The Eilat Free Trade Zone Law (Tax Exemptions and Discounts), 1985 (hereinafter: “the Law”), was enacted to promote the development of the city of Eilat and transform it into a thriving tourist and commercial hub. The legislation was designed to address the economic challenges posed by the city’s geographical remoteness from Israel’s economic and commercial centers. To this end, the Law provides businesses in Eilat with a series of tax incentives, including exemptions from Value Added Tax (VAT) on transactions conducted within the city. However, to benefit from the incentives provided by the Law, businesses must meet specific conditions, with the primary condition being registration as a VAT taxpayer in Eilat, which is a crucial requirement for receiving the tax benefits intended for businesses that contribute to the city’s economic development.
Provisions of the Law and Regulations
The Law establishes the conditions under which a business may be considered a “resident of the Eilat area” for the purpose of receiving the tax incentives designated for businesses in the city. A central condition for receiving these benefits is registration as a VAT taxpayer in Eilat, as outlined in Section 1 of the Law:
“A resident of the Eilat area” is defined as:
(1) An individual whose permanent residence is located within the city of Eilat or the Eilat area and has resided there for at least three consecutive months before requesting an incentive under this Law;
(2) A person (as defined in the Ordinance) who operates a business in the Eilat area – in respect of that business, provided they are registered in Eilat as a VAT taxpayer concerning that business, and under other conditions specified.”
Furthermore, the regulations enacted under the Law outline the administrative requirements related to registration, including the obligation to separate the accounting books and reports of the Eilat-based business from those of transactions conducted outside of Eilat.
Tax Benefits for Businesses in Eilat
The Law provides several significant tax benefits for businesses in Eilat. The primary benefit is the exemption from VAT on the sale of goods and services within the city. This exemption is designated for businesses operating in the city that conduct transactions for business purposes within the city. The Law, however, lists specific goods and services that are not eligible for this exemption. Among these exemptions are private vehicles, motorcycles, televisions, cigarettes, jewelry of high value, and others.
In addition to the VAT exemption on sales or services conducted within Eilat, the Law also provides a VAT exemption on the importation of goods to Eilat, provided they are intended for consumption or sale within the city. In cases where goods are imported to Eilat via another port, VAT must be paid at the time of importation, after which the business operator may apply for a VAT refund from Eilat Customs, in accordance with the provisions outlined by the Law and the regulations.
VAT Registration Requirements for Businesses in Eilat
To qualify for the tax benefits, any business operating in the Eilat area must be registered as a VAT taxpayer in Eilat. As the cornerstone of all the benefits granted to businesses in the city, registration as a VAT taxpayer in Eilat is a constitutive requirement that is essential for recognizing the business as a “resident of the Eilat area” and for eligibility to receive the tax benefits. As clarified in rulings by the courts, registration with VAT in Eilat is not merely a formal act, but is substantive and has a direct impact on a business’s eligibility to receive the tax benefits provided under the Law.
The Requirement for Separating Accounting Books and Reports
In addition to registering as a VAT taxpayer in Eilat, businesses are required to separate their accounting books and reports between business activities conducted in Eilat and those outside of Eilat. According to Regulation 2(a) of the Eilat Free Trade Zone Law, a business operator who conducts business activities outside of Eilat must maintain separate records for their Eilat business. This requirement ensures that the tax benefits granted to businesses in Eilat are not exploited improperly.
Consequences of Failure to Register as a VAT Taxpayer in Eilat
Failure to register as a VAT taxpayer in Eilat has significant consequences. A business that is not registered with VAT in Eilat cannot be considered a “resident of the Eilat area” and will therefore not be entitled to the benefits provided under the Law. Failure to register may result in substantial loss of tax benefits, including exemption from VAT on the sale of goods and services within the city of Eilat. Any business that fails to meet the requirements of the Law and the regulations may find itself exposed to retroactive tax liabilities and delays in the process of receiving benefits.
Legal Rulings and Their Implications
In rulings issued by the Supreme Court, particularly in cases such as Israir Airlines and Tourism Ltd. v. Eilat Tax Authority and R.D.M.P. Zman Oir Ltd. v. Eilat Tax Authority, it was established that registration as a VAT taxpayer in Eilat is a constitutive condition for eligibility for the tax benefits. These rulings emphasized the need to separate business activities conducted in Eilat from those carried out outside the city and clarified that a business cannot be recognized as a “resident of the Eilat area” if it has not complied with the essential requirements of the Law at the relevant time. Additionally, it was made clear that failure to register in a timely manner prevents eligibility for retroactive benefits, even if the business is substantially operating in the city.
Retroactive Implications of Failure to Register
According to the rulings of the courts, failure to meet the registration and separation requirements may lead to a business operator being unable to benefit from the tax incentives retroactively. The court ruled that registration as a VAT taxpayer in Eilat is not just a technical measure but a substantive condition that defines the business’s economic connection to the city of Eilat. Therefore, a business that has not met the administrative requirements in a timely manner cannot be recognized as a resident of the Eilat area. These rulings establish the principle of oversight and prevent improper use of benefits.
Conclusion
The Eilat Free Trade Zone Law provides businesses in Eilat with a series of significant tax benefits, but they must meet the registration requirements specified in the Law and regulations. Registration as a VAT taxpayer in Eilat is a necessary condition for eligibility for these benefits, and failure to comply with this requirement may lead to the denial of benefits and retroactive tax liabilities. Additionally, businesses must ensure the proper separation of their accounting books between activities in Eilat and those outside the city to maintain the integrity of the Law’s objective – the economic development of the city of Eilat and the reduction of tax distortions.
Ish-Shalom & Co. Law Office specializes in analyzing and understanding the legal and financial aspects of the Eilat Free Trade Zone Law, particularly regarding VAT matters and the registration requirements for VAT taxpayers in Eilat. Our office offers professional, comprehensive services with extensive experience in tax law and an in-depth understanding of VAT regulations and the special benefits available to businesses in Eilat.
We assist our clients in avoiding complications and maximizing the advantages offered by the Law for businesses operating in the area.
Should you have any questions or need legal consultation regarding taxes and benefits for businesses in Eilat, our office is at your service with tailored solutions and the highest level of professional advice.
