First check whether you are eligible for VAT exemption. Then compare customers, costs, investments, pricing and growth. An exempt dealer is exempt for VAT purposes within the applicable framework — not automatically exempt from income tax.
Is there a choice?
The 2026 annual exempt-dealer turnover ceiling is NIS 122,833. Turnover means transactions under the VAT rules, not profit after expenses. Separate activities of the same dealer do not receive separate ceilings. For a business starting partway through the year, check the turnover and registration rules rather than assuming the full ceiling applies automatically. Employment salary is not business turnover, although it can affect overall income tax.
Regulation 13 requires certain professions and business forms to register as VAT dealers even below the ceiling, including lawyers, accountants, doctors and architects. Check the full rules and actual activity. A limited company cannot choose exempt-dealer status. Eligible individuals can consider voluntary VAT registration with the office.
Comparison table
| Topic | Exempt dealer (osek patur) | VAT-registered dealer (osek murshe) |
|---|---|---|
| Output VAT | Does not charge VAT on ordinary transactions covered by exemption | Accounts for VAT on taxable transactions; the standard rate is 18% |
| VAT on costs | Cannot deduct input VAT | May deduct eligible input VAT supported by valid documentation |
| Customer documents | Cannot issue a tax invoice; uses appropriate transaction documents and receipts | Issues tax invoices and receipts or combined documents as required |
| VAT reporting | Annual turnover declaration and ceiling monitoring; other obligations remain | Monthly or two-monthly returns as determined |
| Income tax and National Insurance | No automatic exemption; liability depends on applicable income and status rules | The same principle; VAT registration alone does not set the tax rate |
| Private customers | Can make final-price competition easier | VAT must be considered in the consumer’s total price |
| Business customers | No tax invoice for input-VAT deduction | Eligible customers may deduct VAT; not every business can |
| Growth | Monitor the ceiling and arrange a status change when required | No exempt-dealer ceiling; reporting duties continue |
Numerical example: the same final consumer price
Assume a service sells for NIS 1,000 as the final price, with no costs for this illustration. An exempt dealer records NIS 1,000 of income. For a VAT dealer charging 18%, that price consists of NIS 847.46 before VAT and NIS 152.54 VAT. VAT is not business income. If the VAT dealer instead charges NIS 1,000 plus VAT, the customer pays NIS 1,180: that is a different final-price comparison.
A business customer entitled to deduct all input VAT may have a cost of NIS 1,000 after deduction despite paying NIS 1,180. Eligibility depends on the customer and transaction.
Numerical example: investment in equipment
Equipment costs NIS 11,800, including NIS 1,800 VAT. An exempt dealer bears the full cost. A VAT dealer may deduct NIS 1,800 if all conditions are met, leaving a cost of NIS 10,000. The example assumes a valid invoice in the dealer’s name, use for taxable transactions and an allocation number where required. At the review date, invoices issued from 1 June 2026 exceeding NIS 5,000 before VAT require an allocation number for input-VAT deduction, subject to statutory exceptions. Income-tax relief may arise through depreciation over time rather than an immediate expense. This illustrates acquisition cost, not profit or a guaranteed refund.
When might each option fit?
Exemption can suit an eligible low-turnover activity with mainly private customers and limited VAT-bearing costs. VAT registration may be compulsory for your profession, or worth considering where growth, eligible input VAT and customer pricing support it. Status is not a quality rating, and registration does not itself produce a higher profit.
A “micro-business owner” is a different concept
This is an income-tax track, not another name for VAT exemption. Both exempt and VAT-registered dealers below the turnover ceiling may qualify if all conditions are met. It permits a 30% deemed expense deduction instead of actual business expenses, subject to eligibility, reporting and exceptions. It does not automatically remove VAT, National Insurance or all filing obligations.
What should you review with the office?
- Actual activity and compulsory registration rules.
- Annual turnover forecast, customer types and final selling prices.
- Operating costs, investments and genuinely deductible input VAT.
- Profit forecast, other income and potential micro-business eligibility.
Contact the office before approaching the ceiling. Switching back to exemption is not an unrestricted monthly choice.
Official sources
- Tax Authority — exempt-dealer registration and eligibility
- Tax Authority — guide for new VAT dealers
- VAT Registration Regulations — regulation 13: compulsory registration
- Tax Authority — micro-business income-tax track
- VAT Law — input VAT and exempt transactions
- Tax Authority — Israel Invoices: allocation numbers
Keeping this article current
The figures and rules relate to the review date above. Amounts, deadlines and rules may change. The next scheduled editorial review target is January 2027, and earlier if legislation or official guidance changes. This is an editorial target, not an active automated update.