Key Takeaways
- The Israeli VAT rate is 18% (as of October 2026). An Osek Murshe charges it to customers, deducts the VAT paid on business expenses, and pays the difference to the Tax Authority in a monthly or bi-monthly report.
- A tax invoice to a business customer above NIS 5,000 before VAT needs an allocation number from the Tax Authority (since June 1, 2026, as of October 2026); without it, the customer cannot deduct the VAT. Software is not required: the number can be requested free of charge in the personal area on the Tax Authority website.
- Input VAT is deducted only on the basis of a lawful tax invoice, within six months of the invoice date (after that, only with an extension from the VAT Director). Mixed expenses, such as car or phone running costs, are deducted only in part, and VAT on hospitality is not deductible, except for hosting a person from abroad.
- In a zero-rated transaction, such as an export, a service to a foreign resident or a sale of fresh fruit and vegetables of the listed types, the customer pays no VAT but the business keeps the right to deduct input VAT. In an exempt transaction, such as renting a home for up to 25 years, the input tax used for it cannot be deducted.
- Most service providers, and sellers of goods with annual turnover up to NIS 2 million, pay VAT on a cash basis: when payment is received, with no special application. This works only if no tax invoice is issued before payment (a transaction invoice can be sent until then), because a tax invoice issued in advance makes the VAT due in the period it was issued.
Impact of the Updated VAT Rate on Business Operations
Value Added Tax (VAT) is an indirect tax imposed on consumption in Israel, standing at 18% (as of October 2026) since the update that took effect on 1 January 2025. For business owners, proper VAT management is critical for cash flow and legal compliance.
The year 2026 brings new challenges, primarily the lower thresholds of the Israel Invoice Model, requiring appropriate accounting preparation. Understanding the current mechanisms will help you avoid penalties and maximize your input tax deduction rights.
The impact of the new tax rate is felt in two main areas:
- Pricing - Businesses had to update their price lists to maintain profit margins while considering the impact on end consumers.
- Cash flow - VAT payment amounts have increased, requiring more careful cash flow management between the time of collection from customers and payment to the authorities.
For an Osek Murshe (authorized dealer) or a Ltd. company, the change requires increased collection from customers and transferring the amounts to the Tax Authority on reporting dates. New businesses or those changing their status must ensure they complete the VAT file opening process accurately to match their expected scope of activity.
A simple calculation helps check any price: NIS 1,000 before VAT is NIS 1,180 including VAT, and to find the pre-VAT amount in a VAT-inclusive price you divide by 1.18. It helps to mark the VAT collected from customers in your cash-flow plan as money that goes to the Tax Authority, so it is not mistaken for money the business can spend.
Israel Invoice Model and Allocation Numbers
The most significant change in 2026 is not in the tax rate itself, but in how it is reported. The Israel Invoice Model has entered an advanced implementation phase, aimed at combating the shadow economy and fictitious invoices.
The model requires obtaining a unique "allocation number" from the Tax Authority for a tax invoice to a business customer above the threshold set by law. The threshold has come down in stages: it was NIS 10,000 before VAT from January to May 2026, and since 1 June 2026 it is NIS 5,000 before VAT (as of October 2026). Sales to private consumers and zero-rated transactions do not need an allocation number.
Without this allocation number appearing on the invoice, the receiving customer cannot deduct the VAT included in it as input tax. Software is not required, though: a business that uses a manual invoice book, or software that is not connected to the Tax Authority's system, can request an allocation number free of charge in its personal area on the Tax Authority website and write it on the invoice, even by hand.
An allocation number can also be requested after the invoice has been issued, but the customer can deduct the VAT only once the number exists. A supplier that issued an above-threshold tax invoice without an allocation number must request one, even retroactively, when the business customer asks. Since 1 August 2025, an expense whose input VAT was disallowed for lack of an allocation number is also not deductible for income tax (Income Tax Ordinance s.32(18)).
Updated Rules and Guidelines for Input Tax Deduction
The right of an Osek Murshe to deduct VAT paid on expenses (input tax) against VAT collected from customers (output tax) is a fundamental principle of the VAT system. However, this right is not automatic and is subject to strict rules.
