Legal notice
This is a free information tool operated by an AI model. It explains the tax rules and helps you organise your own figures. All of its outputs are produced automatically by an AI model, with no involvement, review, or approval by a tax adviser or accountant. The output is not a tax opinion, not a return prepared by a licensed representative, and not professional advice, but a general calculation and explanation only: it does not examine the full extent of your income or your complete documents. An AI model may err, omit data, or present a wrong conclusion.
Any form or text this tool produces is an automatic draft for your personal preparation only, and is not a filed return. Responsibility for reporting and for paying the tax is yours, the binding computation is the Tax Authority's, and representation before the Tax Authority is reserved to those permitted by law. This tool is not a substitute for advice that takes account of the particular circumstances and needs of each person. Consult a tax adviser or accountant before filing or paying. All use of its output is the user's sole responsibility.
Instructions
Step 1: Identify Invoice Type and Source
Determine what documents the user has:
| Document Type | Hebrew | VAT Reclaimable | Categorization |
|---|---|---|---|
| Tax Invoice | Tax Invoice | Yes, extract VAT | Full categorization |
| Tax Invoice/Receipt | Tax Invoice/Receipt | Yes, extract VAT | Full categorization |
| Transaction invoice | Transaction Invoice | No, it is NOT a tax document | Reference only, chase the Tax Invoice |
| Receipt only | Receipt | No VAT to reclaim | Payment record only |
| Credit Invoice | Credit Invoice | Yes, NEGATIVE VAT | Reverse the original category |
| Proforma | Proforma Invoice | No, not a tax document | For reference only |
Key: only a Tax Invoice or Tax Invoice/Receipt allows input-VAT deduction.
The Transaction Invoice is the trap in a pile of paperwork. It looks like an invoice, is often headed "Invoice", and carries a VAT line, but it is a demand for payment rather than a tax document. Its VAT is not deductible and it must not be entered as an input. If the supplier is on a cash basis they issue it BEFORE payment and the Tax Invoice follows once they are paid, so the fix is to chase the real document rather than to book this one. Sort every "Invoice" in the pile on this distinction before doing anything else.
A Credit Invoice reverses an earlier invoice, so carry it as a NEGATIVE amount. Entering it as a positive inflates the reclaim by twice its VAT.
Step 2: Extract Invoice Data
Parse the following fields from each invoice:
| Field | Hebrew | Where to Find | Validation |
|---|---|---|---|
| Supplier name | Supplier Name | Header | Must match TIN |
| Supplier TIN | Business Number | Header | 9 digits with check digit |
| Invoice number | Invoice Number | Header | Sequential |
| Date | Date | Header | DD/MM/YYYY format |
| Net amount | Amount Before VAT | Line items sum | Before VAT |
| VAT amount | VAT Amount | VAT line | = Net * 0.18 |
| Total amount | Total Amount | Bottom | = Net + VAT |
| Allocation number | Allocation Number | B2B invoices above SHAAM threshold | SHAAM allocation required |
SHAAM allocation threshold timeline (Israel Tax Authority, accelerated rollout):
| Period | Threshold (pre-VAT) |
|---|---|
| Before 5 May 2024 | No allocation-number requirement at all |
| 5 May 2024 to 31 Dec 2024 | NIS 25,000 |
| 2025 (full year) | NIS 20,000 |
| 1 Jan 2026 to 31 May 2026 | NIS 10,000 |
| From 1 Jun 2026 | NIS 5,000 |
NIS 5,000 is the terminal step. Nothing below 5,000 is legislated or announced, so do not tell a user a further cut is coming, and do not state a schedule the Tax Authority page does not carry.
A B2B tax invoice above the threshold without a valid SHAAM allocation number (Allocation Number) is not eligible for VAT input deduction. Always check the threshold for the invoice issue date, not today's date.
Step 3: Extract VAT (1/6 Rule)
First confirm the supplier is an Israeli VAT-registered dealer. Foreign suppliers (AWS, Google, OpenAI, Figma, Upwork, and most overseas SaaS) charge NO Israeli VAT. Do NOT apply the 18/118 rule to a foreign-supplier invoice, or you will fabricate a reclaimable input-VAT figure that does not exist. Import VAT on goods is reclaimed only through the customs import entry (Import Entry), not the foreign supplier's invoice. Convert any foreign-currency amount to shekels at the invoice-date exchange rate before booking. For imports and purchases from foreign/unregistered suppliers, self-invoicing / reverse charge (Self-Invoice) may apply, route the accountant to that mechanism.
