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 VAT rate.
In NDLA (rendered 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 for taxes.
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 eagerly awaited.
For further information on this topic please contact Amnon Rafael or Shlomi Lazar at A Rafael & Co Law Offices by telephone (+972 3 696 6999), fax (+972 3 696 1444) or email ([email protected] or [email protected]).