In 2026, the Tax Authority tightened its control over deductions, among other things by lowering the allocation-number threshold. Basic conditions for deduction include:
- Valid tax invoice - The document must be a tax invoice lawfully issued to the business (the original, a signed digital document, or a scanned copy that meets the bookkeeping instructions) and include all required details, including an allocation number if the amount requires it.
- Business expense - The input must serve business purposes. VAT on mixed expenses (such as running a car or a phone) is only partly deductible: where the business share cannot be determined, two thirds of the VAT is deducted if the main use is business and one quarter if it is not (VAT Regulations, reg. 18). VAT on buying a private car is generally not deductible.
- Deduction timing - The input must be deducted within six months of the invoice issue date (VAT Law s.38). After that, it can be deducted only if the VAT Director approves an extension, which is discretionary and limited to five years at most.
Improper expense management, such as failing to keep receipts or attempting to deduct personal expenses, can lead to tax assessments and penalties. It is essential to maintain accurate documentation of all business expenses.
A receipt or a transaction invoice is not enough for a deduction: you need a tax invoice issued to the business. An Osek Patur does not deduct VAT at all, and the VAT it pays becomes part of its expense for income tax. It is worth checking an invoice's details when you receive it, not at the end of the period, so there is time to ask for a correction within the six-month window.
Petty Cash and Below-Threshold Expenses
While the Israel Invoice Model requires allocation numbers for significant transactions, it is important to remember that the law sets a monetary threshold (standing at NIS 5,000 before VAT as of October 2026) above which this requirement applies.
This means that tax invoices for routine expenses below this threshold (such as small office supplies or courier services) do not require an allocation number as a condition for VAT deduction. These expenses, typically managed within "petty cash," are still subject to the other deduction rules: a lawful tax invoice is needed, mixed expenses such as fuel for a private car are deducted only in part, and VAT on hospitality cannot be deducted, except for hosting a person from abroad.
Small expenses also need to be recorded in the books and backed by a document. A business that must keep a cash book under the bookkeeping instructions records every cash receipt and payment in it, so that the balance matches the cash on hand.
The Tax Authority states that artificially splitting a transaction into several invoices below the threshold, to avoid an allocation number, is illegal. For petty cash, it is worth keeping every document and noting next to it who paid, when and for what, so that every expense can be explained in an audit.
The Critical Difference Between Exempt and Zero-Rate Transactions
Not all transactions are subject to the full 18% VAT rate. Understanding the exceptions is essential for proper tax planning:
- Export of goods and services - 0% VAT rate, allows input tax deduction. Conditional on meeting legal requirements: for goods, an export declaration is needed; for services, the customer must be a foreign resident.
- Sale of fruits and vegetables - 0% VAT on fresh, unprocessed fruit and vegetables of the types listed in the regulations (VAT Law s.30(a)(13)). This is a zero-rated transaction, not an exempt one, so the right to deduct input tax is preserved.
- Residential rental - Rental for residential purposes for a period not exceeding 25 years is VAT exempt, except rental for hotel lodging.
- Tourism services - 0% VAT under certain conditions on services listed in the law, such as hotel lodging and car hire, to a tourist as defined in the law (broadly, a person staying in Israel on a visitor permit, not one issued for work).
The difference between "tax exempt" and "zero-rate VAT" is critical: in an exempt transaction, input tax used for its production cannot be deducted, while in a zero-rate transaction, the right to deduction is preserved.
The periodic report shows zero-rated and exempt transactions separately from transactions at the standard rate. A business with both taxable transactions (including zero-rated ones) and exempt transactions deducts only the input tax used for its taxable transactions. A customer abroad does not guarantee a zero rate: a foreign company with a business or activity in Israel is not a foreign resident for this purpose.
Updated Reporting and Payment Obligations
Authorized dealers (Osek Murshe) are required to file regular reports with the authorities either monthly (annual turnover above NIS 1,775,000) or bi-monthly (turnover up to NIS 1,775,000, as of 2026), as set by the Tax Authority. Reporting is usually done online (a business required to file detailed reports must report online) and includes taxable transactions and the VAT on them, exempt and zero-rated transactions, and deductible input tax.
In the detailed report, the Tax Authority automatically cross-checks allocation numbers and invoice details against the data reported by suppliers. Input tax from an above-threshold invoice without a valid allocation number is disallowed and removed from total input tax.
