A long-overdue reform: New Osek Zair will help Israel’s small businesses thrive - analysis

Israel’s entrepreneurial spirit has long been a cornerstone of its economy, yet small business owners often find themselves entangled in bureaucratic processes that are frustrating and unnecessary.

Tuesday marked a turning point, as a long-overdue Tax Authority reform offering real relief to small business owners went into effect with a new Osek Za’ir status. This streamlined tax framework is designed to provide support for entrepreneurs via a simplified tax process. 

The reform introduces a host of improvements aimed at lightening the load for small business owners, empowering them to focus on what they do best: driving innovation and growth. The most significant improvement is the implementation of a new system that simplifies income reporting.

Specifically, a fixed deduction automatically takes 30% for expenses, eliminating the need for itemized deductions for operational costs, pensions, donations, and other costs. This streamlines tax compliance and eliminates the need for meticulous record-keeping. 

As of 2024, small businesses with annual turnovers of up to NIS 120,000 are eligible to opt into this new classification. Approved in May 2023, the reform offers financial relief for those who currently hold Osek Patur or Osek Murshe status.

For example, reporting requirements under Osek Za’ir are now more efficient: Income will be reported directly to the Tax Authority instead of submitting full annual tax reports, saving both the time and expense of hiring an accountant. In most cases, business owners will now be exempt from the time-consuming process of filing a declaration of assets, known as a “hatzharat hon.”

A statement acknowledging critical role of small businesses

More than just a convenience, the reform is a statement of intent that acknowledges the critical role of Israel’s smallest enterprises and empowers them to thrive. Yet, as with any new system, there are caveats. Entrepreneurs must evaluate whether this framework aligns with their business model. For example, the 30% automatic deduction may not be advantageous for those with higher operating expenses or for those seeking higher allowances for pensions or charitable contributions.

Anti-avoidance rules are also built into the framework. The Tax Authority will issue invoices for any remaining taxes owed after reporting, with rules preventing more than 50% of income from coming from a single source. This is designed to curb tax evasion. Entrepreneurs who previously converted employers into clients may be negatively affected.

Additionally, businesses with high salaries, supplemental income streams, or a spouse operating a larger business may still be required to file full tax returns. It is crucial to consult a tax professional to determine whether this classification is the best financial model for your business.

While Osek Za’ir streamlines income tax compliance, other obligations do remain. Annual VAT reporting is still mandatory, and US citizens operating under this framework must continue fulfilling their American tax obligations.

To ease the transition, the Tax Authority has opened a dedicated digital portal that will guide eligible small business owners through a self-registration and reporting processes. 

For small business owners, the Osek Za’ir is an opportunity to save time, reduce costs, and focus on contributing to Israel’s economy.  Businesses will be able to switch to the Osek Za’ir classification and begin benefiting from the reform for the 2024 tax year. 

I highly recommend taking the time to see if this streamlined, fairer, and more supportive system is the right fit for you and your business. 

Rifka Lebowitz is the founder of Living Financially Smarter in Israel and a trusted advisor to its 40,000 members. She is a Certified Financial Planner (CFP®), author of Smarter Israeli Banking and a member of Israel’s Financial Planning Association and the Israeli Union of Home Economic Advisors. With her background as a licensed portfolio manager, investment advisor, personal banker, and budgeting expert, Rifka empowers olim and Israelis to achieve financial stability and long-term success.