Other BriefingsIsrael’s Osek Za’ir: A Simplified Tax System for Small Businesses
Israel’s entrepreneurial ecosystem has always been a key contributor to its economic success, but small business owners have long faced cumbersome bureaucratic hurdles that hinder their growth. In a move aimed at simplifying tax administration and easing the financial burden on small business owners, Israel has introduced a long-awaited tax reform in the form of the Osek Za’ir status. This new tax framework promises to save time, reduce costs, and provide small business owners with much-needed financial relief, enabling them to focus on what they do best: driving innovation and growth.
Simplified tax system for small businesses
The Osek Za’ir offers a streamlined tax process designed to relieve small businesses with annual turnovers of up to ILS 120,000 (approximately US$32,340). This new framework provides several key benefits for eligible businesses. Perhaps the most notable of these is the 30% automatic deduction for expenses, which eliminates the need for business owners to track and itemize their operating costs, including pensions, donations, and other expenses. This simple deduction process reduces the burden of record-keeping, allowing entrepreneurs to focus more on growing their businesses.
In addition, the Osek Za’ir framework simplifies income reporting by allowing businesses to report their income directly to the Tax Authority. This change alone can save small businesses considerable time and resources, which can now be reinvested into their operations. Furthermore, under the Osek Za’ir system, businesses will generally be exempt from submitting a declaration of assets (known as “hatzharat hon”), a time-consuming task that many entrepreneurs find cumbersome.
A step towards empowering entrepreneurs
The Osek Za’ir reform aims to empower small enterprises by making tax compliance more efficient and reducing the costs associated with business operations. This, in turn, will help entrepreneurs remain competitive, innovate more freely, and focus on expanding their businesses rather than getting bogged down in administrative tasks.
The new framework is especially beneficial for those with lower operating expenses, who previously may have been overwhelmed by the complexities of tax filing. By reducing administrative requirements and simplifying the filing process, Osek Za’ir enables small businesses to devote more time to customer service, product development, and other critical growth areas.
Critical considerations for entrepreneurs
However, as with any tax reform, there are important considerations to keep in mind. The 30% automatic deduction may not be ideal for every small business undertaking, particularly those with high operating expenses or those that regularly make large contributions to pensions or charitable causes. In these cases, the new system could result in a lower deduction than would have been available under the previous system of itemizing deductions.
Furthermore, the Osek Za’ir framework is not entirely without its caveats. The Israeli Tax Authority has introduced anti-avoidance measures, such as rules preventing more than 50% of income from coming from a single source, to curb potential tax evasion. Entrepreneurs who have converted employees into clients or those with higher salaries, multiple income streams, or a spouse operating a larger business may still be required to file full tax returns.
Despite these potential challenges, the Osek Za’ir presents a promising option for many small business owners looking for a more efficient and cost-effective tax model.
A smooth transition with digital support
To ensure a smooth transition, the Israeli Tax Authority will launch a dedicated digital portal for businesses wishing to switch to the Osek Za’ir classification. The portal is expected to offer step-by-step guidance on self-registration and reporting, making it easier for small business owners to adopt the new system and begin benefiting from the reform.
Meanwhile, VAT reporting remains a mandatory obligation.
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