Opening an "Osek Patur" File
Starting an independent business in Israel requires opening a file with three authorities:
- VAT (Ma’am)
- Income Tax
- National Insurance
An Osek Patur is a self-employed individual who reports independent income to the Israeli tax authorities—Income Tax, VAT (Ma’am), and National Insurance. This classification is available only to individuals, not partnerships or companies.
The Meaning of the “Exempt” in “Osek Patur”
In Israel, every transaction is subject to 18% VAT (as of 2025), unless exempt by law. Osek Patur is one such legal exemption. Others include transactions made in VAT-exempt zones (e.g., Eilat), second-hand car sales, municipal tax payments, insurance, and more.
The "exemption" in the term Osek Patur refers specifically to VAT: An Osek Patur does not charge VAT to clients. The exemption is valid up to an annual income threshold of ₪120,000 in a calendar year (as of 2025).
Calendar year - from January 1 to December 31.
How a VAT-Exempt Business Operates?
Since 2024, under the Small Dealer Reform, the Israel Tax Authority allows anyone registered as an Osek Patur for VAT purposes to also register as a Small Dealer for income tax purposes.
If during the year the business exceeds the ₪120,000 income limit, it must change its classification to Osek Murshe (Authorized Dealer). This change is not retroactive. From the moment the classification changes, VAT must be collected on all income exceeding the threshold, starting from the very first shekel above ₪120,000.
Since an Osek Patur does not charge VAT, they are also not entitled to deduct input VAT on business-related expenses. This raises the question: Can the VAT paid on expenses (that cannot be deducted) still be recognized as a business expense? The answer is yes—input VAT paid on expenses is recognized as a deductible expense for income tax purposes.
Unlike an Osek Murshe, who issues a tax invoice (חשבונית מס) including VAT, an Osek Patur issues only receipts without VAT for payments received.
Example
Uri is a tour guide who opened an Osek Patur to report his income. He has an annual income of ₪60,000. He also has routine expenses, such as purchasing maps and instructional materials, for which he paid ₪1,180 (₪1,000 + ₪180 VAT). Because Uri does not charge VAT on his income, he cannot deduct the ₪180 VAT he paid on expenses. However, he can count the full ₪1,180 as a business expense, meaning his taxable income for the year is ₪58,820.
Receipts and Reporting Because an Osek Patur does not charge VAT, they cannot issue tax invoices—only receipts. A receipt is a document confirming the client made a payment to the business owner.
The receipt must be issued based on cash accounting—on the date the payment actually appears in the business’s bank account.
Reporting Obligations and Limitations
An Osek Patur must report to the VAT authority once a year, between January 1 and January 31, for the previous tax year’s income. If also classified as a Small Dealer for income tax purposes, they must pay income tax for the previous year—also during January.
If not registered as a Small Dealer, the Osek Patur must file a full annual tax report to the income tax authority. This report must include all sources of income—such as employment, capital markets, or rental income.
Income Tax may require bi-monthly advance payments (6 per year) if taxable income is expected. This is usually relevant for those who are both employees and Osek Patur simultaneously.
It’s recommended for an Osek Patur to update their National Insurance status twice a year based on actual income. This status is personal and may vary per individual.
Who Cannot Register as an Osek Patur?
Certain professionals cannot register as an Osek Patur, even if their income is below the annual threshold of ₪120,000. These are listed in Section 13 of the VAT Regulations (1976):
Section 13. A person in any of the following professions must register as an Osek Murshe even if their income or number of employees qualifies them as a small dealer:
1. A licensed professional, including: agronomist, architect, engineer, private investigator, rabbinical pleader, technician, dental technician, organizational consultant, management consultant, scientific consultant, tax advisor, economist, surveyor, bookkeeper, translator, insurance agent, lawyer, accountant, appraiser, and operators of chemical or medical laboratories, as well as those providing services listed in Regulation 6A of the VAT Regulations.
2. Medical professionals: doctor, psychologist, physiotherapist, veterinarian, dentist, or dental therapist.
3. Driving school owners licensed under Section 15 of the Traffic Ordinance.
4. Operators of educational institutions (including kindergartens) that provide structured learning to students and are not nonprofit organizations, including schools that provide theoretical, practical, artistic, or sports training to groups of 5 or more students—excluding occasional instruction not exceeding 30 teaching days per group per year.
5. Real estate dealers or brokers. Real estate dealer: one engaged in the sale of real estate rights. Real estate broker: one engaged in mediating the sale of real estate.
6. Car dealers and brokers. Car dealer: one engaged in the sale or trade of motor vehicles. Car broker: one mediating the purchase, sale, or exchange of cars. Car trade: includes rental or barter. Car: as defined in the Traffic Ordinance.
A legally registered company under the Companies Ordinance.
A legally registered cooperative society under the Cooperative Societies Ordinance.