Opening a business as an exempt business owner is considered one of the first and most convenient steps for entrepreneurs just starting out. This is a status that allows you to start providing services or selling products on a relatively small scale, while maintaining simple management and limited reporting obligations. However, the establishment process includes opening files with three entities: VAT, income tax, and national insurance.
To clarify things, we've compiled a comprehensive guide here that explains everything you need to know from understanding what an exempt business owner is to the final registration stage.
What is an exempt business owner and what distinguishes them from an authorized business owner?
An exempt business owner is a private individual who operates an independent business providing services or selling products, as long as their annual revenue does not exceed the exemption threshold.
This threshold changes annually, and in 2026 it stands at 122,833 NIS. This means that as long as the business operates on a relatively modest scale, you can enjoy simplified reporting and the absence of VAT collection from customers.
The main difference between an exempt business owner and an authorized business owner is particularly related to VAT. An authorized business owner must add VAT to transactions and transfer it to the tax authority, while an exempt business owner does not collect VAT at all. Therefore, their services are sometimes cheaper for the customer, but on the other hand, the exempt business owner cannot deduct input tax on business purchases.
Additionally, there are free professions such as lawyers, doctors, and accountants who are required to be authorized business owners in any case, even if their income is below the threshold amount.
Opening an exempt business owner file for VAT
The first step in registering a business as an exempt business owner is opening a file for VAT.
The business number will be the ID number of the business owner, and it will accompany them throughout their business activity.
To perform the registration, you must fill out forms 821 and 821a – VAT registration forms that include personal details, business details, estimated revenue volume, the type of property where the activity takes place, and bank account details. The form must be accompanied by an ID card, proof of bank account management, a lease or purchase agreement (if applicable), and documents evidencing business activity.
Method of submission
The file can be opened in two ways:
Physical submission after scheduling an appointment at the regional VAT office.
Online submission through the tax authority website, including the option to submit through a representative; an accountant, lawyer, or tax consultant.
After the request is approved, a temporary registration confirmation is received, and subsequently the exempt business owner certificate is sent by mail.
Opening a file with income tax
After registering for VAT, you must also open a file with income tax.
The process is carried out using form 5329, a form that includes personal details, sources of income, and information about a spouse if necessary. Married couples may also be required to complete additional election forms depending on their family status.
If the business owner plans to employ employees, this must be marked on the form and a deductions file must be opened. This opening is subsequently coordinated with national insurance as well.
Methods of submission
Here too, you can submit the documents manually at the income tax office or online through the authority's website. Those who choose to use a representative can submit through them.
Opening an exempt business owner file with national insurance
The final step in the establishment process is registration with the national insurance institution.
The purpose: payment of national insurance premiums and health tax, as a self-employed person or as a person with non-employment income, according to the legal definition.
To register, you must fill out form 6101, a multi-year statement that includes a declaration of estimated income volume. These incomes affect the amount of national insurance advance payments that must be paid during the year. If necessary, the amounts can be updated once every three months.
Who is considered self-employed according to national insurance?
The law defines three possible tracks:
Self-employed worker engaged for at least 20 hours per week
Even if their income is not very high, the number of hours indicates full self-employment activity.
Self-employed person earning over 50 percent of the average wage
As long as the income comes from business profits, national insurance will treat them as self-employed in all respects.
Self-employed person working 12 hours per week and earning at least 15 percent of the average wage
A lower threshold intended for very small businesses just starting out.
If the business owner employs salaried employees, national insurance automatically opens a deductions file after receiving the information from income tax.
Open an exempt business owner account online with CPA Digital
Establishing an exempt business owner requires moving between several authorities, filling out forms, and understanding reporting obligations. This is one of the reasons why more and more self-employed individuals choose to carry out the process with professional guidance that prevents errors and saves time. With CPA Digital, you can open an exempt business owner account online, receive guidance throughout the process, and a complete guide for managing the business as an exempt business owner, including a comprehensive list of deductible expenses.
Start right. Open an exempt business owner account online with CPA Digital.