Do You Add Israeli VAT to an Invoice You Send a Foreign Client?
Generally no. When you freelance or consult for a foreign-resident client (a US or EU company) as a self-employed Israeli, the export of that service is generally zero-rated for Israeli VAT (מע"מ (maam)), known as maam b'shiur efes, a 0% rate1. So you do not add the standard 18% you would charge an Israeli client. The conditions matter, though, and the documentation is on you to keep.
Not advice
Here is what blindsides new olim. In your home country, you mostly worried about one VAT (or sales-tax) line on a domestic invoice. As an Israeli osek invoicing back home, you now juggle two opposite behaviours on the same business: you charge 18% VAT to your Israeli clients, and you zero-rate the qualifying invoices you send your foreign clients. Get the two confused and you either overcharge a US client 18% they should never have paid, or you fail to register and collect VAT where you owed it. Both are common newcomer mistakes, and both are avoidable once you see how the export rule sits on top of your osek status.
Which Osek Status Are You: Osek Patur or Osek Murshe?
Before the export rule does anything for you, you need to know which VAT status you registered in with the Israel Tax Authority, because the 0% export rate behaves differently in each2.
What Is an Osek Patur?
An עוסק פטור (osek patur) is a small business under an annual turnover threshold that the Israel Tax Authority sets and updates each year2. An osek patur charges no VAT at all on any invoice, Israeli or foreign, and correspondingly cannot reclaim input VAT on business purchases. It is the simplest status for a small freelancer. For an osek patur, the export zero-rating rule is largely academic: you were not charging VAT to a foreign client anyway, so the practical question is just staying under the threshold and filing the simple annual VAT declaration.
What Is an Osek Murshe?
An עוסק מורשה (osek murshe) is a business above that turnover threshold (or that opts in), and it is fully inside the VAT system2. An osek murshe charges 18% VAT on invoices to Israeli clients, files periodic VAT returns, and can reclaim input VAT (maam tashum) on Israeli business expenses such as a laptop, software, or a co-working desk. For an osek murshe, export zero-rating is genuinely valuable: you put 0% on the qualifying foreign invoice (not 18%), yet you still get to reclaim the input VAT on the expenses behind that work, which an exempt status never lets you do.
How Does Export Zero-Rating Actually Work, and What Are the Conditions?
Zero-rating means the rate of VAT on the transaction is 0%, not that the transaction is outside VAT entirely. The supply of a service to a foreign resident is treated as an export and generally carries the 0% rate1. The practical effect on your invoice to a US or EU client: the VAT line reads 0%, you collect no VAT, and (as an osek murshe) you still report the transaction and keep your right to reclaim input VAT on the related Israeli costs.
What Conditions Must the Service Meet?
The 0% rate is conditional, and this is where olim trip up. Broadly, the service must be supplied to a foreign resident, and it must not be a service that is effectively consumed in Israel, nor a service relating to an asset physically located in Israel1. If you are designing a brand for a New York company that has no Israeli operation, that is a clean export. If, by contrast, the real beneficiary of the service is in Israel, or the service attaches to Israeli property or to people physically present in Israel, the export treatment can fail even though the paying client is abroad. Certain categories of service are carved out of the 0% rate by the VAT rules, so confirm your specific activity with an accountant rather than assuming every foreign invoice qualifies1.
What Documentation Do You Need to Keep?
Because the 0% rate is a benefit you are claiming, the burden of proof sits with you. Keep the engagement contract or written scope, evidence that the client is a foreign resident (their foreign registration or address), and proof that payment came from abroad1. If the Israel Tax Authority reviews your file and you cannot substantiate that the service was exported to a foreign resident, it can deny the zero-rating and treat the supply as a standard 18% transaction, leaving you to pay VAT you never collected. Treat the paperwork as part of the invoice, not an afterthought.
How Do You Invoice in Foreign Currency and Handle the FX?
An osek murshe issues a cheshbonit mas (tax invoice) for a sale; the document that merely confirms money received is a kabala(receipt). For a zero-rated export, your tax invoice still issues, it simply shows VAT at 0% rather than 18%. You can bill and be paid in foreign currency (USD, EUR, GBP); for your Israeli VAT and income-tax books, the foreign amount is translated into shekels using the exchange rate at the relevant date, so the shekel value you report can differ from the figure on the client's invoice once the currency moves. Keep the FX rate you used alongside each foreign-currency invoice so your accountant can reconcile the shekel figures cleanly.
A Worked Example: Billing a US Client as an Osek Murshe
Dana invoices a US software company
Dana made aliyah, registered as an osek murshe, and does $4,000 of contract product-design work for a US software company with no Israeli presence. Here is the contrast with how the same job would have run before, and how it runs now.
- Home-country habit: a domestic client invoice carried the local VAT or sales-tax line, and that was the only indirect-tax question she thought about.
- Israeli reality, the foreign invoice: Dana issues a tax invoice (cheshbonit mas) for $4,000 showing VAT at 0%, because the service is exported to a foreign resident and not consumed in Israel1. She collects $4,000, no VAT added.
- If the client were Israeli instead: the same invoice would carry 18% VAT, so she would bill the shekel equivalent plus 18% and remit that VAT to the Israel Tax Authority1.
- Input VAT she can still reclaim: the VAT on her Israeli expenses behind the project (design software subscription, a new monitor) is reclaimable as maam tashum, even though the sale itself was zero-rated, because she is an osek murshe inside the VAT system1.
- Still taxed on the profit: the profit on the $4,000 faces Israeli income tax (מס הכנסה (mas hachnasa)) and Bituach Leumi self-employed contributions4. Zero VAT is not zero tax.
