Invoicing Israeli Customers: VAT Rules for Foreign Firms

A software firm in Reading had been invoicing an Israeli customer quietly and successfully for four years. In February the customer's finance department returned an invoice for NIS 46,000 unpaid, with a one-line explanation about a missing allocation number. The UK finance director had never heard the term, could not find it in any of the guidance she was reading about exporting to Israel, and had a quarter-end approaching.

She had run into a reform that took effect in stages and that reached her business on 1 January 2026 without anybody telling her. It is worth understanding, but it is the second question, not the first. The first question is whether a foreign supplier is inside the Israeli VAT system at all, and most British companies selling into Israel are not, which is a considerable relief once you know it.

When an Israeli Sale Falls Into the Israeli VAT Net

Israeli VAT is charged at 18%. The rate went up from 17% on 1 January 2025 and survived the 2026 budget intact after a proposed rise to 19% was dropped, so 18% is what you price against for the year.

Whether your sale is caught turns on the place of the transaction. Section 15 of the Value Added Tax Law 1976 treats a service as supplied in Israel where the supplier's business is in Israel, or where the service is supplied to an Israeli resident, or where it concerns assets located in Israel. Read literally, that second limb sweeps in a great deal of ordinary cross-border trade, and it is what makes British suppliers nervous when they first read it.

What stops the literal reading from producing chaos is the collection mechanism, not the charging provision. Israeli VAT can be due on a transaction without the foreign supplier being the one who accounts for it.

The Reverse Charge That Saves Most UK Suppliers

Regulation 6D of the VAT Regulations 1976 is the provision every foreign supplier to Israel should know by name.

Where a transaction is made in Israel and the seller or service provider is a foreign resident, the duty to pay the tax falls on the buyer, unless the buyer holds an invoice for the transaction. The Israeli customer reports the supply in the periodic return it files under Regulation 23, issues a self-invoice made out in its own name in place of the one the foreign supplier would have issued, and simultaneously claims the input tax on that self-invoice.

For a registered Israeli business customer the arithmetic is neutral. Output and input net to nothing, and the mechanism exists to record the transaction rather than to collect money.

For you, the practical effect is that you invoice without Israeli VAT and say so on the face of the document. Do not add 18%. Do not add UK VAT either. An invoice that shows a VAT line the Israeli customer cannot use is an invoice that comes back.

Two limits are worth marking. Regulation 6D operates where the buyer is accounting for the tax, so it does not solve anything for sales to Israeli consumers or to bodies that are not registered dealers. And it is a collection rule, not an exemption: it does not answer the separate question of whether your activity in Israel has grown into something that requires you to register in your own right.

In Practice: Regulation 6D of the VAT Regulations 1976 shifts the liability for a transaction in Israel from a foreign-resident supplier to the Israeli buyer, who reports it in the Regulation 23 return and issues a self-invoice in its own name. Returns go to the Israel Tax Authority monthly, by the 15th of the following month, with bi-monthly filing available where annual turnover stays under NIS 1,510,000. Records supporting a Regulation 6D charge must be retained for five years by a registered dealer. On a NIS 200,000 annual contract the tax at stake is NIS 36,000, which the Israeli customer books on both sides of its return in the same period, so the cash effect on both parties is nil provided the invoice does not carry a VAT line that contradicts the self-invoice.

When You Must Register and Appoint a Representative

Section 60 of the VAT Law 1976 is the threshold provision, and it is drafted around activity rather than money.

A person liable to tax who is a foreign resident and who has business or activity in Israel must, within thirty days of beginning that business or activity in Israel, appoint a representative whose permanent residence is in Israel, and file that representative's written consent with the Israel Tax Authority. There is no turnover figure in the section. The NIS 122,833 ceiling that separates an osek patur from an osek murshe in 2026 is a small-dealer concept built for Israeli residents and does not give a foreign company a free allowance.

What tips a foreign supplier over the line is presence and activity: a fixed place of business, staff on the ground, a warehouse, installation work, a dependent agent concluding contracts, or supplies made to Israeli consumers rather than to registered businesses. Selling software from Reading to a Tel Aviv company under a contract signed by email does not. Opening a Tel Aviv office to service that customer usually does, and it raises a permanent establishment question for income tax at the same moment. The choice between registering as a foreign trader and forming a subsidiary is a real one, and we cover the related self-employment route in our guide to registering as self-employed in Israel as a non-resident.

Registration itself runs on Form 22, the application to open a VAT file for a foreign trader, filed with the regional VAT office. Expect to produce an apostilled certificate of incorporation, the company's constitutional documents, notarised and authenticated identification for the directors, evidence of the Israeli activity such as the underlying contract, a signed power of attorney, and the representative's written consent. Every foreign document needs an apostille. Realistically the document gathering, not the Tax Authority, sets the timetable, and six to ten weeks from decision to VAT number is a fair expectation for a company doing it from Britain.

What the Representative Is Signing Up For

The wording of Section 60 is not decorative. A representative appointed under it is treated, for the purposes of the VAT Law, like the person liable to the tax.

That means the Israeli representative carries joint and several liability for the VAT itself, for filing the returns on time, and for the penalties when they are not. A representative who signs the consent for a foreign client and then loses contact with them is personally exposed to an assessment they cannot fund. This is why serious Israeli firms charge properly for the role, ask for a retainer or a deposit, and want to see the underlying contracts before agreeing.

From the foreign company's side, the consequence is that you cannot treat the representative as a mailbox. They will insist on receiving your Israeli sales data monthly, on approving how transactions are characterised, and on holding funds to meet the liability. If that feels intrusive, the alternative is an Israeli subsidiary that carries its own liability, which is often the cleaner structure once activity is real.

