International trade transactions can take various contractual forms, each carrying distinct legal and tax implications. The way in which an agreement is drafted is key to defining the parties’ rights and obligations, ensuring compliance with applicable laws, and minimizing exposure – especially in relation to tax issues. As tax consequences vary based on the specific circumstances, contractual terms may require tailored adjustments.
This client update provides an introductory overview of selected tax aspects relevant to transactions between Israeli importers and foreign suppliers. A follow-up update will address tax considerations applicable to Israeli exporters.
Value Added Tax (VAT)
One of the central questions in international transactions is whether a foreign supplier – incorporated and registered outside of Israel – is required to register as a VAT dealer in Israel. The answer depends on the agreement’s language, commercial terms, and broader factual context. For instance, the way goods are marketed, the nature of services provided in Israel, and the identity of the party interacting with end customers may all affect the VAT analysis.
Business Activity in Israel
A foreign supplier may unexpectedly find itself subject to VAT registration in Israel if it carries on business activity locally. The appointment of a local representative – explicitly or implicitly, including through the agreement – may increase both parties’ tax exposure.
Customs Clearance
Where customs clearance is handled by a customs broker acting on behalf of the foreign supplier, this may indicate the supplier is conducting business in Israel, requiring VAT registration.
Structure of the Arrangement
Some agreements, such as agency relationships where the Israeli agent maintains ongoing contact with local customers and acts as the supplier’s commercial arm, may result in a deemed business presence in Israel, requiring VAT registration.
Proper planning, consideration of all relevant facts, and drafting an agreement that reflects the true commercial relationship may help reduce tax exposure.
Customs and Purchase Tax
The allocation of liability for Customs duties and Purchase tax is largely influenced by the contractual structure between the foreign supplier and the Israeli importer. For example, the commercial terms of sale may affect responsibility for Customs clearance, liability for payment of import taxes, and more.
Unexpected tax disputes highlight the importance of clearly defining the relationship between the parties in a detailed and unambiguous manner, beyond merely referencing the relevant Incoterms (International Commercial Terms), which must also be selected with due care and tailored to the specific transaction. Such disputes typically center around three key issues: the classification of the goods, the origin of the goods, and the price of the imported goods.
Classification of Goods
The classification of goods determines the applicable Customs rate and Purchase tax. Misclassification (or disputes regarding the manner of classifying the goods and their assignment to a specific item in the Customs Tariff) may result in delays in the release of the goods from the Customs Authority, retroactive assessments, and penalties. Advance rulings may be obtained when appropriate.
Origin of Goods
The origin of goods affects Customs liability. Goods from countries with which Israel has a Free Trade Agreement may be exempt from Customs, subject to compliance with specific rules. The agreement should include relevant provisions addressing both regulatory and substantive origin requirements.
Valuation of Goods
The value for Customs purposes is not limited to the price of the goods but may also include additional payments such as royalties, freight, insurance, and other charges. These issues should be addressed prior to the importation of goods into Israel, especially when such amounts are not known at the time of Customs clearance.
Withholding Tax
Payments by an Israeli importer to a foreign supplier may give rise to withholding tax obligations, depending on the nature of the transaction. While it is often argued that payments solely for importing tangible goods are not subject to withholding, this position may be challenged.
The supplier’s incorporation abroad does not by itself establish non-residency for Israeli tax purposes. If the Israeli importer acts as the supplier’s agent or representative, this may raise questions about the supplier’s residency status and the existence of a permanent establishment in Israel. Payments for additional services – such as implementation of goods or marketing services – may affect both the withholding obligation and the applicable rate. Non-cash consideration and barter transactions may also have implications for withholding tax.
Proper structuring of the commercial arrangement, assessment of potential tax exposures, and precise contractual drafting can improve cross-border efficiency and reduce risk. Our firm advises Israeli and international clients on trade agreements and international tax matters and is available to provide tailored legal support.