Israeli VAT is 18% (raised from 17% effective 1 January 2025). For an Israeli-supplier invoice where only the total (gross) is visible:
# VAT extraction from gross amount (כלל השישית)
vat_rate = 0.18 # 18% standard rate (effective 1 Jan 2025)
gross_amount = 1180 # סכום כולל מע"מ
# Method: VAT = gross * (rate / (1 + rate)) = gross * (18/118)
vat_amount = gross_amount * (vat_rate / (1 + vat_rate))
# = 1180 * (0.18 / 1.18) = 1180 * 0.1525... = 180.00
net_amount = gross_amount - vat_amount
# = 1180 - 180 = 1000
Shortcut at 18%: VAT ≈ Total / 6.556 (the divisor is 118/18). The colloquial name "klal hashishit" (the 1/6 rule) predates the rate hike and is now an approximation, not a literal sixth.
Step 4: Categorize by Expense Category
Assign each expense to a working bookkeeping category. The 1-12 numbering below is this skill's own convention, not a Tax Authority code list, so do not tell an accountant an expense is "code 4" and expect to be understood. Use the category NAME when you talk to them. These 12 categories map onto the Tax Authority income-statement structure (the Profit and Loss Statement / form 6111 groupings), with references/expense-categories.md, and with the keyword-based auto-categorizer in scripts/categorize_invoices.py:
| Code | Hebrew | English | Common Examples |
|---|---|---|---|
| 1 | Raw Materials | Raw materials | Production materials, components |
| 2 | Subcontractors | Subcontractors | Freelancer invoices, outsourced services |
| 3 | Labor Cost | Wages and salaries | Employee salaries, bonuses, commissions |
| 4 | Employer National Insurance | Employer NII | Employer share of Bituach Leumi |
| 5 | Rent | Rent | Office, warehouse, shop, workshop rent |
| 6 | Insurance | Insurance | Liability, professional, property, inventory |
| 7 | Electricity and Water | Utilities | Electricity, water |
| 8 | Communications | Communications | Phone, mobile, internet, cloud services |
| 9 | Vehicle Expenses | Vehicle expenses | Fuel, maintenance, vehicle insurance, parking |
| 10 | Depreciation | Depreciation | Computers, furniture, equipment, vehicles |
| 11 | Office Expenses | Office expenses | Stationery, paper, toner, postage |
| 12 | Other Expenses | Other expenses | Representation, travel, training, subscriptions |
Use scripts/categorize_invoices.py for automatic categorization.
Step 5: Identify Business Type
Determine supplier and customer business status:
| Status | Hebrew | VAT Treatment | Invoice Type |
|---|---|---|---|
| Osek Murshe | Authorized Dealer | Charges VAT, can deduct input VAT | Tax Invoice or Tax Invoice/Receipt |
| Osek Patur | Exempt Dealer | No VAT charged (under threshold) | Receipt only, may not issue a Tax Invoice |
| Hevra Peratit (HP) | Private Company (Ltd.) | Usually charges VAT; a 51 or 52 prefix SUGGESTS a company but does not establish it, and other ranges exist | Tax Invoice |
| Amuta (Non-profit) | Non-Profit Organization | Usually no VAT, TIN starts 58 | Receipt |
| Malkar (Non-profit) | Public Benefit Company | No VAT | Receipt |
Important: You can only deduct input VAT (mas tsumos) from tax invoices issued by Osek Murshe (or Hevra Peratit) suppliers. Receipts from Osek Patur do not have VAT to deduct.
Osek Patur turnover ceiling (2026): NIS 122,833 (raised from NIS 120,000 in 2024 and 2025). Once a freelancer crosses this annual turnover, they must convert to Osek Murshe from the date of the breach and notify the VAT office. Certain professions (lawyers, doctors, architects, engineers, accountants and a few others) are barred from Osek Patur status regardless of turnover.
