At the stage when a business idea begins to take shape, the question arises of how to properly structure it, both from a legal and tax perspective. For many self-employed individuals starting out, opening a tax-exempt business account represents a convenient and relatively simple entry point. However, it is important to know that choosing this route depends on the scope of activity, the nature of income, and future planning.
In the guide below, we will explain what a tax-exempt business is, who is eligible to open a tax-exempt business account, and what considerations should be taken into account - before making the decision.
What is a tax-exempt business?
A tax-exempt business is a legal status anchored in the Value Added Tax Law, 5735-1975 which defines:
"Tax-exempt business - a business whose transaction turnover in all its businesses does not exceed 120,000 new shekels per year or a higher amount set by the Minister of Finance". The meaning of the tax-exempt business status is that the business does not charge value added tax (VAT) from its customers, and accordingly is not permitted to deduct VAT that it paid on its expenses.
** As of 2026, the annual income ceiling for a tax-exempt business stands at - 122,833 ₪.
When is it advisable to open a tax-exempt business?
A small business or secondary activity, meaning a business that begins operating as self-employed on a limited scale
Independent and self-employed workers (freelancers) and self-employed individuals providing personal services
Employees with side income, meaning those engaged in additional work alongside a permanent position
Students and private tutors, providing private lessons or various digital services
Expected low revenue turnover
The expected annual income is the central measure for opening a tax-exempt business. If you estimate that your annual transaction turnover will not exceed the ceiling set by law - tax-exempt business status will be the right choice for you.
Important to know: The consideration is for gross revenue turnover and not net profit. You are required to sum all receipts entering the business before deducting expenses.
Savings in costs and bureaucracy
A tax-exempt business enjoys administrative simplicity:
No obligation to report VAT (monthly or bi-monthly)
No need for an accountant's services for VAT reporting purposes (though consultation is recommended)
Low setup costs - opening an account on the Tax Authority website is free
Simple management - no need beyond maintaining a record of payments and receipts
Who cannot be a tax-exempt business?
It is important to know that not every business is permitted to register as a tax-exempt business, even if its transaction turnover is below the ceiling. Professions required to register as a licensed business, regardless of turnover:
Licensed professionals - agronomists, architects, technicians, engineers, physicians - including psychologists, physiotherapists and dentists, lawyers, accountants, appraisers, tax consultants, bookkeepers, economists, private investigators, translators, insurance agents
Owners of certain businesses such as a driving school owner, owner of any school (except non-profit), real estate dealer or broker, vehicle dealer or broker, owner of a chemical or medical laboratory
Anyone who falls into one of these professions is required to register as a licensed business from the day the business opens, even if their income is low.
How do you open a tax-exempt business?
Since 2025, the process of opening a tax-exempt business has been streamlined and online submission is now possible:
Submit an application on the Tax Authority website - an online process at no cost
Receive updates via SMS and email on the progress of your application
Open an account with the National Insurance - separately, with a declaration of expected income or when opening an account on the Tax Authority website, mark in the appropriate place if you wish to also open an account with the National Insurance, and the application will be transferred to the National Insurance systems to open an account
Required documents
As a rule, there is no requirement for many documents except in the case where the business operates from a rented property, in which case a lease agreement must be attached.
Micro-business reform (2025)
In 2025, a new track came into effect - the "micro-business track", whereby businesses with annual turnover not exceeding the tax-exempt business ceiling can register as a "micro-business" and enjoy additional benefits such as:
A condensed report at the beginning of the year - instead of a full annual report
Exemption from paying advance income tax - during the year
Exemption from filing a capital declaration in many cases
Advantages and disadvantages of a tax-exempt business
Advantages lie in administrative simplicity, time savings, low management and accounting costs, and no need to issue tax invoices
Disadvantages are evident in the fact that VAT on expenses cannot be deducted, relatively low revenue turnover limits, and the need to maintain constant monitoring of turnover to prevent exceeding the ceiling permitted by law
Summary
Opening a tax-exempt business account is suitable mainly for those starting self-employment, operating a small business, or an employee with side income, with annual turnover up to 122,833 ₪ (as of 2026).
The status of a tax-exempt business offers administrative simplicity and cost savings. However, you must ensure that you are not among the professions required to register as a licensed business. In the new era, with the micro-business reform, starting a business in Israel has become more accessible and simple than ever. We are here to make the process fast, simple, and hassle-free.
*This article was written for general information purposes only and does not constitute legal or tax advice.