Nostro Activity
Individuals and companies that trade in securities for themselves and not for others (so-called – Nostro Activity) may be considered by the VAT authorities as a financial institution for value added tax purposes. The consequences of this definition are crucial, since the tax applicable to financial institutions is profit and payroll tax, which raises the total tax to a very high rate.
For decades, the Tax Authority did not require activity in the Nostro account under the VAT Law. This is until Taxation Decision (VAT) (not in the agreement) 4396/15 – VAT liability due to financial investments – classification as a “financial institution” for the purposes of the law VAT of Nostro activity, in which the authority’s decision stated that investments in the Nostro account fall within the scope of alternative 3 to the mentioned above decree.
In this taxation decision, the tax authority took a position interpreting the above alternative, as applying the tax net even to investments made from self-capital gain and for the investor’s own needs without involving a third party (investments in the Nostro account).
This taxation decision was a turning point in the Authority’s approach, and since then the Tax authorities took a position that requires tax on activities in the Nostro account by virtue of the third alternative in the order.
In this way, activities were brought under the definition of a financial institution, which the main legislation in the VAT law did not define them as required in Tax base according to the VAT law, but by virtue of the decree which has a lower legal status – Subsidiary legislation.
After this taxation decision, the Tax Authority issued a binding position in report number 12/2017 that establishes instructions regarding capital investments in the Nostro account. After much criticism of the position stated above, it was canceled on September 20, 2018.
In the recent ruling in the case of Y.G.M. Investments LTD, Judge Avi Gorman referred to the difficulties with the position described above and reversed the position taken over the years, according to which – Even investments in a Nostro account constitute an activity that classifies the investor as a financial institution in accordance with the wording of the above-mentioned alternative, even though it is secondary legislation, while the law itself does not define such activity as the activity of a financial institution.
Judge Avi Gorman concluded and ruled that:
Classifying a body whose entire activity is only trading in a Nostro account as a financial institution will lead to distortions and difficulties, which justify - in light of the range of possible interpretations - avoiding such an interpretation... This determination does not mean to ignore the justifications that may exist for changing policy and applying an indirect Tax, even to those whose entire activity is in a Nostro account ... it is appropriate that such a move be carried out (if at all) by the legislator
Judge Avi Gorman stated that the wording of the law indicates that the legislator does not intend to Tax activity in securities in the Nostro account, since an activity that the legislator did not see fit to impose Tax on the main legislation, the likelihood that he will choose to impose Tax on such an activity in secondary legislation is very low and puzzling and therefore, the decree should be clarified in this spirit. In the continuation of the above-mentioned ruling, Judge Avi Gorman suggested that the Tax Authority consider the appropriate mechanism for taxing this activity, a mechanism that cannot be activated under the provisions of the above-mentioned order except by changing the existing legislation. The tax authority did not appeal the court decision, but in a manner that arouses great wonder – it continues to take its own position against the nostro dealers.
In fact, since it is a ruling in the district court that is not a binding law, the tax authority continues to claim that trading in nostro becomes a financial institution. Our office has handled many clients who trade Nostro in securities, options, and in the field of crypto (digital currencies, mainly Bitcoin and Ethereum). In these cases, we determined in an opinion that trading in Nostro would not result in the company being considered a financial institution for VAT purposes and we held discussions with the Tax Authority in this regard.
For further inquiry on this subject, please contact our office.
