differences) the split between income charged at 17% and that charged at 18%.

Overall, the change is not too difficult to handle, but if in doubt, seek professional help.

Who is a resident?

The question of residency is important in determining a person's status vis-a-vis their obligations to paying Israeli taxes.

As previously discussed, Israeli residents must pay Israeli tax on their worldwide income, whereas a non-resident pays only on their Israeli income.

Furthermore, with the 10-year exemption on taxation of non-Israeli income in place for new residents and veteran returning residents, the question of when you become an Israeli resident is highly pertinent.

So, what defines a resident?

The tax law defines an Israeli resident as an individual whose "centre of life" is in Israel. Whilst no further help is given, in practice the authorities consider where the bulk of your family, social, economic and business ties lie. This will include looking at where the spouse and (minor) children live, where your business interests lie and where you attend social gatherings.

The law also says that if you meet the "days test" you will automatically be considered an Israeli resident. You will meet this test if you meet one of the following two criteria:

1. You were in Israel for at least 183 days in the tax year.

2. You were in Israel for at least 30 days in the tax year, and at least 425 days in the tax year and the two previous tax years combined.

Whilst for most people the question of their residency is fairly easy to determine, there are plenty of situations where the story is not so clear cut. As an example, many families make Aliyah, but one spouse travels back to the country of origin on a regular basis on order to support the family. The question of the travelling spouses residency might come into question.

It should be added that the concept of tax residency is wholly unconnected to the concept of Aliyah, even if in many cases the two are concurrent.

Aliyah is a concept in citizenship and has very little impact within the tax law. There are many people who live full-time in Israel but for personal reasons do not make Aliyah. Nonetheless, they will still be considered tax residence by virtue of living in Israel.

Conversely, there are people who make Aliyah before emigrating. This is normally to take advantage of lower purchase tax rates on properties for new olim, but they will remain non-Israeli resident until the emigration is completed from a tax perspective.

Anyone in a borderline situation should seek professional advice.