Invoice issuance timing: section 46(a) requires a tax invoice (Heshbonit Mas) within 14 days of the מועד החיוב במס, the charge event, NOT within 14 days of delivery. The charge event is set by sections 22 to 29: for a SERVICE the general rule (section 24) is receipt of payment, so a cash-basis freelancer who has not been paid is not late. Section 29(1a) overrides it for a service provider whose turnover exceeds NIS 15 million a year and who keeps books under תוספת י"א: there the charge arises when the service is GIVEN (a service given in parts is charged part by part; a continuous service that cannot be split is charged on each payment or at completion, whichever is earlier). The same paragraph covers a service whose price is affected by special relations between the parties, one with no set price, and one paid wholly or partly in kind. The Finance Minister may raise the NIS 15 million figure by order, and section 29(2) lets him return classes of transactions to the on-payment rule, so confirm the current figure before relying on it. For goods it is delivery, unless the dealer is on the cash basis. "Supply or payment, whichever comes first" is a rough paraphrase that lands near the right answer in most cases but is not the rule. Invoices dated more than 14 days after the charge event may be challenged by the Tax Authority.
Step 6: Generate Accountant-Ready Export
Organize the data for the accountant (ro'eh cheshbon).
Output format (CSV/Excel):
Date, Supplier, TIN, Invoice#, Category, Net, VAT, Total, Notes
15/01/2026, חברת אלפא, 515000000, 1234, קבלני משנה, 10000, 1800, 11800, שירותי פיתוח
Include summary:
- Total expenses by category
- Total input VAT (mas tsumos) to reclaim
- Missing invoices or data gaps flagged
- Separate section for non-deductible items
Step 7: Align with Filing Deadlines
Surface the relevant filing windows so the user knows when the accountant needs the organized batch.
| Filing | Frequency | Threshold / Trigger | Deadline |
|---|---|---|---|
| VAT return (Doch Tkufati) | Bi-monthly | Annual turnover ≤ NIS 1,775,000 | 15th of the month after the period (online filers get an extension, confirm the current date) |
| VAT return | Monthly | Annual turnover > NIS 1,775,000 | 15th of the next month (same online extension) |
| Detailed VAT report (Doch Meforat) | Per VAT period | Annual turnover > NIS 500,000, OR required to keep double-entry books regardless of turnover | With the periodic VAT return |
| Income tax annual return (Doch Shnati) | Annual | All self-employed | 30 April is the statutory date, subject to extensions. The Tax Authority publishes extensions each year, including for representatives (מייצג (English: authorized representative)); confirm the current year's date |
| Bituach Leumi advances | Monthly | All self-employed | 15th of next month |
Hand the categorized batch to the accountant at least 7-10 days before the VAT deadline so they have time to reconcile and file. For invoices over the SHAAM threshold without an allocation number, flag urgently: the deadline to request a corrected invoice from the supplier is before that period's VAT filing.
Osek Zair (Small Dealer) option: a self-employed individual with annual revenue ≤ NIS 122,833 may elect the "Small Dealer" track on the annual return and deduct a flat 30% of revenue as expenses instead of actual expenses. The election is not available (section 87ה(a)) if the freelancer employs workers, does not keep admissible books, has business income not from personal exertion (יגיעה אישית), received part of the income from someone who is their employer in the tax year, had income attributed from a תאגיד שקוף under section 64(a), is a controlling shareholder as defined in section 32(9) (NOT the 10% substantial-shareholder test), or received more than 25% of the income from a קרוב as defined in section 88 or from someone who was their employer at any time in the previous three tax years (NOT "a related party" generally). Further Finance Minister conditions may also apply. Under 87ה(b), a small dealer who took the deduction in one year and then, in the next year with business income, did not take it, cannot take it in the two tax years after that year either. When this election is in play, this skill should still organize invoices for backup and Bituach Leumi purposes, but the categorized totals will not flow to the income tax return.
Examples
Example 1: Monthly Invoice Organization
User says: "I have 30 invoices from this month. Help me organize them for my accountant" Actions:
- Collect: Invoice images or text data from user
- Parse: Extract supplier, amount, VAT, date from each
- Categorize: assign a working category per Step 4
- Validate: Check TIN format, VAT calculation, allocation numbers
- Run
python scripts/categorize_invoices.py --input invoices.json --output categorized.json - Export: Generate accountant-ready CSV with summary Result: Organized expense report with VAT summary ready for accountant
Example 2: VAT Extraction from a Receipt
User says: "I paid 5,850 NIS total to an Israeli hosting company (Osek Murshe) for server hosting. What is the VAT portion?" Actions:
- Confirm the supplier is Israeli VAT-registered. (A foreign provider such as AWS or Google carries NO Israeli VAT, in that case skip the 18/118 extraction and record the full amount with zero reclaimable VAT.)
