Import Taxation in Israel — Customs, Purchase Tax & VAT Explained

1. The Three Taxes on Imports

Israel applies three separate taxes at import, stacked in a specific order. Each tax has its own rules, its own base, and its own circumstances under which it applies or doesn't.

The order matters. Customs duty is calculated on the tax base (see below). Purchase tax — when it applies — is calculated on the base plus customs. VAT is calculated on the base plus customs plus purchase tax. So a tax saved at the customs stage cascades into smaller purchase-tax and VAT bills.

2. Customs Duty (מכס)

Customs duty is a tax on imported goods, paid on the value of the cargo as declared for customs. The rate is a percentage that depends on two inputs:

1. The product's HS code (Harmonised System). Israel uses the 8-digit extended classification; the Israeli tariff book publishes the customs rate for every code.
2. The country of origin. Goods originating in a country that has a trade agreement with Israel pay preferential duty — usually zero, sometimes reduced — instead of the MFN (Most Favoured Nation) rate.

3. Purchase Tax (מס קניה)

Purchase tax is a selective excise-style tax that applies to specific product categories only. It is levied both on imports and on locally manufactured goods. The product categories that typically carry purchase tax include:

• Motor vehicles and motorcycles (the largest category by revenue)
• Tobacco products (cigarettes, cigars, electronic smoking devices)
• Alcoholic beverages (beer, wine, spirits — graduated by alcohol content)
• Fuels and energy products
• Certain electronics and specific appliances as designated
• Sugary drinks and some snacks (per periodic amendments)

If your product is not on the purchase-tax list, this layer is 0% — and there are only three layers, not purchase-tax and VAT. For categories that do carry purchase tax, the rate can be substantial (cars, for example, face multi-tier purchase tax that often exceeds the commercial value of the vehicle itself).

4. VAT (מע״מ) — Applied Last

Value Added Tax is applied to virtually every commercial import into Israel at the standard rate in force at the time of clearance. Unlike customs and purchase tax, VAT is not about the product — it is a general consumption tax. The VAT rate is fixed and published by law; the importer pays it at customs and — if registered for VAT — recovers it as input VAT against output VAT on domestic sales.

5. Tax Base — How Incoterm Affects It

The base on which customs is calculated — the customs value — depends on the Incoterm under which the cargo was purchased. Israel follows the WTO Customs Valuation Agreement, which uses the transaction value, adjusted to include freight and insurance to the port of entry.

If you purchased on a term that does not yet include freight and insurance (e.g., FOB, FCA, EXW), the freight and insurance you pay separately must be added to the declared commercial value to compute the customs base. If you purchased on a term that already includes them (e.g., CIF, CIP, DAP, DDP), the declared value already captures them.

See our Incoterms 2020 guide for the full picture of how each term allocates cost and risk.

6. Israel's 48 Trade Agreements

Israel has signed 48 bilateral and multilateral free-trade agreements. Under each, goods that meet the agreement's rules of origin pay preferential (usually zero) customs duty instead of the MFN rate. The major ones cover almost all of Israel's commercial import volume:

To claim preferential duty under any of these, the shipment must be accompanied by the correct origin certificate for that agreement. The most common types are EUR.1 / EUR.MED (Pan-Euro-Med), Certificate of Origin Form A (some historical agreements), and agreement-specific forms (e.g., Israel-US COO, Israel-Canada COO, Israel-China COO).

7. Pan-Euro-Med & EUR.MED Certificate

Pan-Euro-Med (PEM) is a multi-country customs system that links Israel with 27 EU member states, 4 EFTA countries, Turkey, Jordan, the UK, and a handful of other Mediterranean and Eastern European partners. Its key innovation is cumulative origin: an exporter in any PEM country can use inputs sourced from any other PEM partner and still claim preferential origin, provided proper tracing certificates (EUR.MED) accompany the goods through the supply chain.

PEM rules of origin are strict. "Made in" the exporting country is not enough — the product must undergo sufficient processing per the specific product rule (PSR) in the agreement, or be produced wholly from originating inputs. Minimal handling (packing, labelling, mixing) does not confer origin.

8. Exchange Rate for Customs

Customs value on Israeli import declarations is expressed in New Israeli Shekels (NIS), but commercial invoices are typically in USD, EUR, GBP, or the supplier's currency. The conversion to NIS uses the Bank of Israel customs exchange rate, which is published weekly (effective for clearances in the following week). For Israeli customs purposes the rate may include a small statutory uplift over the standard market rate — your customs broker will apply the correct rate for the clearance week.

9. Common Mistakes

• Wrong HS code — A misclassification can swing customs from 0% to double-digit. Customs audits flag misclassifications years later, with back-duty, interest, and penalties. Always invest in the right classification up-front.
• Missing or wrong origin certificate — The preferential rate is forfeit. Pay MFN on a shipment that should have cleared at zero.
• Confusing 'made in' with 'originating in' — A product finished in Vietnam with entirely Chinese inputs is 'made in Vietnam' but may not qualify as Vietnamese-originating under the rules of origin. Customs verifies the PSR, not the label.
• Under-declaring to reduce tax — Customs compares declared values to market references and across comparable shipments. Under-declaration triggers re-valuation, back-duty, and offences. The cost-benefit is never worth it.
• Forgetting freight/insurance addition under FOB — When buying on FOB or FCA, freight and insurance must be added to the customs value. Forgetting this understates the base and creates an audit risk.