The amendments to the VAT Law approved last year and effective as of 1 January 2010 refer also to financial services. Certain services provided by banks and insurance companies which do not have financial substance, such as the rental of safe deposit boxes, factoring, management services, custodial services, etc. are subject to VAT as of 1 January 2010.
The new VAT situation for financial services might also influence the current VAT status and obligations of other entities which render financial services, such as commercial companies, leasing companies, etc. If a commercial company provided a loan to another company, it would not be obliged to assess VAT on the interest.
A commercial company that provides a loan from its own funds for the delivery of goods or services may choose/opt whether the interest on such a loan will be subject to VAT or VAT exempt, provided the total value of VAT exempt deliveries does not exceed 2% of the total annual deliveries and if the Tax Authorities are notified of the opted VAT treatment.
For all companies that will have VAT exempt deliveries (e.g. financial services) and deliveries liable to VAT deliveries, rules on input VAT recoverability have been established: The general rule is that a VAT payer can recover input VAT that relates to the provision of deliveries subject to VAT, while input VAT cannot be recovered for purchases relating to the provision of VAT exempt deliveries.
Input VAT which cannot be directly allocated to deliveries that are subject to VAT or exempt (e.g. general expenses) is determined by calculating the share of deliveries subject to VAT on the total of deliveries made in the previous year. An adjustment is then made in the final VAT return for the year for input VAT which cannot be directly allocated.
However, the regulations provide exceptions to the above rule prescribed for certain entrepreneurs:  during 2010, financial institutions, except insurance companies, have the right to recover 2% of total input VAT, but an adjustment must then be made in the final VAT return for 2010 based on the actual share of deliveries subject to VAT on total deliveries in 2010;  entrepreneurs whose total deliveries are at least for 98% subject to VAT, have the right to recover all input VAT without allocation.