The Eilat Free Trade Zone Law (Tax Exemptions and Discounts), 1985 (hereinafter: “the Law”), was enacted with the aim of developing the city of Eilat and transforming it into a prosperous tourist and commercial area. The legislation is intended to deal with economic challenges arising from the city’s geographical distance from the centers of trade and the economy in Israel. To this end, the law grants businesses in the city of Eilat a series of tax benefits, including exemption from value-added tax (VAT) on transactions carried out within the city. However, in order to benefit from the benefits offered by the law, businesses must meet specific conditions, primarily the requirement to register as an Eilat VAT dealer, which constitutes a fundamental condition for receiving the reliefs intended for businesses leading to the city’s economic development. Provisions of the Law and Regulations
The law determines the conditions under which a dealer can be considered an “Eilat area resident” for the purpose of receiving the benefits intended for dealers in the city. A key condition for receiving the benefits is registration as a dealer in the Eilat VAT, as stated in Section 1 of the law: “A resident of the Eilat area” is: “A resident of the Eilat area”
(1) An individual whose permanent residence is within the city of Eilat or the Eilat region and has resided there for at least three years.
consecutive months before he applies for a benefit under this law; (2) a person within the meaning of the ordinance who has a business in the Eilat area – in respect of that business, provided that it is registered
in Eilat as a dealer for the purposes of the VAT Law regarding the aforementioned business and under other prescribed conditions; In addition, the regulations enacted under the law detail the administrative requirements related to registration, including a requirement to separate the business’s accounting books and reports in the Eilat area from transactions carried out outside Eilat. Tax benefits for dealers in the city of Eilat
The law grants businesses in the city of Eilat a number of significant tax benefits. The main benefit concerns exemption from value-added tax (VAT) on the sale of goods and services within the city. This exemption is intended for businesses in the city that carry out transactions for business purposes within the city, and includes a wide range of services and products, but not all products and services. The law establishes exceptions to the exemption regarding goods or services, including private vehicles, motorcycles, televisions, cigarettes, high-value jewelry, and more. In addition to exemption from VAT on sales or provision of services in the city of Eilat, the law grants exemption from VAT on the import of goods into Eilat, as long as they are intended for consumption or sale in the city of Eilat. In cases where goods are imported into Eilat through another port, the business must pay the VAT upon importation, and may then submit an application for a VAT refund from Eilat Customs, under the conditions set forth in the law and regulations. Conditions for registering as an Eilat VAT business
To be eligible for tax benefits, a business operating in the Eilat area must register as an Eilat VAT business. As the backbone of all benefits granted to business owners in the city, registration as an Eilat VAT business is a constitutive requirement, which is necessary for recognition as a resident of the Eilat area and eligibility for tax benefits. As clarified in court rulings, registration with the Eilat VAT is not just a formal act, but is essential and has a direct impact on the business owners’ eligibility for tax benefits granted by law. The requirement to separate ledgers and reports
In addition to registering with the Eilat VAT, businesses are required to separate their accounting books and reports between business activity in the city of Eilat and that conducted outside of Eilat. According to Regulation 2(a) of the Eilat Free Trade Zone Law, a business conducting business activity outside of Eilat is required to maintain a separate registration for the business in Eilat. This requirement is intended to ensure that the benefits granted to businesses in the city of Eilat are not misused.
Consequences of not registering as a VAT trader in Eilat
The consequences of not registering as a VAT dealer in Eilat are very significant. When a dealer is not registered with the VAT in Eilat, he cannot be considered a “resident of the Eilat area” and therefore will not be able to enjoy the benefits to which he is entitled under the law. Failure to register may lead to a significant loss of tax benefits, including VAT exemption on the sale of goods and services within the city of Eilat. Any dealer who does not meet the requirements of the law and regulations may find himself exposed to retroactive tax liabilities, while delaying the process of receiving the benefits. Legal rulings and their consequences
In rulings issued by the Supreme Court, especially in cases such as Israir Aviation and Tourism Ltd. v. Eilat Tax Officer and R.D.M.P. Zman Air Ltd. v. Eilat Tax Officer , it was determined that registration with the Eilat VAT constitutes a prerequisite for eligibility for tax benefits. These rulings emphasized the need to separate business activity in Eilat from that carried out outside of it, and it was clarified that there is no reason to recognize a business as an “Eilat area resident” if it did not meet the substantive requirements of the law in real time. It was also clarified that failure to register in real time prevents eligibility for benefits retroactively, even if the business operates substantially in the city. Retroactive Consequences of Failure to Register
According to court rulings, failure to comply with the registration and separation requirements may result in the trader not being able to benefit from the benefits retroactively. The court ruled that registration with the Eilat VAT is not just a technical measure, but a substantive condition that defines the trader’s economic relationship with the city of Eilat. Therefore, a trader cannot be recognized as a resident of the Eilat area if he did not comply with the administrative conditions in real time. These rulings establish the principle of supervision and prevent the improper use of the benefits. Summary
The Eilat Free Trade Zone Law provides businesses in the city of Eilat with a number of significant tax benefits, but they must meet the registration requirements defined in the law and regulations. Registration as an Eilat VAT business is a prerequisite for eligibility for benefits, and violation of this requirement may lead to denial of eligibility for benefits and retroactive tax liabilities. In addition, care must be taken to maintain separate ledgers between business activities in the city of Eilat and those carried out outside the city, in order to ensure that the purpose of the law is maintained – economic development of the city of Eilat and reduction of tax distortions.
The Ish-Shalom & Co. Law Firm specializes in analyzing and understanding the legal and financial aspects of the Eilat Free Trade Zone Law, and in particular the VAT aspects and registration conditions for Eilat VAT dealers. Our firm provides its clients with professional and comprehensive service, with rich experience in the field of taxation and in-depth knowledge of VAT laws and special benefits for dealers in Eilat. Our firm helps its clients avoid complications and maximize the benefits offered by the law to businesses operating in the area.
In case of questions or need for legal advice in the field of taxes and benefits for businesses in Eilat, our office is at your disposal with customized solutions and professional advice of the highest level.
