The ruling in the GFI (hereinafter: “The Appellant”) case was published recently.

The Appellant is an English company, which established a branch in Israel and which is engaged in the provision of a range of financial services, including brokerage and arbitration services to institutional customers (the Appellant has a defined group of customers – banks, insurance companies, investment funds and etc.) in Israel and across the globe, in consideration for a commission.

The Appellant has signed on a facility agreement for the provision of a range of financial services and “products” with each of its institutional customers and the commission is set with each customer in accordance with the service that is provided to it. The list of projects may vary from customer to customer, as may the level of the commissions.

The appeal deals with two of the Appellant’s “products”: futures transactions in foreign currency (mostly shekel – dollar) and also in swap transactions between interest rates, a fixed interest rate against a variable interest rate. An “initiating” customer (for example an Israeli bank or a foreign bank) approaches the branch and requests a range of prices for the execution of a transaction (it is not known at this stage whether this is for a purchase or for a sale). The handling trader distributes the range of prices that is requested to its other customers, and he receives a range of prices from among them. At this stage, notification is received from the initiating customer regarding whether he is interested in buying or in selling. The trader approaches the customers from which he has received an appropriate range of prices again and a negotiating process is started, which continues until there is agreement with a counter customer and a transaction is signed, for which the branch is entitled to commissions from both of the customers, in accordance with the facility agreement.

The initiating customer can be Israeli or foreigner and the counter customer can be Israeli of foreign.

If both of them are Israeli, the commissions from both of them is chargeable with VAT. If both of them are foreigners, the commissions from both of them are chargeable with VAT at a zero rate and if one of them is Israeli, then VAT will apply to the Israeli party, and a dispute has arisen regarding the service that is provided to the foreign resident in this instance. The Appellant claims that a zero rate applies, and the Director of VAT claims that this is one transaction involving brokerage between both of the parties – even though the service is provided to a foreign resident, in parallel, service is also provided to a resident of Israel and therefore it is excluded in accordance with the provision of the law, which determines that a service that is provided to a foreign resident where the subject of the agreement is the actual provision of the service to a resident of Israel in Israel as well.

In this regard, the Appellant claims that there are two separate agreements, for two different services, and each party bears its own commission and the service to the foreign resident is entitled to VAT at a zero rate.

The court has accepted the appeal:

• The language of the qualification in the section determines that VAT at a zero rate on service to a foreign resident will be negated insofar as the subject matter of the agreement between the provider of the service and the foreign resident, is also the actual provision of service to a resident of Israel in Israel.

In the case in hand we are not dealing at all with an agreement that relates to a resident of Israel in any way (and it is not even clear if there will be such at all). There is no concern of artificiality regarding this fact.

• From a practical perspective, there is no disputing that service is provided to both of the parties, a service is provided to a resident of Israel and a service is provided to the foreign resident. The Court compares the Appellant’s activity to that of a real estate agent, who has a community of customers who are interested in purchasing an apartment and a community of customers who are interested in selling apartments. Is the situation one in which the same real estate agent represents both the seller and also the buyer, is this one service for both of them? The Court determined that this is not the case!!

The Judge mentioned the following reasoning on this issue:

• • In the circumstances of the case in hand, since these are permanent customers, without an emphasis on a single transaction, this is an ever-clearer case than a non-recurring brokerage act.

  • There are permanent separate agreements with the customers.

  • The customers are permanent customers who receive a range of services. The commission rate is determined for the generality of the services and not in relation to the specific transaction.

  • The service to each party is not connected to the identity of the counter party but rather it expressed the presentation of a price that is appropriate to the parties’ wishes.

  • The service to each party is not connected at all to the identity of the other party, but rather expresses the presentation of a price for a product that is sufficiently close to the party’s wishes. There is no sort of cooperation here between the parties in order to maximize the economic benefit and for certain there is no ordering of service here by one party in order to cause an improvement or a benefit for the other party.

  • In effect, different services are inherent in the meeting and the brokerage for the different recipients, and not the very same “service” – and this is not because of the absence of similarity in the content of the services but rather because of the gap in the interests and the desires.

And in brief, and as part of the presentation of examples – the Court determines that where the issue is one where a service is given to 2 parties for the parties of achieving results, each of them has their own interests, where the objective is to find a compromise between them such as in a brokerage transaction for land, where the estate agent represents both of the parties, investments brokerage, matchmaking, arbitration and etcetera – this is a service that is given to each of the parties separately, and the VAT is to be handled accordingly.

As an aside, the Court ruling relates to two important ancillary issues:

The substance of the zero-rate relief for a service that is provided to a foreign resident

Some of the substantive issues are the encouragement of the export of services and bringing foreign currency into Israel and assisting Israeli businesses in competing opposite foreign businesses in the international service markets.

And indeed, the VAT director claims that in the circumstances of the case there are no grounds for or need to encourage the appellant to grant the services that are connected to the products in question, that in any event the establishment of a branch and the Israeli team is necessary from a commercial perspective.

Accordingly, the Court responds:

that even if on the factual plain this claim has substance, the language of the law is broad, and it absolutely may apply to cases in which no encouragement or assistance in international competition is required.

There are many examples – for example, a journalist who is a resident of Israel whose services are hired by a foreign publisher of travel guides in foreign languages in order to put together a chapter of a book on restaurants in Israel, with a description thereof and a rating thereof. What is more natural or necessary that engaging an Israeli restaurant critic to do this work, and despite this, prima facie, there is no impediment to imposing VAT at a zero rate on such a case.

An asset that is located in Israel

The Director of VAT claimed that the agreement between the Appellant and the foreign resident is an asset that is located in Israel, and accordingly and in accordance with the qualification in the law – VAT will not apply at a zero rate.

On procedural grounds, and when this claim was not made by the Director in more preliminary stages, the Court was not prepared to discuss this claim. However, it went further and determined that the parties’ rights that are created in the financial transactions are not necessarily “an asset that is located in Israel” and it would appear that this issue, where the discussion involves complex financial products, is not a very simple one.

We can summarize by saying that in the special circumstances of the case in hand, it is not certain that the Tax Authority will appeal to the Supreme Court on the ruling. Even if an appeal were to be submitted, and so long as it has not been accepted – the harsh, restrictive approach that has been adopted by the Tax Authority regarding the provision of the zero-rated VAT benefit on a service that is provided to a foreign resident has been fractured and has become much more open.