The lesson the contrast carries: in your home country the indirect-tax question was a single line; in Israel, the same freelancer charges 18% to Israeli clients and 0% to qualifying foreign ones, on the same business, in the same month.
Osek Patur vs Osek Murshe for a Freelancer Who Exports
| What matters for an exporter | Osek patur (small/exempt) | Osek murshe (VAT-registered) |
|---|---|---|
| VAT charged to an Israeli client | None (charges no VAT at all) | 18%1 |
| VAT on a qualifying foreign-client invoice | None (no VAT in either case) | 0% via export zero-rating1 |
| Can reclaim input VAT (maam tashum) on expenses? | No | Yes, including behind a zero-rated export1 |
| VAT filing | Simple annual VAT declaration | Periodic VAT returns (monthly or bi-monthly)2 |
| Best fit | Small freelancer under the turnover threshold | Higher-revenue freelancer, or one with real expenses to reclaim2 |
Zero VAT Is Not Zero Tax: Income Tax and Bituach Leumi Still Apply
Export zero-rating is purely a VAT matter. The profit on your foreign-client work is still ordinary self-employment income, so it faces Israeli income tax (mas hachnasa) and ביטוח לאומי (bituach leumi) self-employed contributions just like income from an Israeli client4. Many new olim hear "no VAT on exports" and quietly assume the income is somehow tax-light; it is not. Budget for income tax and Bituach Leumi on the profit from day one, and set standing orders so a deadline never becomes a penalty.
US persons: self-employment tax stacks on top
If you are a US citizen or green-card holder, there is a further layer that has nothing to do with Israeli VAT. Because there is no US-Israel totalization agreement, your US self-employment tax (Social Security and Medicare) is not coordinated with your Israeli Bituach Leumi contributions, so you can owe both on the same freelance profit5. The export rule zeroes your Israeli VAT; it does nothing for this double social-tax exposure. See our dedicated article on US self-employment tax and the missing totalization agreement for olim.
PFIC: Out of Scope for Freelance Invoicing
PFIC does not apply to this topic. The Passive Foreign Investment Company rules attach to pooled investment vehicles (an Israeli ETF, a keren ne'emanut, a kupat gemel). Invoicing a foreign client for your work is earned income from services, not a pooled investment, so there is no PFIC exposure in the act of freelancing or zero-rating an export. PFIC becomes relevant only if you later take that income and invest it in non-US pooled funds, which is a separate investing topic covered elsewhere on this site.
When you freelance for a foreign-resident client (a US or EU company) as a self-employed Israeli, the export of that service is generally zero-rated for Israeli VAT (maam) at 0%, so you do not add the standard 18% you would charge an Israeli client. Zero-rated is not the same as exempt: an osek murshe still files VAT returns and can reclaim input VAT on Israeli business expenses behind that work, while an osek patur charges no VAT on anything and reclaims nothing. The 0% rate is conditional. The service must be supplied to a foreign resident and not effectively consumed in Israel (or relate to an asset located in Israel), and the burden of proof is on you, so keep the contract, foreign-client details, and proof of payment from abroad. Zero VAT is not zero tax: the profit still faces Israeli income tax (mas hachnasa) and Bituach Leumi self-employed contributions, and for US persons US self-employment tax can stack on top because there is no US-Israel totalization agreement.
Generally no. The export of a service to a foreign resident is zero-rated, so a qualifying invoice to a US or EU client shows VAT at 0%, not 18%. Charging a foreign client 18% by mistake is one of the most common newcomer errors. The catch is that the service must genuinely be supplied to a foreign resident and not effectively consumed in Israel, and you must keep the documentation to prove it.
No. Zero-rated means the rate is 0% but the transaction stays inside the VAT system: an osek murshe still files VAT returns and keeps the right to reclaim input VAT (maam tashum) on business expenses. An osek patur is a different thing: it charges no VAT on anything and reclaims nothing. The distinction matters most when you have real Israeli expenses whose VAT you would like back.
It depends on turnover and expenses, not on where your clients sit. Below the annual threshold with few expenses, an osek patur is simplest. Above the threshold, or with meaningful Israeli business costs you want to reclaim VAT on, an osek murshe is usually better, and that is the status where export zero-rating actually pays off. Ask your accountant to model both against your real numbers.
Yes. You can bill and be paid in foreign currency (USD, EUR, GBP). For your Israeli VAT and income-tax records, the foreign amount is converted to shekels at the exchange rate on the relevant date, so the shekel value you report can move with the FX. Record the rate you used with each invoice so your accountant can reconcile the books.
No. Zero-rating is a VAT matter only. The profit still faces Israeli income tax (mas hachnasa) and Bituach Leumi self-employed contributions, and for US persons US self-employment tax can stack on top because there is no US-Israel totalization agreement. Plan for tax on the profit even when the VAT line reads 0%.
Because the 0% rate is a benefit you are claiming, the burden of proof sits with you. Keep the engagement contract or written scope, evidence that the client is a foreign resident (their foreign registration or address), and proof that payment came from abroad. If the Israel Tax Authority reviews your file and you cannot substantiate that the service was exported to a foreign resident, it can deny the zero-rating and treat the supply as a standard 18% transaction, leaving you to pay VAT you never collected.
No. The Passive Foreign Investment Company rules attach to pooled investment vehicles such as an Israeli ETF, a keren ne'emanut, or a kupat gemel. Invoicing a foreign client for your work is earned income from services, not a pooled investment, so there is no PFIC exposure in the act of freelancing or zero-rating an export. PFIC becomes relevant only if you later take that income and invest it in non-US pooled funds, which is a separate investing topic.
