Shipments entering Israel through Ashdod, Haifa or Ben Gurion Airport are cleared by the Israel Customs Directorate, part of the Israel Tax Authority (ITA). For foreign manufacturers and suppliers, delays at the port are rarely logistical. They usually come from legal disputes: a challenged customs value, a transfer pricing adjustment, royalties left out of the declared price, or goods classified under the wrong tariff heading.
When customs questions a declaration, it can issue a demand notice (hoda’at chiyuv) reaching back several years, add interest and penalties, and hold goods at the port. This guide covers how customs values imports, how purchase tax is layered on top, and how to respond to an audit or demand.
1. How Israeli Customs Values Imports
Israeli customs valuation is governed by the Customs Ordinance [New Version], 5717-1957, which follows the WTO Customs Valuation Agreement. The customs value is the base for three separate charges: customs duty, purchase tax (mas kniya) and import VAT. It is determined on a CIF basis: the cost of the goods plus freight and insurance to the Israeli port.
Transaction Value and Its Additions
The primary method is the transaction value: the price actually paid or payable for the goods when sold for export to Israel. The invoice price is only the starting point. Added to it, among others:
- International freight, loading and handling charges up to the Israeli port.
- Insurance up to the port of discharge.
- Selling commissions, containers and packing.
- Assists: goods or services the buyer supplies free or at a reduced price for producing the imported goods, such as designs, tooling, molds or components.
Related-Party Imports and Transfer Pricing
When a foreign parent sells to its Israeli subsidiary, customs often challenges the declared price. A related-party price is accepted only if the importer shows that the relationship did not influence it.
This creates a built-in conflict between two arms of the same authority:
- Income tax is concerned that the import price is too high, shifting profit out of Israel.
- Customs is concerned that the import price is too low, reducing duty, purchase tax and import VAT.
If customs rejects the transaction value, it moves down the statutory hierarchy: identical goods, similar goods, deductive value and computed value. Importers should keep a transfer pricing file that supports the declared customs values, not only the income tax position.
Royalties, License Fees and Software
Leaving royalties, license fees or embedded software out of the customs value is one of the most frequent grounds for a valuation demand against technology and industrial importers. A royalty or license fee is added to the value of the imported goods when:
- It relates to the imported goods, for example embedded software, a patented design or a brand integral to the product; and
- The buyer must pay it, directly or indirectly, as a condition of the sale of the goods for export to Israel.
Separate agreements for services unrelated to the goods themselves, such as later software updates, cloud services or post-import support, are generally outside the customs value, provided the contracts and invoicing clearly separate them from the hardware.
Purchase Tax on Top of the Customs Value
Purchase tax is a separate tax levied on specified goods, whether imported or made locally, notably vehicles, fuel, alcohol and tobacco, among others. On imports it is calculated on the customs value plus customs duty, and VAT is then charged on the total. A single upward adjustment to the customs value therefore increases all three charges.
2. Tariff Classification
The classification of goods under the Israeli Customs Tariff determines the customs duty rate, the purchase tax rate, regulatory import requirements and eligibility for trade agreement preferences. The tariff follows the international 6-digit Harmonized System (HS), extended with Israeli national subdivisions.
The Cost of Misclassification
Importers often rely on ERP mappings or supplier-provided HS codes that do not match the Israeli tariff. A different national subheading can turn a duty-free item into a dutiable one. Misclassification can lead to demand notices for past imports, fines, and closer scrutiny of future shipments.
Advance Classification Rulings
For high-value, multi-component or technically novel goods, importers can apply to customs for an advance classification ruling before shipment. A ruling gives certainty on the heading, and therefore on the duty, purchase tax and VAT, for the goods and facts it describes.
3. Responding to a Customs Demand Notice
When a post-clearance audit finds undervaluation, misclassification or undeclared royalties, customs issues a formal demand notice (hoda’at chiyuv).
Step 1: Triage
- Diarise the deadlines before anything else.
- Establish the scope: a single consignment, or a retroactive adjustment across up to five years of declarations.
- Avoid informal statements. Explanations given informally at the port, including by customs brokers, can become part of the evidentiary record. Have them reviewed first.
Step 2: Release the Goods and Build the File
Storage and demurrage costs accrue quickly while goods are held. Goods can usually be released without conceding the dispute by paying under protest or by posting a guarantee with the Customs Collector.
At the same time, assemble the defense file:
- Purchase agreements, commercial invoices and bills of lading.
- Proof of payment matching the invoices.
- Intercompany transfer pricing documentation.
- License, software and royalty agreements.
- Bills of materials and technical specifications for classification.
Step 3: Administrative Objection
The objection (hasaga) is filed with the relevant customs station. An effective objection combines legal argument with economic evidence: that a related-party price is at arm’s length, that royalties are independent of the imported goods, or, for classification disputes, a technical expert opinion. This is also the stage at which settlement is usually negotiated with the Customs Collector.
Step 4: Court Proceedings
If the objection is rejected, the importer can bring the dispute before the District Court within three months of the decision. Proceedings involve expert evidence and examination of the customs auditors, and the court reviews whether customs applied the valuation or classification rules correctly.
4. Voluntary Disclosure
An importer that discovers past underpayments, such as undeclared royalties or systematic misclassification, can report them proactively under the ITA’s voluntary disclosure procedure (giluy mirtzon), instead of waiting for an audit.
| Voluntary disclosure | Assessment after an audit | |
|---|---|---|
| Timing | Before any audit, inquiry or investigation begins | After customs has opened the file |
| Criminal exposure | Protection from criminal proceedings where the procedure’s conditions are met | Exposure where there was negligence or omission |
| Penalties | Tax, interest and linkage payable; fines typically reduced or waived | Penalties and fines added |
| Scope | Defined by the importer’s disclosure | Set by customs, potentially across several years |
The disclosure must be made in good faith, be complete, and be filed before the ITA begins an audit, inquiry or investigation of the company.
Key Steps for Importers
- Review intercompany contracts so hardware is priced separately from software, royalties and post-sale services.
- Align transfer pricing with customs values so the same documentation supports both.
- Seek advance rulings for high-value or ambiguous tariff headings.
- Act on demand notices immediately to protect the objection and court deadlines.
Facing a customs audit, port hold or valuation dispute in Israel? Contact Alex Polo about customs and VAT dispute representation and audit support.