Israel Considers VAT on Financial Firms’ Foreign Transactions to Boost Revenue

As Israel faces fiscal challenges ahead of 2027, government officials are exploring new tax measures to reduce the debt-to-GDP ratio, including potential VAT imposition on financial services purchased abroad by large Israeli financial institutions. At a recent accountants’ conference in Eilat, David Shilon, head of the VAT professional department, revealed the tax authority’s plan to levy VAT on major transactions between Israeli insurers and foreign reinsurers, as well as on loans Israeli banks take from foreign financial entities and pension fund management services insured abroad.

Currently, Israeli financial institutions do not pay VAT in the usual manner but are subject to a different tax on profits and salaries. However, the tax authority argues that applying VAT on these foreign financial transactions could generate between 2 to 3 billion shekels annually. Insurers dispute this figure, estimating the potential revenue at around 0.5 billion shekels. Under Israeli VAT law, if the foreign seller cannot be taxed directly, the obligation shifts to the Israeli buyer, meaning banks and insurance companies would bear the VAT cost.

The tax authority acknowledges legal ambiguities since the current VAT law applies to goods, not financial services, and thus prefers to pursue primary legislation to clarify the matter. Insurance companies warn that imposing VAT could lead to higher insurance costs and reduced coverage, as some foreign reinsurers might avoid the Israeli market or raise prices due to increased risk and costs. They also argue the tax burden would ultimately fall on consumers, especially in less competitive insurance segments.

The Insurance Association criticized the proposal, emphasizing the importance of foreign reinsurance for risk distribution in Israel’s small market and warning that VAT could conflict with the VAT law’s structure and harm financial institutions’ tax principles. The Banking Association also expressed concerns about negative impacts on Israeli businesses and the economy. The tax authority and financial regulators are weighing these concerns as they consider advancing the VAT measure through legislation, aiming to increase state revenues without directly raising taxes on citizens.