Recently, the Payment Ethics Law 5777-2017 (the "Law") entered into effect. The purpose of this law is to regulate payment schedules to suppliers for goods, services or labor. The initial aim was to enforce a fair payment regime on government offices, governmental authorities, municipal authorities and other statebudged entities. Nonetheless, the law applies to private businesses as well .
We hereby provide a summary of the provisions regarding payment schedules set forth in the Law:
Government offices and authorities and certain defined entities
Government offices and authorities and certain defined entities are required to remit payments to suppliers for goods and services within 45 days from the date on which the invoice was submitted, or, alternately, if the basis for payment is counted from the end of the month within 30 days from the end of the month in which the invoice was submitted (current ["shotef"]+30). Payments for construction works should be paid for within 85 days from invoice submission, or"current"+70 (from the end of the month in which the invoice was submitted).
Municipal authorities are required remit all payments at "current+45", except for construction work, which shall be paid at "current"+80 .
Governmental and municipal entities may not extend these timetables. However, in the case of a transaction of a municipal authority that is based on external financing, that part which is financed externally can be delayed until 10 days from receipt of such financing.
Other state-budgeted entities
Other state-budgeted entities (including institutes of higher education, but excluding medical establishments) shall remit all payments at "current"+45.
Businesses are all required to pay to suppliers at "current"+45. The definition of a "business" is based on term in the Value Added Law ("osek murshe", "osek patur" and "Financial Institution") and does not include consumers and nonprofits, and therefore the new law does not apply to them. Businesses (and state-budgeted entities) may expressly stipulate another payment schedule in the agreement with the supplier, provided that this is required due to the special nature of the engagement, or that the agreed date is not "exceptionally unfair". There is currently no binding interpretation for this expression, but we assume that industry standard will serve as the benchmark for this purpose. These restrictions apply only if the business has more power than the supplier in drafting the contract. There is no reference to the applicability of the Law on foreign businesses which acquire goods or services in Israel. Since the definition of "business" is based on the Value Added Law, we assume that foreign entities shall be subject to the Law only if their activity in Israel requires them to be registered with the Israeli VAT authorities pursuant to the Value Added Law or if they elected to register.
Suppliers are required to submit an invoice specifying all material terms. Failure to submit an invoice shall cause a delay in payment.
The Law does not stipulate any criminal sanction for delaying payment beyond the schedule set forth by the new Law. However, the Law does stipulate that defaulting on the deadlines provided therein shall lead to interest and linkage as of the deadline, and in the event of delay of 30 days or more, will also bare penalty (arears) interest.
The Law does not govern contracts executed prior to its effective date (including tenders published beforehand, even if the tender process and ensuing contracts were only completed after the effective date).
Recommendations: we estimate that many businesses are unaware of the Payment Ethics Law and its effective date and should be advised. In light of this new law, we recommend that any business should, upon creating or renewing any engagements with suppliers, make sure that the agreement satisfies all provisions of the Law. Any business that practices longer payment schedules than stipulated by the Law ("current"+45) should document these understandings in writing with its suppliers. We also recommend documenting the reasons for the longer schedule or obtaining substantiation proving that these terms are fair and acceptable.