Israel Tax Authority Changes Rules for Deducting Expenses for Income Tax

📘 Overview of the Legislative Change

Amendment No. 280 to the Income Tax Ordinance, published on March 27, 2025, and effective from August 1, 2025, introduces a significant new requirement tied to deducting business expenses for tax purposes. It aligns Income Tax and VAT regulations more closely, especially in the context of invoice authenticity and tax enforcement.

This change is part of a broader policy effort to reduce tax evasion and prevent fraud through the “Israel Invoice Model”—a technological framework developed by the Israel Tax Authority.

📘 Objective of the Amendment

The primary goals of this amendment are:

1. Combating Fake Tax Invoices: Preventing deduction of expenses tied to fraudulent or unauthorized VAT invoices, which cost the state billions of shekels annually.

   
   

2. Fighting the Black Economy: Improving oversight over unreported transactions and illegal cash flow.

   
   

3. Strengthening Technological Controls: Using digital tools to enforce stricter validation of tax documentation.

🔍 What Is Changing?

Previously:

• Businesses could deduct expenses for income tax purposes if the expense met general deductibility criteria.

• Separately, VAT input could be deducted if the invoice met the requirements of the VAT Law.

  
  

🆕 Now (Effective August 1, 2025):

• If a VAT input deduction is disallowed under Section 38(a1) of the VAT Law, because a VAT Allocation Number was not issued correctly, then the related business expense is also disallowed for income tax purposes.

In other words:

If the VAT system doesn’t recognize the invoice as valid (due to a missing or invalid allocation number), then you can't deduct the expense in your income tax return either.

This represents a major shift: disallowed VAT now automatically taints the expense under income tax rules.

🔐 Enforcement & Technology Link

This is a technological enforcement measure:

• It links real-time invoice approval (through VAT) with downstream income tax deductions.

• It enables the Tax Authority to track and prevent tax avoidance through fake invoices across both tax systems simultaneously.

📅 Future Measures

The amendment also hints at upcoming restrictions:

• Additional limitations on income tax deductions may apply in the future if a business violates the Cash Law, which governs limits on cash transactions.

• These changes will be published later, further tightening compliance obligations.

✅ Recommendations for Businesses

To comply with the new regulations, businesses should:

1. Use Tools in the "Israel Invoice Model"

   Verify allocation numbers are issued and valid before processing invoices for VAT or income tax deductions.

   
   

2. Update Accounting Software & Workflows

   Please contact your ERP software provider, to ensure that you have the latest updates. Alfasi has included in our Allocation Number suite of programs for JD Edwards EnterpriseOne a program that will check all Supplier Invoices and confirm the correct allocation number to tax reporting tables. This was done with this amendment in mind.  

   
   

3. Train Finance & Procurement Teams

   Make sure relevant staff understand how to verify invoices and avoid non-deductible expenses.