TAX NEWSFLASH – MAY 2025

A ruling on an appeal was recently rendered by the Beer Sheba District Court in the case of Mr. Ofer Rotberg (“the Appellant”).  The focal point of the appeal concerned the decision of the Eilat VAT Administration to impose a tax lability on the Appellant in the sum of roughly NIS 3.6 million for construction service transactions which were reported by him as being VAT-exempt, pursuant to the provisions of section 5(e) of the Eilat Free Trade Zone Law (Tax Exemptions and Discounts), 5745-1985 (“the Eilat Free Trade Zone Law”).

After examining the provisions of the Eilat Free Trade Zone Law and considering their application in the circumstances of the case at hand, the court reached the conclusion that the appeal should be rejected since the Appellant was not an Eilat resident during the relevant years, because he did not have a permanent place of residence in Eilat.  In so doing, it was held that although throughout most of the period of the appeal the residential address of the Appellant as registered with the Ministry of Interior was in Eilat, it was not proven that the Appellant indeed actually lived at that address, and that even if it may be assumed this to be the case, then this entailed a temporary residence that served him for the purpose of executing casual work in Eilat and not a permanent residence.  Regarding the family ties, it was held that the fact that members of the Appellant’s family (his partner, children and ex-wife) did not move the centre of their life to Eilat, supports the fact that the centre of the Appellant’s life was not Eilat during the relevant period.  The court added and held that, examining the workplace of the Appellant also demonstrates that the Appellant’s connection to Eilat was only temporary.  In this context, the court noted that the scope of transactions in the city of Eilat reported about by the Appellant was significantly less than the scope of transactions engaged in by him outside Eilat.  In addition, most of the Appellants employees are employed outside Eilat.  To complete the picture, the court mentioned that also examining the place of actual and substantive economic interests of the Appellant leads to the conclusion that the centre of the Appellant’s life during the relevant period was not Eilat, since his bank accounts remained in the centre of Israel, as did his tax file and his auditing firm.

In our view, this ruling hones the importance when planning the process of moving one’s center of life in general, and to Eilat in particular.  As may be seen, the criteria examined within the realm of “the centre of life test” are not based on purely technical metrics, but rather on a series of material tests interwoven with objective and subjective ties.  That being the case, intelligent planning of the process may lead to establishment of a position of severing the residency on the one hand, and moving it to the new centre of life, on the other hand. 

THE TAX AUTHORITY DOES AN ABOUT-TURN – TAX WILL NOT BE IMPOSED ON RESTAURANT TIPS

As is known, the question of taxation on receipts in the form of gratuities (tips) has been disputed for many years and has reached the doorsteps of the Israeli courts in a long line of cases.  In this context, it should be recalled that the Supreme Court has already ruled that income earned by a waiter in the form of tips constitutes work income, that should be taxed in his hands, even if not paid to him by the employer.

On 25 July 2024, the Israel Tax Authority (the “ITO”) published a clarification, whereby a tip that is paid to a business for a service provided by its workers is an intake that constitutes portion of the consideration for the service, thus rendering the tip subject to value-added tax as well.  This clarification sparked a huge storm and public outrage, following which the ITO published several notices regarding the postponement of enforcement action in this respect.  In so doing, and in its last notice published on 17 March 2025, the ITO imparted that enforcement action in this respect has been postponed until 30 June 2025.

We wish to update you that on 4 May 2025, the ITO published a new clarification, that does an about-turn by providing that VAT will not be imposed on a tip that is given for a service provided by a salaried worker to a customer in a restaurant, subject to fulfilment of all the following criteria:

1. The restaurant manages a daily service log pursuant to Addendum JA of the Income Tax Provisions (Bookkeeping), 5773-1973 (the “Income Tax Provisions”).

2. The tip is documented in the daily service log pursuant to the Income Tax Provisions.

3. The tip is reported as work income in the hands of the worker and the worker paid income tax and national insurance duties with respect thereto as prescribed by law.

4. The tip is given voluntarily by the customer/recipient of the service.

* The newsflash is intended to provide subscribers with general information only and should not in any way be regarded as firm professional advice and/or a definitive legal opinion.