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

In 2026, Israeli small businesses with annual turnover below 122,833 shekels can register as exempt dealers (osek patur), avoiding VAT collection and periodic reporting. Businesses exceeding this turnover must register as licensed dealers (osek murshe), which requires charging VAT and submitting monthly or bimonthly VAT reports. The classification depends solely on gross turnover, excluding profit from the calculation.

The VAT exemption applies only to VAT collection and reporting; other obligations remain, including annual income tax returns, national insurance payments based on profit, and maintaining proper documentation. Certain professions such as lawyers, accountants, engineers, architects, doctors, dentists, veterinarians, real estate agents, and car dealers must register as licensed dealers from the start, regardless of turnover. New tax consultants also must register as licensed dealers even with minimal initial turnover.

The financial impact varies depending on the client 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 paid on expenses is a full cost. As a licensed dealer serving business clients, the consultant charges 18% VAT, which clients can deduct, resulting in a slightly higher profit of approximately 103,000 shekels after input VAT credit. However, when serving private clients who cannot deduct VAT, the effective income drops to about 84,750 shekels, creating a 15,250 shekel annual gap compared to the exempt dealer status.

A third option, the "small business track," allows deducting 30% of turnover as a standard expense instead of actual expenses, waiving VAT prepayments and enabling simplified reporting. This option suits service businesses with low actual expenses but is unavailable to employers, controlling shareholders, or those earning over 25% from a single employer or relative.

Businesses exceeding the turnover threshold must notify the regional VAT office promptly, ideally before receiving payments that push turnover over the limit, as VAT obligations begin immediately upon crossing the threshold. Transactions before reclassification remain under the previous status. The VAT law measures turnover based on the past year, with a forward-looking rule requiring reclassification once expected turnover surpasses the threshold. Sales of business assets like vehicles or computers are excluded from turnover calculations.

Ultimately, the decision to register as exempt or licensed depends on the proportion of business versus private clients, with licensed status benefiting those serving mostly businesses due to input VAT credits, while exemption benefits those serving mainly private clients by retaining the VAT amount in their income.