Allocation Numbers and Why Your Invoice Gets Rejected

Israel has moved to a clearance model for B2B invoicing, and 2026 is the year it starts to bite at ordinary commercial values.

Under the Invoice Israel reform implementing Section 38(a1) of the VAT Law, a tax invoice above a set value requires an allocation number, mispar hakatzaa, obtained in advance from the Israel Tax Authority through its digital platform before the invoice is issued. The buyer cannot deduct input VAT on an invoice that should have carried a number and does not.

The thresholds have been falling fast:

| From | Threshold, before VAT | |------|----------------------| | 2024 | NIS 25,000 | | 2025 | NIS 20,000 | | 1 January 2026 | NIS 10,000 | | 1 June 2026 | NIS 5,000 |

For a foreign supplier operating through Regulation 6D the obligation sits with the Israeli customer, who is issuing the self-invoice and therefore obtaining the number. For a foreign supplier that has registered under Section 60 and issues Israeli tax invoices in its own name, the obligation is yours, and it has to be built into your billing system rather than handled manually at month end.

The commercial effect reaches even suppliers who owe nothing. Israeli finance departments now screen incoming invoices, and an invoice that is ambiguous about who is accounting for the VAT gets returned rather than queried. State the position on the document: that the supplier is a foreign resident, that no Israeli VAT is charged, and that the recipient accounts for the tax under Regulation 6D.

In Practice: Section 38(a1) of the VAT Law 1976, as implemented through the Invoice Israel reform, requires an allocation number for B2B tax invoices above NIS 10,000 before VAT from 1 January 2026 and above NIS 5,000 from 1 June 2026, down from NIS 20,000 during 2025. The number is issued in advance by the Israel Tax Authority and without it the Israeli buyer loses the input VAT deduction entirely, so on a NIS 46,000 invoice the customer is NIS 8,280 out of pocket at the 18% rate. Where a registered foreign trader files late, the Israel Tax Authority applies a fixed penalty of roughly NIS 239 for every two weeks a return is outstanding, alongside linkage and interest on the unpaid tax, and records must be kept for seven years.

The UK Side of the Same Transaction

None of the above removes your British obligations, and they need to line up.

For a UK business supplying services to an Israeli business customer, the general place of supply rule in section 7A of the Value Added Tax Act 1994 puts the supply where the customer belongs. Israel is outside the UK, so the supply is outside the scope of UK VAT. You charge no UK VAT, but the sale still has to appear in the turnover box of your UK VAT return, and you should hold evidence that the customer is in business, because HMRC will ask for it on an enquiry rather than take it on trust.

Goods are different in the ways you would expect. An export to Israel is zero rated for UK purposes with the usual evidence requirements on proof of export within the time limit, and the UK Israel trade continuity arrangements deal with customs duty rather than with VAT on either side.

There is no VAT treaty between the two countries. Double taxation treaties, including the one between the UK and Israel, allocate taxing rights over income and profits, not over VAT, so the UK Israel tax treaty will not help with an Israeli VAT assessment. It is, however, the instrument you reach for the moment your Israeli activity raises a permanent establishment question, which is usually the same moment Section 60 starts to apply.

Where Foreign Suppliers Get Caught

The recurring failures are practical rather than exotic.

Adding 18% to an invoice "to be safe" is the most common. You have then collected Israeli VAT you are not registered to collect, your customer cannot recover it, and unwinding it requires credit notes and an explanation.

Treating Regulation 6D as a general answer is the second. It works for sales to registered Israeli businesses. It does nothing for sales to Israeli consumers, and a foreign company that starts selling direct to the Israeli public without registering has a genuine problem.

And the third produces a bill years later:

Common Mistake: A foreign supplier hires an Israeli sales employee or engages a local agent who negotiates and closes deals, then keeps invoicing from abroad without Israeli VAT because nothing about the invoicing changed. That is business or activity in Israel, and Section 60 of the VAT Law 1976 required a representative within thirty days of it starting. When the Israel Tax Authority reaches the file, usually through an audit of the Israeli customer rather than of the supplier, it assesses the unpaid VAT for the open years with linkage and interest, adds the roughly NIS 239 per fortnight late-filing penalty for each missing return, and Section 117 makes the failure to register an offence carrying up to one year's imprisonment, or five where evasion is alleged. On NIS 3M of unreported Israeli sales the tax alone is NIS 540,000 before interest, and the Israeli customers who lost their input deduction generally have a contractual claim for it.

Practical Checklist

• Confirm whether your Israeli customers are registered dealers, because Regulation 6D depends on it
• State on every invoice that you are a foreign resident, that no Israeli VAT is charged, and that the recipient accounts under Regulation 6D
• Never add Israeli VAT to an invoice unless you hold an Israeli VAT number of your own
• Reassess the Section 60 position whenever you put a person, an office, an agent or stock into Israel
• If registering, start the apostille process on the corporate documents first, since it drives the timetable
• Build allocation numbers into billing before 1 June 2026 if you issue Israeli tax invoices in your own name
• Keep Israeli records for seven years and confirm with your representative where they are held
• Report the same supplies correctly on the UK return, outside the scope for services, zero rated with export evidence for goods

Speak With an Israeli Attorney

The question that decides everything here is whether your activity has crossed from selling into Israel to doing business in Israel, and it is not a question a foreign finance team can answer from the wording of Section 60 alone. An Israeli attorney can review the contracts and the on-the-ground arrangements, tell you whether registration is required, structure the appointment of a representative so the liability is properly documented, and get the invoicing wording right before an Israeli customer rejects it.

Contact us for a confidential initial consultation.