Israel Sets 2026 VAT Threshold at 122,833 Shekels for Small Businesses

In 2026, the VAT registration threshold for small businesses in Israel is set at 122,833 shekels in annual turnover. Businesses with turnover below this amount may register as exempt from VAT (known as "exempt dealers"), while those exceeding it must register as VAT-registered dealers. This classification is based solely on gross turnover, excluding profit from the calculation.

The VAT exemption applies only to VAT collection and periodic reporting; other obligations such as annual income tax returns, national insurance payments based on profit, and record-keeping remain mandatory. Certain professions, including lawyers, accountants, engineers, architects, doctors, dentists, veterinarians, real estate agents, and car dealers, must register as VAT-registered dealers from the outset regardless of turnover.

The financial impact of VAT status depends on the customer base. For example, a consultant with 120,000 shekels turnover and 20,000 shekels expenses including VAT earns about 100,000 shekels profit as an exempt dealer, since VAT on expenses is a full cost. As a VAT-registered dealer serving business clients, the consultant charges 18% VAT, which clients offset, resulting in a slightly higher profit after input VAT deductions. However, when serving private clients who cannot reclaim VAT, the effective income is lower by approximately 15,000 shekels annually compared to the exempt status.

A third option, the "small business track," allows deducting 30% of turnover as a standardized expense, simplifying reporting and eliminating advance payments. This option is not available to employers, controlling shareholders, or those earning over 25% from a single employer or relative.

Businesses exceeding the threshold must notify the regional VAT office and change their status promptly, as transactions beyond the limit become subject to VAT. The VAT law requires businesses to anticipate turnover increases and adjust classification accordingly, even if payments have not yet been received. Sales of business assets like vehicles or computers are excluded from turnover calculations.

Ultimately, the choice between exempt and VAT-registered status hinges on the proportion of business versus private clients, with VAT registration benefiting those with mostly business clients and exemption favoring those with mostly private clients.