January 13 2012
The Value Added Tax
(VAT) Law 1975 specifies a zero rate of tax for a number of transactions. Where
such a rate applies, the taxpayer does not pay VAT on the transaction, but may
offset the input tax incurred with respect to it against the transactional tax
due on other transactions. Where the input tax exceeds the transactional tax,
the difference is refunded to the taxpayer.
The export of a
service is eligible for the zero rate, except where it is rendered in respect
of an asset located in Israel. Thus, a lawyer's services to a non-resident
pertaining to the lease of real estate in Israel would be subject to the full
on October 31 2011) the taxpayer acted on behalf of a group of non-residents
who held shares in an Israeli company. The latter exchanged its assets and
liabilities for shares of a Nasdaq-traded company. It was agreed that the
Israeli company would be liquidated and that its shareholders would receive the
shares traded on the Nasdaq exchange as a liquidation dividend.
The taxpayer was
requested by the non-resident shareholders of the Israeli company to obtain a
tax ruling with respect to their Israeli tax liability resulting from the
transaction. The ruling was obtained and afforded favourable tax treatment to
the non-resident shareholders. The taxpayer subsequently billed the
non-resident clients, charging them with a zero VAT rate.
The taxpayer contended
that the service it had provided was not rendered with respect to an asset
located in Israel. The VAT director countered by relying on previous VAT cases,
which held that the services of a lawyer, whether serving a plaintiff or a
defendant, are not entitled to the zero rate since they pertain to an asset -
the right to sue or the right to defend the suit - located in Israel.
Under the law, the
term 'right' is incorporated in the term 'goods' which serves to define an
'asset'. The director contended that the right of the shareholders to pay the
tax in accordance with the tax ruling constituted an economically valuable
right; as the tax was due to the Israeli tax authorities, the right which
constituted the asset was located in Israel.
The taxpayer attempted
to distinguish the cases dealing with legal services rendered to non-resident
plaintiffs and defendants in Israeli courts by asserting that the case at hand
did not involve any assertion or denial of obligations of a party. No demand
had been made of the shareholders by the tax authorities and they made no claim
The court held in
favour of the VAT director. It concluded that the ruling dealt with a tax
payable to the Israeli tax authorities, "and therefore the right to pay
the correct amount of tax is located in Israel".
The court's holding is both
surprising and far reaching and, if rigorously applied, seems to imply that all
services of Israeli tax lawyers are subject to the full VAT rate. A Supreme
Court decision clarifying the bounds of the term 'asset' for VAT purposes is