- Apply the 18/118 rule: VAT = 5,850 * (18 / 118) = 892.37 NIS
- Net amount: 5,850 - 892.37 = 4,957.63 NIS
- Categorize: Communications (code 8) Result: VAT of 892.37 NIS extractable, net expense 4,957.63 NIS in Communications (8). Had the supplier been foreign, reclaimable VAT would be 0.
Example 3: Osek Patur Invoice Handling
User says: "I got an invoice from a freelance designer, but there is no VAT line" Actions:
- Check: Is the supplier Osek Patur (עוסק פטור (English: VAT-exempt business operator))?
- If Osek Patur: No VAT to deduct, record full amount as expense
- Categorize: Subcontractors (code 2) for freelance design work
- Note: Request the supplier's TIN and verify their status Result: Full amount recorded as expense with no VAT deduction, flagged for accountant
Example 4: Mixed-Use Vehicle Expense
User says: "I got a fuel receipt for 2,340 NIS for a car I use for both work and personal trips" Actions:
- Extract VAT: 2,340 * 18 / 118 = 356.95 NIS (total VAT)
- Ask which use predominates before computing anything. "Both work and personal" does not answer the Regulation 18 question, and the two answers differ by a factor of 2.7. Ask: has the Director set a proportion for this vehicle, and if not, is the MAIN use business or private?
- If the main use is business (Reg 18(ב)(2)): deductible 356.95 * 2/3 = 237.97 NIS, non-deductible 118.98 NIS.
- If the main use is private (Reg 18(ב)(3)): deductible 356.95 * 1/4 = 89.24 NIS, non-deductible 267.71 NIS.
- If the Director has set a proportion, that determination governs both of the above.
- Categorize: Vehicle expenses (code 9) Result: state which limb you applied and why. If the user cannot say which use predominates, take the 1/4 limb and tell them the answer is provisional, because over-deducting is the error the Tax Authority reverses. The bundled script does exactly this: it applies 1/4 and says the main use was not stated.
Bundled Resources
Scripts
scripts/categorize_invoices.py-- Categorizes Israeli invoices into the 12 working categories, extracts VAT at the rate in force on the invoice date (18% from 2025, 17% before), validates business numbers by check digit, applies the Regulation 18 vehicle ladder, flags missing allocation numbers against the issue-date threshold, zeroes VAT on foreign-supplier and non-VAT documents, and carries credit invoices as negatives. Flags:--input/-i(required),--output/-o,--report/-r,--validate/-v(exits 1 on issues),--format json|text. Per-invoice fields it reads beyond the obvious:foreign_supplier,mainly_business_use,director_determined_business_share,allocation_number,invoice_type,vehicle_lease(REQUIRED on any invoice from a leasing or rental company or for a leased or rented car, see Gotchas),vehicle_running_cost(true forces the Regulation 18 vehicle ladder, false keeps a line off it),lease_maintenance_vat(VAT on a qualifying maintenance component the leasing company itemizes separately),lease_deal_vat(VAT on the whole deal, the 15% cap base when maintenance is billed on its own invoice),vat_free_reimbursement(insurance or licence-fee reimbursement on a long lease, no VAT),commercial_vehiclewithvehicle_weight_kg, andreg14b_exception. Run--helpfor the full list.
References
references/expense-categories.md-- The 12 working expense categories (this skill's own numbering, not an ITA code list) with descriptions and common examples, plus the special rules: the Regulation 18 vehicle ladder, the כיבוד קל (English: light refreshments) 80% income-tax cap, mixed-use apportionment, retention periods, and depreciation rates. Consult when categorizing an unusual expense.
Gotchas
- Agents often calculate VAT as
amount * 0.18when extracting from a total, but the correct formula to extract VAT from a VAT-inclusive amount istotal / 1.18 * 0.18(or equivalentlytotal * 18/118). This "1/6 rule" is specific to Israeli bookkeeping and the divisor changed from 117 to 118 when the rate moved to 18% in 2025. - Osek Patur (exempt dealer) invoices have no VAT component. Agents may still try to extract VAT from these invoices, producing incorrect bookkeeping entries.
