In today’s financial landscape where brokerage firms facilitate funds transfer between banks and institutions, the issue of VAT on brokerage transactions is crucial.
Recently, the Supreme Court ruled that a brokerage firm must pay full VAT on fees charged to foreign banks, in addition to the full VAT on fees from Israeli banks for the same transaction.
The case involved an Israeli branch of a foreign company that provided brokerage services to institutional clients like banks and insurance firms. It facilitated a transaction between an Israeli bank and a foreign bank, receiving fees from both. While the full VAT on the Israeli bank’s fee was undisputed, the contentious matter was whether the foreign bank’s fee should be subject to full VAT (the tax authority’s stance) or zero-rated VAT (the company’s position).
The tax authorities viewed the brokerage as a single service to both parties, invoking section 30(a)(5) of the law which states: “Rendering a service to a foreign resident… shall not be considered as a service rendered to a foreign resident when the subject of the agreement is the actual provision of the service, in addition to the foreign resident, also to an Israeli resident in Israel…”
Conversely, the company argued each bank received a separate service, entitling the foreign fee to zero-rated VAT under section 30(a)(5). It further claimed full VAT undermined the law’s purpose of aiding Israeli export of services and global competitiveness.
The Supreme Court ruled the foreign fee is subject to full VAT. Its economic analysis determined brokerage cannot be split into separate services, even if fees are charged individually. Having established it as one service, the Court concluded the company’s brokerage was also available to an Israeli resident (itself), negating the exemption under section 30(a)(5)’s final section.
* C.A 8556/21, Administration of Value Added Tax Tel Aviv Center v. G.F.I Securities Limited.