For years, many trade-in transactions in Israel operated under the "Net Method": the customer buys a new product, hands over an used one, and the company issues an invoice only for the cash difference. A dramatic new Position Paper published by the Israel Tax Authority (ITA) yesterday (01/2026), combined with the landmark Trade Mobil court ruling, has officially ended this practice. Businesses that continue this method are now exposed to massive tax assessments and bookkeeping penalties.
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The Bottom Line:
The ITA has clarified that a trade-in is legally two separate transactions: a full sale of a new product and a separate purchase of a used one. The use of internal credit notes to reduce the price of the new product is strictly prohibited. However, as "compensation" for this tightening, the District Court has granted a major relief: the ability to perform a Monthly Aggregate VAT Calculation on second-hand inventory, allowing for the offsetting of losses between items within the same reporting month.
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1. The Accounting Trap: Why You Cannot Offset on the Invoice

Position Paper 01/2026, issued following the District Court's ruling, halts the use of "internal credit notes." The ITA has ruled that receiving a used device from a customer does not constitute a "discount" or a "cancellation of a transaction" under Section 49 of the VAT Law.

The Practical Impact: If you sell a new smartphone for 5,000 NIS, you must pay VAT on the full 5,000 NIS. You cannot issue an invoice for 3,000 NIS simply because the customer traded in a device worth 2,000 NIS. Any attempt to "zero out" the used device against the new one within the invoice will be flagged as an under-reporting of revenue.
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2. The Lifeline: Monthly Aggregate Calculation (The Trade Mobil Precedent)

Despite the strictness regarding invoicing, the ruling in Trade Mobil Ltd vs. VAT Director (Appeal 38465-02-20) provided a significant economic win for dealers. Previously, the ITA required calculating the profit (the Margin) on every single used item individually. If you lost money on a specific vehicle sale, that loss was "wasted" for tax purposes.

The Strategic Shift: The Court adopted the "Monthly Basket" approach. Dealers can now aggregate all second-hand sales within a single reporting month, deduct the total acquisition costs of those items, and pay VAT only on the total positive margin. This is a critical tool for cash flow management and reducing the actual tax burden of the business.
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3. Market Expansion: Clothing and Household Goods as "Used Assets"

It is important to note that the ITA is also adapting to modern circular economy trends. In Tax Ruling 8808/25, the Authority confirmed that the "Margin Scheme" (Section 5a) now applies to used clothing and household items. This opens a significant door for retail chains looking to enter the "Resale" and sustainability markets while paying tax only on the added value.
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Practical Takeaways for Executives

• Contractual and Invoicing Decoupling: Ensure your trade-in agreements clearly define two separate actions. The invoice to the customer must reflect the full catalog price of the new product to avoid bookkeeping violations.
• Adopt the Aggregate Offset Model: Now is the time to update monthly reporting procedures. Correct implementation of the Trade Mobil precedent can save companies significant sums that were previously paid due to the inability to offset losses within used inventory.
• "Smart" Inventory Management: To benefit from the Margin Scheme (Section 5a), you must maintain a precise record of the purchase price from every private individual. Without this documentation, the ITA will disqualify the benefit and demand VAT on the total sales turnover.
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FAQ

Q: Can I offset a loss from a used product sale against the VAT paid on a new product?
A: No. Position Paper 01/2026 explicitly prohibits this. The VAT on the new item is full and final. Offsetting is only possible within the "basket" of second-hand products sold in the same month.

Q: What happens if I sell a used product at a loss and have no other profits that month?
A: In such a case, the transaction price for VAT purposes is zero. You will not receive a VAT refund from the state, but you will also not pay tax on that specific sale.

Q: Does this apply to electronics and cellular companies?
A: Yes. The ITA specifically cites the cellular industry as a primary example of where these rules will be strictly enforced.

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