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  • Writer's pictureשוהם שאוליאן, רו״ח (עו״ד)

Deduction of Input Tax in VAT

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This guide focuses on the deduction of input tax for Value Added Tax (VAT) purposes, a critical aspect for business owners, significantly impacting cash flow and business decisions.


Input tax is the VAT paid by a business for the import or purchase of goods or services. Allowable deductions are subject to the following cumulative conditions:

  • The deduction is carried out by a business registered for VAT.

  • The input tax is included in a tax invoice legally issued by a business providing the service or selling the asset.

  • The tax invoice must detail the issuer's information, including name, address, business number, and the word "original" alongside the date, customer's name, and address.

  • The inputs must be for transactions subject to tax (even if the tax rate on these transactions is 0%). Accordingly, input tax cannot be deducted for transactions exempt from tax.

  • Only registered businesses can deduct input tax. However, new businesses can deduct input tax paid before registration if the expenses were incurred during the establishment of the business and not for ongoing activities.

  • There is no prohibition on deducting expenses under the VAT law or its regulations.


Proforma invoice versus Tax Invoice

  • Proforma invoice documents a transaction but is not subject to VAT or income tax payment by the issuer, and therfore the recipient cannot deduct the input tax against his VAT payments. Such invoice is typically issued as a payment demand before receiving payment and issuing a tax invoice.

  • A tax invoice documents the transaction and is necessary for accounting, requiring VAT and income tax payment by the issuer.


Mixed Expenses

  • If an expense, such as the purchase of an asset or service, is not entirely for business purposes, a proportional deduction is allowed based on the ratio of business use to total use.

  • If the portion of business use is not specified by the manager, up to two-thirds of the input tax can be deducted if the primary use is for business, or up to one-quarter if it is not mainly for business.


Invoice Not in the Name of the Business

  • In certain cases, an invoice not issued in the name of the business can also be deducted if it is proven that the expenses were for business purposes, such as telephone, water, gas, electricity, or similar expenses.


Examples of Expense Types

  • Personal expenses: Not allowed in deduction.

  • Purchase or rental of a vehicle: Not allowed in deduction for vehicles under 3.5 tons or those listed in the tax authority's vehicle list, except for some exceptions for certain businesses.

  • Routine vehicle/motorcycle maintenance (fuel, services): Deducted as a mixed expense.

  • Mobile phone communication: Usually allowed in deduction, up to two-thirds of the input tax.

  • Landline phones: Full deduction, provided they are used in the business.

  • Internet, fax, etc.: Full deduction, provided they are used in the business.

  • Clothing: Full deduction for unique work attire such as uniforms and safety glasses, but not for regular clothing used outside work hours.

  • Employee meals: Not deductible unless reported as a taxable transaction.

  • Organized trips and entertainment shows: Usually not deductible, but exceptions can be argued if more beneficial to the employer than the employee, like in professional training combined with the event.


Deductions for a Holding Companies

  • Holding companies, mainly for generating income through dividends or stock sales, are eligible for the following deductions:

  • 25% for general expenses.

  • Up to two-thirds for direct expenses used in taxable transactions.

  • No deductions for direct expenses not used in taxable transactions, such as expenses for buying/selling stocks.

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