Invoicing a Client Abroad: Zero-Rated VAT in Israel, Reverse Charge in the European Union and OSS for Digital Services

Israeli companies and startups, consulting firms, developers and digital marketers issue invoices to clients abroad every day. Two questions recur in every transaction: whether to charge Israeli VAT, and whether a VAT obligation arises in the client's country. The answer depends on three things: who the client is (a business or a private consumer), where it is located, and what type of service it is.

This guide explains the basic rules in Israel and in the European Union. It does not deal with the sale of physical goods, and does not replace a review of a specific transaction. The classification of each type of income and the VAT reporting are done with an Israeli accountant, and where necessary with a VAT adviser in the client's country.

1When is a service to a client abroad zero-rated for VAT in Israel?

When the service is provided to a non-resident who is outside Israel and has no business or activity in Israel. Under section 30(a)(5) of the Value Added Tax Law, the provision of a service to a non-resident is taxed at a zero rate, "except a service the Minister of Finance has prescribed for this purpose". The definition of "non-resident" for the purposes of the section is a non-resident while outside Israel who has no business or activity in Israel.

The section includes an important proviso: a service is not regarded as provided to a non-resident when the subject of the agreement is the actual provision of a service, in addition to the non-resident, also to an Israeli resident in Israel, to a partnership most of whose rights belong to Israeli residents, or to a company treated as an Israeli resident under the Income Tax Ordinance. In other words, the question is not only who pays, but also who actually receives the service.

To prove that the client is a non-resident, it is worth keeping on file: a contract with the foreign entity, the client's registration certificate in its country, its VAT number or tax identification number, and proof that the payment came from abroad. Also tell the accountant about any connection the client has with Israel, because it changes the answer.

2A business client in the European Union: who pays the VAT?

The client. Under Article 44 of the European VAT Directive (2006/112/EC), the place of supply of a service to a business is the place where the business is established. Under Article 196, when the service is supplied by a supplier not established in that Member State, the business client is liable for the VAT. This is the "reverse charge" mechanism: the client reports the VAT in its own return, and the Israeli supplier does not charge European VAT.

• Check that the client is a business: it is customary to ask for its EU VAT number and verify it in the Commission's VIES system.
• State on the invoice the client's details and VAT number, and a reference to the VAT being payable by the client under the reverse charge. The exact wording should be coordinated with the accountant.
• There are exceptions: some services have other place-of-supply rules, for example services connected with immovable property located in the EU, or admission to events. For these, a registration obligation may arise in the country where the property is located or the event takes place.

3A private customer in the EU buying a digital service: who collects the VAT?

The Israeli supplier. When the customer is a private individual and not a business, there is no reverse charge, because a private individual has no VAT registration through which to report. The obligation therefore moves to the supplier: for a digital service, the supplier must charge the customer VAT at the rate of the country where the customer lives and pay it to that country (Article 58 of the Directive). A digital service is a service delivered over the internet with minimal human involvement, for example a software or app subscription, a recorded course, a file download or paid content on a website. Advice from a professional by email, or a live lesson with a teacher over the internet, is not a digital service in this sense (Implementing Regulation 282/2011, Article 7).

Example: an Israeli company sells a monthly app subscription for EUR 10 before VAT. A private customer in Germany pays EUR 11.90, because the German VAT rate is 19%. A private customer in France pays EUR 12, because the French rate is 20%. The company pays the EUR 1.90 to Germany and the EUR 2 to France. So that it does not have to register in each country separately, it can use the OSS scheme explained below.

There is no minimum amount: even a single sale to a private customer in the EU is subject to that customer's country's VAT. The EUR 10,000 threshold that is sometimes mentioned applies only to a supplier established in an EU member state, not to an Israeli supplier.

4How does the OSS scheme work for a supplier outside the EU?

Instead of registering for VAT in every country where it has consumers, a supplier not established in the EU can register for the "non-Union scheme" in one country of its choice, and report and pay through it the VAT on all services to private consumers in all EU countries. According to the Commission's OSS portal:

1. Who is eligible: a taxable person not established in the EU that supplies services to private consumers in the EU. A business that has a place of business in the EU cannot use this scheme.
2. Member State of identification: the supplier chooses one country, which issues it a dedicated identification number for the scheme, in the format EUxxxyyyyyz.
3. Start: the registration applies from the first day of the calendar quarter following notification to the Member State of identification.
4. Return: the reporting period is a calendar quarter, and the return is filed by the end of the month following the quarter: April 30, July 31, October 31 and January 31.
5. Payment: with the return, and no later than the end of the month following the end of the quarter.
6. Rates: each sale is subject to the VAT rate of the consumer's country, so the consumer's place of residence must be identified and evidence of it kept.

5And what about a non-digital service to a private consumer in the EU?

Here the basic rule is different: Your Europe states that for services to consumers the seller generally charges the VAT of its own country, subject to exceptions. For a supplier established in Israel, this means that usually no European VAT applies to a service such as consulting to a private consumer, but there are exceptions depending on the type of service, for example services connected with immovable property in the EU, transport, events and services that certain countries tax according to the place of actual use. Such a service requires a case-by-case review.

6When do you need to register for VAT in a foreign country?

When the transaction is taxable in that country and the obligation to report it rests on the supplier rather than the client. These are common situations in which local registration is worth checking:

• Digital services to private consumers, if the OSS scheme was not chosen.
• Services connected with immovable property in the country, such as construction, design or property management services, when the client is not liable under the reverse charge.
• Organising events, conferences or renting space, when the place of supply is the place of the event.
• Activity through a fixed place of business in the country, such as a branch or office. See the guide to permanent establishment and remote employees.
• Importing and selling goods located in the country, which are outside the scope of this guide.

A company outside the EU that registers for VAT in a particular country may be required to appoint a local fiscal representative, under local law. Specific examples for each country appear in the guides to an Israeli company doing business there, for example in Romania, Greece and Cyprus. Countries outside the EU, such as the United Kingdom, Switzerland and Norway, operate their own rules for digital services, and in the US there is no federal VAT but a state-level sales tax.

7Do Israel's tax treaties deal with VAT?

No. The double taxation treaties Israel has signed cover taxes on income, and some also cover taxes on capital. The taxes each treaty covers are listed in its Article 2, and VAT is not among them. VAT is governed by each country's own law, and in the EU by the VAT Directive. In most cases there is no double taxation even without a treaty: Israel charges zero-rate VAT on a service to a non-resident, and VAT is paid only in the customer's country.

8Summary table: how to charge by client type

9What we review and how we accompany it together with the accountant

Before starting to sell to clients abroad, it is worth mapping the types of clients and services, and making sure the contracts and proposals are worded to fit the classification. We work on the contractual side: defining the parties and who receives the service, the place of supply, tax and VAT clauses in the contract, and payment terms, and coordinate with lawyers or advisers in the client's country when required. The VAT classification of transactions, OSS registration and reporting are done by your Israeli accountant, and we work with them. Anyone operating through a foreign company should also check the controlled foreign company and foreign professional company rules.

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