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  • Writer's pictureשוהם שאוליאן, רו״ח (עו״ד)

Esek Zair - Small Business for income tax purposes

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In establishing a new business, every business owner must report their income to the tax authority, specifically to three different entities – income tax, value-added tax (VAT), and national insurance.


Small businesses, under certain conditions, are entitled to register as "Osek Patur" for VAT purposes, thereby simplifying the reporting requirements to the VAT authority. One of the advantages of being registered as an Osek Patur is that there is no need for monthly VAT reporting, but rather only a single report at the end of the tax year.


However, it is important to emphasize that despite the VAT exemption, owners of businesses registered as Osek Patur for VAT are still required to fulfill other reporting obligations to the tax authority (income tax and national insurance) and failure to comply with legal requirements can lead to significant costs and even criminal sanctions.


In a significant move for further efficiency in reporting among small businesses and the tax authority, the Arrangements Law for 2023-2024 amended the Income Tax Ordinance to include Section 87A. This section introduces a new provision concerning income tax – the "Esek Zair".


The highlight of this amendment is the provision that allows "Esek Zair" to deduct expenses at a rate of 30% of their turnover, eliminating the need for actual documentation of these expenses. This approach aims to reduce the administrative burden on small businesses, saving them the need to collect invoices and document them for income tax reporting.


The provision defines a "Esek Zair" as someone who is registered as an "Osek Patur" for VAT purposes or someone who has requested to be considered as such (even if not defined as an "Osek Patur" for VAT) provided that their business turnover does not exceed the turnover limit set by the VAT Law for "Osek Patur".


There is a similarity but not an absolute identity between an "Esek Zair" for income tax purposes and an "Osek Patur" for VAT purposes. While both definitions aim to ease the burden on small businesses, there is no obligation to be an "Osek Patur" for VAT purposes in order to be considered as "Esek Zair" for income tax purposes, and vice versa – it is possible to be an "Osek Patur" for VAT purposes and request not to be considered as "Esek Zair" for income tax purposes. Each option should be considered separately to maximize the specific business's benefit.


It should be noted that this model is voluntary. Business owners with higher operational expenses who prefer to remain within the existing taxation system can continue to do so, submitting their annual reports as before. The addition of the provision regarding "Esek Zair" is intended to suit the needs and capabilities of certain small business owners but certainly will not fit everyone.


 

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