The Israel Government has raised the standard VAT rate to 18%, a level not seen in over 10 years. Since January 2015, the rate had been set at 17%, but this new change took effect at the beginning of 2025. As a result, this reform is expected to increase daily expenses for consumers, with family annual expenditures estimated to rise by 1,000 to 2,000 shekels (₪). The move is projected to boost tax revenue by approximately ₪1 billion ($279,044,640), bringing the total tax collection to ₪ 3.8 billion.

The impact of the VAT increase 

Israel’s reliance on a single VAT rate will reduce the purchasing power of its citizens, while the government aims to boost revenue. This decision is driven by the country’s growing national debt, which has now reached 8.1% of the national GDP due to the ongoing conflict.

The VAT increase will affect most goods and services, though some items, such as fruits and vegetables, remain exempt due to their necessity. In addition to the Free Zone in Eliat, a coastal city in the south between the Sinai Peninsula and Jordan, and the sale of second-hand real estate between private individuals.

When will the new VAT be applied? 

This VAT reform also brings up questions about when the new rate will apply. For real estate transactions, the VAT rate will depend on which event happens first: the delivery of the property or the registration of the buyer’s name. However, payments made over time for services and subscriptions will be subject to the at 18% rate if they occur in 2025.

Investment opportunities following the VAT increase

With tax revenue estimated to increase by 73.7% by 2028, tax compliance in Israel will become more complex. However, while this increase represents a challenge for consumers, it also opens up various opportunities for investors. With the growth in tax revenues, the Israeli government is expected to boost more infrastructure, innovation and technology projects, sectors that are key to the country’s economy. In addition, tax exemptions in areas such as Eilat and certain essential products offer a favorable environment for investing in trade and real estate.

Despite the immediate challenges, Israel’s economic outlook remains attractive for those looking to invest in strategic sectors and take advantage of the tax benefits available. Therefore, don’t hesitate to contact Auxadi in order to manage your company’s accounting in Israel. Contact us!

Auxadi can become your ideal partner. We offer a one stop shop value added outsourcing services in the areas of accounting and reporting, tax compliance, payroll management and representation services, among others.