The Tax Authority has just published a tax ruling (decision 4429/19), about VAT obligations for services rendered to a foreign resident via operation and management of a website advertising products of foreign suppliers abroad that provides links (affiliation) to the supplier websites abroad for purchase.
The taxation decision states that full VAT applies to income from these services despite the rule that a zero rate VAT applies to services provided to foreign residents.
The case in question applies to an Israel – resident company that provides marketing and mediation services via a Hebrew website targeting Israeli consumers – for foreign enterprises (the “operating companies”), who provide marketing services to foreign retail enterprises (the “suppliers”), who sell products.
The website includes a search engine and is intended for Israeli customers, allowing content on goods from online stores of the suppliers to be accessible to them in Hebrew (e.g. product images, prices, return policies, shipping).
Website management, including the content presented, operations, support and updates are all the responsibility of The Company. An Israeli client who wishes to purchase an item clicks on a link on the website and is transferred to the sales website of the relevant supplier. From this point on, all activity takes place at the supplier website, directly between the customer and the supplier. Terms of service agreements and transactions for the purchase of goods take place directly on the supplier websites between the suppliers and the Israeli customer. The goods do not belong to the Company at any point.
In exchange for services rendered, the Company receives from the operating companies a fee derived from total purchases and as a function of the entry volume of Israeli customers to the supplier websites
The Company requested that the fee paid by the operating be taken as a fee for services provided to a foreign resident (the foreign operating companies), and as per the VAT Law, zero VAT would then apply.
The tax ruling holds that, although the service is provided to a foreign resident, according to the exception established in the VAT Law: “…services shall not be considered to be provided to a foreign resident when the subject of agreement is service provision that in practice, in addition to the foreign resident is also provided to an Israeli resident in Israel…” -and according to the decision, the Israeli-resident end customers should be viewed as ones who receive services from the enterprise as well – thus zero VAT would not apply, and the enterprise must produce an tax invoice for the full VAT rate to the operating companies on the full sum of the fee obtained. However, the tax ruling determines that if it can be proven that the price of import of the goods includes the company’s fee, then fthe relief should apply, with zero VAT.
Since these are issues of e-commerce – the Tax Authority emphasizes in this decision that the indicated exemption (as a result of the fee being included in the product cost for customs purposes) only applies when the overall price of the product required reported for customs purposes by the Israeli customers and requiring import taxes in practice. That is – the relief will not apply when the import price is low, below the ceiling price for import tax exemption.

Some insights

• First, we maintain that the exception by which zero VAT applies to services for foreign residents, even if those services were also given in practice to an Israeli resident in Israel, applies across the board and does not depend on VAT charge or import tax in practice.

• Second, we would like to distinguish between two cases – the first is the case brought down in the decision, whereby it can be claimed, as the Tax Authority claims, that the service is dual both for the foreign resident requesting the service and the specific Israeli resident who surfed the website, researched the product and then chose to click on the link and execute the purchase himself on the supplier’s website. The second case would be a marketing website of an Israeli resident who only advertises products of foreign suppliers – and they may contain much detail and information – but the purchase, if it takes place, is completely independent from the advertising website. It is clear to us that the latter case is general advertising, reaching out to the general public (albeit Israeli), and no individual Israeli customer is identified as the recipient of service. In this case, we believe zero VAT should be granted on the fees for advertising services received from the advertisers, who are foreign residents.