Filing late brings a late-filing fine of NIS 247 for each two-week period of delay or part of one (VAT Law s.94; as of October 2026, index-linked), which applies by law without prior warning. Paying late adds linkage differentials and interest and a weekly late-payment surcharge.
The report is filed and the VAT paid by the 15th of the month after the reporting period, or by the 19th when you report and pay online (a deadline that falls on a weekend or holiday moves to the next business day). A business required to file the detailed report adds invoice details to it and files by the 23rd. From 2026 the detailed-report requirement also applies to individuals with annual turnover above NIS 500,000, who can ask under certain conditions to defer it to January 1, 2027 (as of 2026). A zero report is required even for a period with no transactions.
Cash Basis Reporting for Improved Cash Flow
In an era where the VAT rate stands at 18%, the gap between the invoice date and the actual payment receipt from the customer creates significant cash flow pressure on businesses.
The law partly addresses this through cash basis VAT reporting (as opposed to accrual basis). Under this method, the VAT liability date is not the date a transaction invoice is issued, but the day the payment is actually received.
The cash basis applies by law, with no application or notice to the VAT authorities: to service providers (the main exception is a business with annual turnover above NIS 15 million that must keep double-entry books) and to sellers of goods with annual turnover up to NIS 2 million. The tax invoice is issued within 14 days of receiving payment, and until then the customer can be sent a transaction invoice. This way VAT is paid only after the money arrives, which can improve business liquidity.
For example, a service provider who issues a transaction invoice in September for NIS 10,000 plus VAT and is paid in November reports the VAT in the report for the period in which the payment arrived. By contrast, a seller of goods with annual turnover above NIS 2 million owes VAT when the goods are delivered, even if the customer has not paid yet.
Technology Readiness with Keep
The growing complexity of the VAT system, especially allocation numbers, makes manual work more cumbersome. The law does not require software, but a digital system can make the work easier.
What you can do in Keep:
- Allocation numbers - On every plan, you can request allocation numbers for tax invoices through Keep.
- Document and payment tracking - See the status of every document and payment and which clients still owe money, plus a dashboard of income, expenses and profit, on every plan.
- VAT reports - In the recommended plan, as part of reports and payments to the tax authorities.
- Expense upload - In the recommended plan, you upload business expenses with a click, as a photo or a file.
Allocation numbers apply only to tax invoices, so only to an Osek Murshe (including a company registered as one). As a rule, an Osek Patur does not issue tax invoices and files only an annual turnover declaration with VAT, by January 31. So for an Osek Patur on Keep's recommended plan, "VAT reports" means this annual declaration.
In 2026 the VAT rate has stayed at 18% (as of October 2026), and the main changes are in reporting and control methods. It is worth knowing the new rules, particularly the Israel Invoice Model.
Frequently Asked Questions About VAT Management
Do I report VAT monthly or every two months?
It depends on turnover, and the Tax Authority sets the period. In 2026 an Osek Murshe with turnover up to NIS 1,775,000 reports every two months, and above that every month. From 1 January 2027 the threshold rises to NIS 1,805,000. As a rule, an Osek Patur files no periodic reports, only an annual turnover declaration by January 31.
What happens if I did not deduct input VAT within six months?
After six months from the invoice date, you can deduct only if the VAT Director approves an extension. Approval is discretionary, not automatic, and the extension is limited to five years at most. An invoice above the allocation-number threshold also needs an allocation number, which, according to the Tax Authority, can be requested retroactively up to a year after the invoice date.
What is the difference between exempt and zero-rated VAT?
In both, the customer pays no VAT. In a zero-rated transaction, such as an export of goods or a service to a foreign resident, the business counts as taxable, reports the transaction and keeps the right to deduct the VAT it paid on inputs. In an exempt transaction, such as renting a home, the input tax used for the transaction cannot be deducted.
What is the fine for filing a VAT report late?
A late-filing fine of NIS 247 for each two-week period of delay or part of one (VAT Law s.94; as of October 2026, index-linked). It applies by law without prior warning, and the VAT Director may waive or reduce it only for special reasons. Paying late adds linkage differentials and interest and a surcharge of 0.25% per week for the first six months and 0.5% per week after that.
Does an Osek Patur need allocation numbers?
No. An Osek Patur does not issue tax invoices, so it does not request allocation numbers. When an Osek Patur receives a tax invoice from a supplier, it also does not deduct the VAT on it; the VAT is part of the expense.
