Opening a Permitted Business — The Complete Guide for Freelancers

If you are a freelancer considering opening a permitted business, or if you have already started working without registering your business properly — this page is for you. Opening a permitted business is not just a form from a government office; it is a step that transforms your entire accounting structure, your tax obligations, and the way you report to the tax authorities.

What is important to remember: every month you work without formal registration, you are essentially working under the radar. The tax authorities will not be pleased, and when they discover it (and they will), it can be costly and complicated. On this page, we will go through all the steps of registering a permitted business, what you need to prepare, what tax obligations you will have, and common mistakes you should avoid.

Typically, the registration process itself takes a couple of weeks, but the preparation and aftermath — that is what keeps freelancers up at night. We are here to make it simpler.

What is a Permitted Business and Who Does It Apply To?

A permitted business is a type of self-employed business registered with the tax authorities and the national registry. Unlike a exempt business (which engages in activities not subject to VAT), a permitted business is typically one engaged in activities subject to VAT — or one that chose to register for VAT even when not required.

If you are a freelancer providing a service (such as a consultant, designer, translator, or technician), or if you are a product seller, you will likely need to be a permitted business. This also applies if you are the owner of a store, studio, clinic, or any business involved in VAT-related transactions. Even if you started with low income, if your business has grown and exceeded a certain threshold, the tax authorities may require you to register.

A question that comes up often: Do I need to be a permitted business or can I be an exempt business? The answer depends on the type of activity you engage in. If you engage in services not subject to VAT (such as journalism, education, or healthcare), you can be exempt. But if you are in a business involving VAT, or if you are selling products, then a permitted business is typically your situation.

How to Open a Licensed Business — Step by Step

The registration process itself is relatively straightforward, but there are several steps that must be completed in the correct order. Let's go through each one.

1. Preparation of Documents and Basic Information: Before submitting an application, you need to gather the required documents. This includes: an identity card or passport, residential address, business address (if different), bank account number, and a description of the type of activity you will conduct. If you are an employed person starting a side business, you will also need an up-to-date pay stub.
2. Registration with the Israeli Tax Authority Registry: You can submit an application through the Israeli Tax Authority website (tase.org.il) or in person at a branch. Your form will include basic details, type of activity, and estimated income. Typically, you will receive a business number within a few days.
3. Registration with the Tax Authority: After the Israeli Tax Authority approves, you need to submit an application to the Tax Authority. This can be done through the Tax Authority's "Shalom" portal or through a certified accountant's office. The Tax Authority will request that you confirm your details, define your reporting year, and provide information about your workplace.
4. VAT Approval (if applicable): If you are liable for VAT, you must also register for VAT. This typically occurs at the same time as Tax Authority registration, but verify that your status is clear. If you are a licensed business selling services or products subject to VAT, you are required to register.
5. Receipt of Business Identification Number: Once everything is arranged, you will receive an official business identification number from the Tax Authority. This is the number you will use for all reporting, statements, and tax payments.
6. Opening of Accounting Books: Once you are registered as a licensed business, you are required to maintain accounting records. This means documenting all income and expenses. Most self-employed individuals use accounting software or hire a certified accountant to do this.

The entire process typically takes between weeks to a month, depending on how quickly you submit documents and the workload of the authorities. Practical tip: Do not wait until the last minute. If you know you will start working in a particular month, register the business in the previous month.

What You Need to Know About Taxes and Reporting as an Authorized Business Owner

As an authorized business owner, you are not just reporting once a year. You are required to report every month or every quarter, depending on the type of reporting. Let us break this down.

VAT: If you are an authorized business owner, you are generally required to report VAT monthly (or every two months, depending on the scope of your business activity). This means you accumulate VAT on your income and can claim VAT refunds on expenses. Reporting is done through the Tax Authority's "Shalom" portal. If you engage in VAT transactions but your income is below the threshold (usually around 100,000 shekels per year), you may be exempt from VAT reporting, but you should verify your specific details.

Income Tax: As an authorized business owner, you must pay income tax advance payments every three months. Typically, the Tax Authority will calculate your advance payment based on your income from the previous year. If your income increases significantly, the advance payments may be too low, and you will need to pay the difference in your annual return. Conversely, if your income decreases, you may receive a refund.

Annual Return: At the end of each year, you must file an annual return with the Tax Authority. This return summarizes all your income and expenses and calculates your final tax liability. If you are an authorized business owner, this return must be signed by an authorized accountant. This is not something you can do yourself, even if you know what you are doing.

National Insurance: As a self-employed person, you must pay national insurance contributions every month. The amount depends on your income, and there is a minimum amount you must pay even if your income is low. This is important not only to remain compliant but also to accumulate rights for health insurance, pensions, and social security benefits.

One point that is not always clear: as an authorized business owner, you cannot operate under the table. All income must be documented, all expenses must be documented, and all reporting must be truthful. If you hide income, it is not just a problem with the Tax Authority — it is also a problem with the National Insurance, and it can lead to investigations and heavy fines.

Common Mistakes and How to Avoid Them

Throughout the years we have worked with freelancers, we have seen several mistakes that repeat themselves over and over again. Here they are:

• Starting work before formal registration: This is the biggest mistake. Freelancers often begin receiving money from clients before they have properly registered their business. When the tax authority discovers this (and they usually do), it can lead to fines and retroactive tax payments with interest. The correct way: Register first, then start working.
• Mixing personal and business funds: If you use your personal bank account for your business, or if you withdraw money from the business for personal use without documenting it, this creates confusion. The tax authority does not like confusion. The correct way: Open a separate bank account for your business and document every transaction.
• Failure to report VAT: If you are a registered business person and are required to report VAT, but you skip the reporting because "it is complicated," that is a problem. The tax authority knows when you are not reporting, and this may lead to fines and payment of VAT retroactively with interest. If it is complicated for you, that is exactly why accountants exist.
• Canceling the business without notice: If you stop working, you must formally cancel your business registration. If you simply stop reporting, the tax authority may continue to impose tax obligations on you. The correct way: Notify the tax authority of business cancellation when you stop working.
• Failure to keep receipts and expenses: As a registered business person, you must keep every receipt and every expense for years. If the tax authority asks you to verify an expense, you need to be able to show a receipt. If you do not keep documents, you cannot prove that an expense is legitimate.
• Confusion between exempt business and registered business person: Some freelancers think they can be an exempt business when they actually need to be a registered business person. This can lead to problems with the tax authority. If your business involves VAT, you are generally required to be a registered business person.

When Should You Contact an Accountant?

That's a good question, and our view is that it's almost always advisable. But let's be specific.

If you are a licensed business operator, you are required to sign your annual report with an authorized accountant. This is not optional — it's the law. But beyond that, there are many good reasons to work with an accountant throughout the rest of the year: they can help you manage your books, report VAT, plan taxes, and avoid errors. If you operate a complex business (such as having multiple sources of income, or dividing your time between self-employment and salary), or if your income varies significantly from year to year, an accountant can save you time and money.

There are also situations where it's particularly urgent: if you started working without formal registration, if you missed a filing, or if you're unsure whether you need to be a licensed business operator or an exempt business operator. In these situations, it's best to reach out as soon as possible to correct the issue before it grows.