Estimate Israeli small business income tax for 2025. Choose osek patur (personal income tax on business profit) or a company (23% corporate tax). Optionally compute dividend tax on profit withdrawal.
Estimated tax due
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Gross profit
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Corporate / income tax
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Net profit after tax
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Dividend tax (if distributed)
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Your breakdown
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Osek patur vs company: which structure pays less tax?
An osek patur (exempt VAT dealer) pays personal income tax on business profits using the same progressive brackets as an employee, starting at 10% and rising to 50% on income above 721,560 ILS. For profits below roughly 200,000 ILS, the personal tax rate is often lower than the 23% flat corporate rate once tax credits are applied. An Israeli resident benefits from 2.25 tax credit points worth 6,345 ILS per year (2025), which can eliminate much of the lower-bracket liability. A company always pays 23% regardless of the profit size, with no credits available at the corporate level. The comparison shifts once personal income exceeds roughly the 35% bracket at 269,280 ILS, where corporate retention becomes more attractive.
The two-layer tax on company profits
Retaining profits inside a company defers the second layer of tax. The company pays 23%, and the retained profits can be reinvested. When the owner eventually withdraws profits as dividends, a further 25% withholding applies (30% for substantial shareholders holding 10% or more). The combined rate for a regular shareholder is 1 minus 0.77 times 0.75, which equals about 42.25%. For a sole shareholder who is also a substantial shareholder, the combined rate rises to roughly 46.1%. This means incorporation is primarily useful when profits can be kept inside the company for reinvestment, not when the owner needs to withdraw all profits each year.
Social contributions for Israeli self-employed individuals
Unlike employees who split NI contributions with their employer, self-employed individuals bear a higher combined rate of Bituach Leumi and Mas Briut. On income up to the reduced-rate threshold of around 90,264 ILS, the combined rate is approximately 9.82% for NI plus 3.1% for health tax. Above the threshold and up to the ceiling of around 540,900 ILS, the rates rise to approximately 16.23% and 5% respectively. These contributions are on top of income tax and can make the total effective rate on self-employment income substantially higher than the headline income tax brackets suggest. For a company, the employer side NI is paid on salaries drawn by the owner-employee, not on the corporate profit itself, which is another structural difference to consider.
Frequently asked questions
What is an osek patur and how is it taxed in Israel?
An osek patur (exempt dealer) is a self-employed individual in Israel whose annual taxable turnover does not exceed the VAT exemption threshold, which is approximately 120,000 ILS for 2025. The osek patur is exempt from charging and remitting VAT to the ITA, simplifying their compliance obligations significantly. However, because they are exempt, they also cannot recover input VAT paid on their purchases. Tax-wise, the osek patur is treated as an individual: business profits are included in personal income and taxed at the progressive Mas Hachnasa brackets, which range from 10% up to 50% in 2025 depending on total income. They also pay Bituach Leumi (National Insurance) and Mas Briut (Health Tax) on their business income as self-employed individuals. The self-employed NI rates are generally higher than the employee rates, so osek patur holders often pay more social contributions than salaried employees on the same income. Above the 120,000 ILS threshold, registration as an osek murshe (authorized dealer) and VAT registration become mandatory.
When should an Israeli small business incorporate as a company?
Incorporation as a limited liability company in Israel can become advantageous once business profits consistently exceed roughly 200,000 to 300,000 ILS per year, though the exact break-even depends on the owner’s personal circumstances. Below that level, the administrative cost of running a company (accounting, annual filings with the Companies Registrar, audit obligations above certain thresholds) often outweighs the tax saving. The company pays 23% corporate tax on profit, while a high-earning individual could face 47% to 50% marginal income tax as an osek murshe. This gap creates the incentive to incorporate. However, profits retained in the company are taxed only once at 23%; if the owner wants to withdraw the money personally, a further 25% or 30% dividend withholding applies, bringing the combined rate to approximately 42% to 46%. Working with a licensed Israeli accountant (roh hesbon) to model the comparison for your specific income, expenses, and cash requirements is strongly recommended before making the incorporation decision.
What deductible expenses can an Israeli small business claim?
An Israeli self-employed individual or company can deduct ordinary business expenses from taxable income. Common deductible items include salaries paid to employees (including owner-employees in a company context, subject to arm’s length rules), rent for office or commercial premises, professional fees such as accounting and legal costs, advertising and marketing expenditure, software and IT costs, business travel and accommodation (subject to ITA limits), depreciation on business assets at ITA-prescribed rates, and insurance. For home-office expenses, a proportionate share of rent, utilities, and internet costs may be deductible if a dedicated area is used exclusively for business. Car expenses are partially deductible: the ITA sets a cap on the deductible portion of private-use vehicle costs. Pension contributions by the self-employed to approved plans are also deductible up to statutory limits and attract a 35% tax credit. Maintaining complete records with valid receipts is essential because the ITA can disallow undocumented claims.
How does Bituach Leumi apply to Israeli self-employed individuals?
Self-employed individuals in Israel (whether osek patur or osek murshe) pay Bituach Leumi (National Insurance) and Mas Briut (Health Tax) directly, unlike employees for whom the employer deducts and remits both contributions. For 2025, the self-employed Bituach Leumi rates are 9.82% on income below the reduced-rate threshold (approximately 90,264 ILS annually) and around 16.23% above that threshold up to the ceiling of about 540,900 ILS. Health tax rates are 3.1% below the threshold and 5% above. These rates are higher than the employee share because self-employed individuals are effectively paying both the employee and a portion of the employer share. Self-employed individuals pay NI quarterly based on estimated income, with a final adjustment after the annual tax return is filed. Failure to pay quarterly advances can lead to arrears and interest. A licensed roh hesbon can model the combined income tax and social contribution burden for a given business profit level.