Zero-rated VAT on work for foreign clients
An Israeli freelancer invoicing a client abroad usually holds one of two wrong beliefs: that any work for a foreign client is automatically VAT-free, or that 18% has to be charged to everyone because that is what the law says. Both are risky. The zero rate is a conditional benefit, and its conditions sit in section 30 of the Value Added Tax Law.
This guide covers who counts as a foreign resident, what cancels the benefit even when the client really is abroad, and what the invoice looks like in practice.
Zero-rated is not exempt
This is the point worth understanding before anything else, because it is worth money. A zero-rated sale is a taxable sale on which the rate is zero. An exempt sale is one the law took out of the tax system.
The difference shows up on the expense side. A business making zero-rated sales deducts input VAT on the expenses behind them as usual: the computer, the software, the cloud services, the accountant. A business making exempt sales deducts nothing. A freelancer whose income comes entirely from clients abroad will usually end up receiving VAT back from the state rather than paying it.
- A taxable sale, at a rate of zero
- Input VAT fully deductible
- Reported in its own field
- Outside the tax system
- No input-VAT deduction
- An osek patur, for example, deducts nothing
Who counts as a foreign resident
The law defines a foreign resident as an individual permanently resident outside Israel, or a body registered or incorporated only outside Israel, provided it is outside Israel and has no business or activity in Israel.
Two limbs, and both have to hold. An entity incorporated in Delaware that runs an office, staff or ongoing activity in Israel is not a foreign resident here, even if the contract is with the American entity and even if payment arrives from a foreign bank account. The same goes for a private individual living in Israel who pays with a foreign card.
What cancels the zero rate
The main exclusion is the Israeli beneficiary. Where the subject of the agreement is a service in fact supplied to an Israeli resident as well as the foreign resident, the zero rate falls away and the sale carries full VAT. A service actually reaching an Israeli party is enough to cancel it, even where the contract and the payment involve only the foreign entity.
The same examples come up again and again. A foreign company orders training for staff sitting in Israel. An agency abroad hires you for work whose output is destined for an Israeli client. A service relating to property located in Israel, such as work on real estate or on equipment installed here. Each has an Israeli beneficiary, and the zero rate does not apply.
That is also the line between "my client is abroad" and "the service was supplied abroad". The first is a fact about who pays, the second is a question about who receives.
What to keep
The burden of proving the conditions is on the business, not on the Tax Authority. In practice that means a simple file per foreign client: the agreement or order describing exactly what was done and for whom, evidence of the client's place of residence, the invoice, and a record of the payment received.
The agreement matters most, because it is what shows the subject of the engagement. Wording that makes clear the service is supplied to the foreign entity and to it alone is worth far more than a declaration written after the fact.
What the invoice looks like
An invoice in English with a 0% VAT rate and the amount in the currency of the deal. The amount is converted to shekels at the determining rate for reporting purposes, even where the invoice itself is denominated in dollars or euros.
In the periodic return the sale is reported as a taxable sale at a zero rate, in a separate field from full-rate sales, and input VAT is claimed as usual. The structure of the periodic report is covered in its own guide.
On allocation numbers: the requirement was built around an invoice that enables an input-VAT deduction on the other side. In a zero-rated sale to a foreign resident there is no Israeli party deducting, so the question does not arise in the same way.
Platforms: who your client actually is
Working through Upwork, Fiverr or a similar platform raises a question that comes before any discussion of the rate: who is the other party to the transaction? Sometimes the platform is only an intermediary and the client is the person commissioning the work, and sometimes the legal engagement is with the platform itself. The answer changes whose foreign residence you have to prove, and what documentation is needed.
What is clear either way: the commission the platform takes does not reduce the income you report. You report the full consideration and record the commission separately as an expense. A business recording only what landed in the bank account is under-reporting, and the gap surfaces against the bank statements at year-end.
Income tax is a separate story
A zero VAT rate says nothing about income tax. Income from a client abroad is taxable income like any other, and it flows into the annual return and the advances exactly as income from an Israeli client does.
If the client withheld tax at source in their own country, ask them for a withholding certificate. Israel's tax treaties carry a mechanism against double taxation, but it only works where there is documentation. It is also one of the items on the year-end document list.
How Slate handles it
You can issue an invoice in English and in foreign currency, with a zero VAT rate on the relevant lines, and the document is stored with its shekel translation for reporting. The VAT report counts zero-rated sales separately from full-rate ones, and input VAT is counted as usual, so a VAT refund needs no manual work.
This is general information, not tax advice. The zero rate turns on the specific facts of an engagement, and those are worth checking with an accountant or tax adviser.
Common questions
Is every service to a client abroad exempt from Israeli VAT?
No. The zero rate applies to a service supplied to a foreign resident on the conditions set out in section 30 of the VAT Law. If the service is in fact also supplied to an Israeli resident, or relates to property in Israel, the benefit falls away and the sale carries full VAT.
What is the difference between zero-rated and exempt?
A zero-rated sale is a taxable sale where the rate happens to be zero, so input VAT on the expenses behind it is still deductible. An exempt sale carries no input-VAT deduction at all. That difference is worth real money.
Who counts as a foreign resident for VAT?
An individual permanently resident outside Israel, or a body registered or incorporated only outside Israel, while it is outside Israel and has no business or activity in Israel. A foreign company with an active presence in Israel does not meet the definition.
My client is abroad but the person using the service is in Israel. What then?
Where the subject of the agreement is a service in fact supplied to an Israeli resident as well, the zero rate falls away. An Israeli beneficiary is enough to cancel it, even when the contract and the payment run through the foreign entity.
What do I need to keep as proof?
The agreement or order, evidence of who the client is and where they are resident, the invoice itself, and a record of the payment received. The burden of proving the conditions is on the business, and that is what an audit looks at.
How is a zero-rated sale reported in the periodic VAT return?
As a taxable sale at a zero rate, in a separate field from full-rate sales. Input VAT on the expenses behind it is claimed as usual.