Knesset wants to exempt tips from VAT

Knesset members approved in preliminary reading a bill by Oded Forer (NDI), providing for the exemption of tips received by waiters in a restaurant from VAT.

The bill seeks to codify into law a decades-long de facto situation that the Tax Administration is seeking to change based on a 2018 ruling by the All-Israel Labor Court.

The court then ruled that any tips (even if they were paid directly to the waiter) should be considered business income and would be taxed accordingly. At the same time, the employer cannot use tips for purposes other than paying employees. He is also obliged to make all social contributions provided by law from them. Tips should be shared among all service workers (bartenders, kitchen workers, waiters, etc.).

In the summer of 2024, based on this decision, the tax department announced that it intends to begin collecting VAT on tips, and emphasized that this issue will be given increased attention in audits.

“According to our position, tips paid to an enterprise for services provided by its employees are income forming part of the remuneration for the service, and, therefore, tips are also subject to value added tax,” the reasoning for this decision says.

The department also emphasized that, from a legal point of view, restaurants are prohibited from deducting VAT on tips from waiters’ salaries.

As a result, it was decided that the collection of VAT on tips will begin on January 1, 2025.