- Israeli invoice numbers are not globally unique. Different suppliers can have the same invoice number. Always index by supplier + invoice number combination.
- Hebrew OCR on scanned invoices frequently misreads the characters vav (ו) and zayin (ז), and confuses final-mem (ם) with samekh (ס). Verify extracted amounts and names.
- The allocation-number threshold is staged (no requirement at all before 5 May 2024, then NIS 25,000 from 5 May 2024, NIS 20,000 in 2025, NIS 10,000 from 1 Jan 2026, NIS 5,000 from 1 Jun 2026). Apply the threshold in force on the invoice ISSUE date, not today's. An invoice from March 2026 is tested against 10,000, not 5,000. There is no announced step below 5,000, so do not invent one.
- The standard rate is 18%. No rise above 18% is in force. Do not apply a different rate you see floated in the press unless it has actually taken effect.
- The Osek Patur turnover ceiling rose from NIS 120,000 to NIS 122,833 starting 2026. Agents that hardcode 120,000 will flag legitimate Osek Patur status as "over threshold" for revenues between 120,001 and 122,833.
- An invoice dated more than 14 days after the CHARGE EVENT (מועד החיוב במס (English: tax charge event), which for a service is receipt of payment) can be challenged by the Tax Authority. Do not measure the 14 days from delivery, and see Step 5 before telling a cash-basis freelancer they are late. Flag genuinely late invoices for the accountant.
- Input VAT can only be deducted in the invoice's VAT period or within 6 months after it (section 38(a) of the VAT Law, not תקנה 23א, which is an unrelated extra return for Gaza and Jericho transactions). Flag invoices older than 6 months in the batch: their VAT is no longer freely reclaimable and needs VAT-office approval.
- A tax invoice must be issued in the name of the claiming business (על שם העוסק (English: in the business operator’s name)) to deduct input VAT. Reject invoices addressed to the owner personally, a spouse, or a different entity, this is the most common reason an accountant disallows an invoice.
- The vehicle 2/3 rule applies to running costs (fuel, maintenance, repairs) under Regulation 18, and it is a DEFAULT, not a flat rate. Where the Director has set the proportional non-business use, that determination governs. Where he has not: if the MAIN use is for business the dealer may deduct two thirds; if the main use is NOT for business the dealer may deduct only a QUARTER. Applying 2/3 to a mainly-private vehicle over-deducts. VAT on buying or importing a private vehicle is fully non-deductible under Regulation 14(a), even at 100% business use.
- Car leasing is NOT a running cost. The Tax Authority reads Regulation 14(a) as covering the RENTAL of a private vehicle too, so VAT on operating-lease or rental payments is not deductible at all, whatever the business use (interpretation 1/2002). The only exception inside a lease is a maintenance component the leasing company itemizes separately (routine servicing, non-warranty mechanical repairs, driver services): that part goes through the Regulation 18 rules (a full deduction if the vehicle is used only for business, otherwise the proportional share or the 2/3 or 1/4 default), and only up to 15% of the deal price unless the Tax Authority approved a higher share on the leasing company's application. Warranty repairs, self-insurance and a replacement car are part of the rental even when itemized, and stay barred. On a lease over 12 months, the lessee's reimbursement of the licence fee and compulsory insurance, and of comprehensive insurance where the policy or the insurer's receipt is in the lessee's name, falls under Regulation 6 and is not part of the rental price: book it with
vat_free_reimbursement. If the leasing company extends credit for these payments, the credit becomes part of the barred rental. Fuel, and garage work bought from a third-party garage, are running costs under Regulation 18 (interpretation 1/2002, section 5). Repair and servicing lines billed BY the leasing company are the lease's maintenance component: barred unless itemized, and then capped at 15%. Equipment leasing is not a vehicle at all. Do not put a vehicle-lease invoice on the 2/3 ladder, and do not file it under Rent. Regulation 14(b) is vehicle-specific: it frees a car dealer's unused stock car, and a vehicle used ONLY for driving lessons, rental by a car-rental business, passenger transport or organised tours. It is not an exemption for every vehicle such a business owns. - Set
vehicle_leaseyourself; the script will not guess. For every invoice from a leasing or rental company, or that concerns a leased or rented car, decide and passvehicle_lease:truefor the lease or rental payment and for the leasing company's own servicing and repair lines (barred, or the capped maintenance path),falsefor anything else, such as a fuel card or a third-party garage bill (Regulation 18). The script only SPOTS a likely lease; when the field is missing it holds the VAT at 0, marks the invoice INPUT NEEDED and fails--validate. Read the supplier name, not just the line text: many leasing companies invoice without the word ליסינג (English: leasing). When you passfalsefor a leasing or rental company's invoice whose line does not show what it is ("חיוב חודשי - כרטיס 4521 (English: monthly charge - card 4521)"), also passvehicle_running_cost:truefor a fuel card, tyres or another vehicle cost,falsefor anything else. Without it the script holds that invoice at 0 as INPUT NEEDED. - "Private vehicle" for Regulation 14 includes a commercial vehicle (van, pickup) with a permitted total weight up to 3,500 kg. A light commercial vehicle is not a full-deduction case: its purchase and lease VAT are barred, and its running costs follow Regulation 18. Only a heavier commercial vehicle is outside the definition, and even then its costs are fully deductible only for business use: mixed use still falls under Regulation 18(a).
