Exempt Dealer or Licensed Dealer: Which is Right for Your

The choice between an exempt dealer and a licensed dealer depends on your type of business, expected income turnover, and the nature of the activity. An exempt dealer does not charge VAT from their clients, while a licensed dealer charges VAT on taxable transactions and can deduct VAT on allowable expenses. Before opening the accounts, it's important to understand what this means for your business.

You might be starting to take on jobs alongside your salary, or you may have decided to go fully independent. In both cases, the registration affects pricing, the documents you issue to clients, and the reports you need to submit. To make the right choice, start by checking the registration conditions and only then consider the business considerations.

What is the difference between an exempt dealer and a licensed dealer?

An exempt dealer and a licensed dealer are classifications under VAT. An exempt dealer does not charge VAT on their regular transactions and is also not allowed to deduct the VAT paid on business purchases. A licensed dealer charges VAT on taxable transactions and can deduct input tax. This is the VAT included in business expenses, which can be deducted subject to the conditions set by law.

It's important to understand what the term "exempt" means. It does not provide an automatic exemption from income tax, national insurance, or business record-keeping. An exempt dealer must also document their activity, issue receipts upon payment, and comply with reporting obligations. The Israel Tax Authority's guide for new dealers details the differences and obligations.

Who can register as an exempt dealer?

According to the Israel Tax Authority, in 2026 the annual turnover ceiling for an exempt dealer is ₪122,833. Turnover is the total income from the business before deducting expenses. For example, if the business income for the year is ₪110,000 and the expenses are ₪30,000, the turnover is ₪110,000. Expenses are not deducted when checking if the ceiling is met.

Alongside turnover, the type of business is also examined. There are professions and activities that require registration as a licensed dealer even when income is low, including lawyers and accountants. The definitions appear in Regulation 13 of the VAT regulations regarding registration. Therefore, you need to check the actual activity you will perform, and not settle for a general definition like "freelancer." The eligibility conditions can be found on the exempt dealer registration page at the Israel Tax Authority.

Clients and Expenses Affect Pricing

If you are eligible to register as an exempt dealer, it's worth examining who your clients will be. A private client is usually interested in the final price they will pay. If you are a licensed dealer, VAT needs to be considered when calculating how much will remain from the payment to the business. This is especially important to check when you have already agreed on a price and VAT cannot be added.

When working with businesses that can deduct input tax, the consideration may be different. Significant expenses on equipment, inventory, and services also warrant examination. For example, a business operating from home with few purchases is in a different situation than a business that needs to purchase expensive equipment at the start. An exempt dealer does not deduct VAT on these purchases, but this does not imply that every business with expenses needs to register as a licensed dealer. It's advisable to compare pricing and expenses with an accountant.

What to Prepare Before Opening Accounts?

Prepare a clear description of the services or products you will sell, an income estimate for the upcoming year, and a breakdown of expected expenses. Instead of choosing an arbitrary amount, try to calculate how many clients you can serve and at what price. Before registration, also prepare your ID and a document for your bank account. Depending on the activity and registration path, additional documents regarding the business location and activity may be required.

For an exempt dealer, there is an online government process for opening accounts with VAT and income tax. For a licensed dealer, there is a specific registration request with VAT, and you must also complete the other required registrations. If you prefer to get help, at start.business you can fill out an online questionnaire and upload documents. We will handle the registration process according to the details and documents you provided.

Frequently Asked Questions

Does an exempt dealer pay income tax?

An exempt dealer may pay income tax, depending on their taxable income and personal data. The calculation also takes into account additional income, allowable expenses, deductions, and credit points. The mere registration as an exempt dealer does not determine whether there will be tax to pay. Even when no tax liability arises, it's necessary to check what reporting obligations apply to the business.

Can you be an employee and open as an exempt dealer?

It is possible to combine employment as an employee with a business registered as an exempt dealer, provided the activity meets the registration conditions. The salary is not part of the business turnover for the ceiling. However, it is relevant for calculating total income tax. Before starting, you should also check the registration with National Insurance and the implications of combining income as employees with income from the business.

Can an exempt dealer work with companies?

Yes, an exempt dealer can work with companies, but is not allowed to issue a tax invoice. Before starting work, it's advisable to clarify what documents are required for opening a supplier account and receiving payment. If you are asked for a tax invoice, explain that you are an exempt dealer and coordinate with the accounting department regarding the appropriate documents. Working with a company does not require registration as a licensed dealer.

What to do if you exceed the exempt dealer ceiling?

If the turnover exceeds the ceiling, you need to contact VAT and arrange for the classification change and handling of the relevant transactions. It is advisable to monitor turnover throughout the year and prepare before exceeding the limit. This way, you can check the quotes and agreements with clients in time and understand how the transition will affect the agreed price and the income that will remain for the business.

Is a small business owner another name for an exempt dealer?

No. A small business owner is a path under income tax, while an exempt dealer and a licensed dealer are classifications under VAT. Both an exempt dealer and a licensed dealer may fit into the path if they meet the ceiling and other eligibility conditions. Therefore, the classification under VAT and the suitability for the income tax path are checked separately, according to the conditions published by the Israel Tax Authority.

Before starting the registration, check the type of business and your expected income. If there is any uncertainty, it's advisable to clarify it before submitting the applications. At start.business (opens in a new tab), we are happy to assist you and guide you through the business opening process. We start with the registration questionnaire, you focus on the business, and we focus on the bureaucracy.