- Input VAT on business hospitality/entertainment (אירוח (English: hospitality)) is NOT deductible (תקנה 16 (English: Regulation 16), except hosting a guest from abroad). Do not reclaim VAT on restaurant/hosting invoices meant to entertain clients or employees; only genuine business inputs qualify.
Reference Links
| Source | URL | What to Check |
|---|---|---|
| Israel Tax Authority | https://www.gov.il/he/departments/israel_tax_authority | Current VAT rate (18%), e-invoice regulations |
| Israel Invoice (חשבונית ישראל (English: Israel Invoice)) | https://www.gov.il/he/departments/topics/israel-invoice | The allocation-number threshold ladder and its effective dates, stated verbatim |
| Request an allocation number | https://www.gov.il/he/service/request-assignment-number-for-tax-invoice | How a supplier obtains a number, and the current threshold |
| Verify a supplier's invoice | https://www.gov.il/he/service/verify-vendor-invoice-information | Check a supplier's invoice against its allocation number |
| Vehicle input-tax guide | https://www.gov.il/he/pages/instructions-for-deduction-of-input-tax-for-vehicles-and-motorcycles | The vehicle rules under Regulations 14 and 18, including mixed use |
Troubleshooting
Error: "VAT amount doesn't match"
Cause: Rounding differences between line-item VAT and total VAT Solution: Israeli invoices may have rounding differences of up to 1 NIS. Use the VAT amount printed on the invoice (not recalculated). If no VAT line exists, use the 18/118 rule from Step 3. Differences greater than 1 NIS usually indicate either the wrong rate (legacy 17%) or a real invoice error, contact the supplier for a corrected invoice.
Error: "Cannot determine business type"
Cause: Invoice does not clearly state Osek Murshe or Osek Patur Solution: Look for "עוסק מורשה (English: VAT-registered business operator)" or "עוסק פטור (English: VAT-exempt business operator)" on the invoice. Check the TIN on the Tax Authority business lookup. If unclear, treat as Osek Patur (no VAT deduction) and flag for accountant review.
Error: "Expense category unclear"
Cause: Invoice description is vague or multi-category Solution: Use the primary purpose of the expense. When in doubt, assign to "Other expenses" (code 12) and let the accountant reclassify. Common confusion: software subscriptions belong in Communications (8), not Office expenses (11).
Error: "Missing SHAAM allocation number on a B2B invoice"
Cause: A B2B tax invoice above the active threshold was issued without a SHAAM allocation number (מספר הקצאה (English: allocation number)) Solution: Determine the threshold in force on the invoice issue date (no requirement at all for an invoice issued before 5 May 2024; NIS 25,000 from 5 May 2024; NIS 20,000 in 2025; NIS 10,000 from 1 Jan 2026; NIS 5,000 from 1 Jun 2026). If the invoice is above the threshold and lacks an allocation number, the invoice is still a valid document, but its input VAT is not deductible by the buyer until the number is supplied. Ask the supplier to reissue with an allocation number, or record the invoice without claiming the input VAT and flag for the accountant.