The three options
- Osek Patur: a sole trader below an annual turnover ceiling (around ₪120,000, updated each year). Does not charge VAT and cannot reclaim it.
- Osek Murshe: a sole trader who charges VAT (18% standard rate) on Israeli sales and reclaims VAT on business expenses. No turnover limit.
- Ltd company: a separate legal entity taxed at 23% on profits, with a second layer of tax when profits are paid out as dividends.
Comparison table
| Osek Patur | Osek Murshe | Ltd company | |
|---|---|---|---|
| Turnover limit | Yes (approx. ₪120k) | No | No |
| Charges VAT | No | Yes, 18% | Yes, 18% |
| Income tax | Personal marginal rates | Personal marginal rates | 23% + dividend tax |
| Bituach Leumi | Self-employed rates | Self-employed rates | On salary paid to you |
| Bookkeeping | Simplest | Bi-monthly or monthly VAT | Full books + audited accounts |
| Liability | Personal | Personal | Generally limited |
| Typical fit | Side income, starting out | Freelancers, B2B clients | Higher profits, investors, staff |
Patur or Murshe?
Osek Patur looks attractive because invoices are VAT-free and reporting is lighter. It suits private-client work below the ceiling. But if your clients are VAT-registered businesses, they reclaim the VAT you charge anyway, so being Murshe costs them nothing and lets you reclaim VAT on your laptop, software and office.
Certain professions (for example lawyers, accountants and some medical professions) cannot register as Patur regardless of turnover. And once you exceed the ceiling you must switch to Murshe.
If most of your clients are abroad, Osek Murshe is often better: qualifying services exported to foreign clients can be zero-rated, so you charge 0% VAT but still reclaim input VAT.
When does a company pay off?
As a sole trader your profit is taxed at personal rates up to 47%, plus surtax on high income, plus National Insurance and health tax. In a company, profit is taxed at 23%. If you take it all out as dividends, a further 25% (30% for a 10%+ shareholder, which you will be) applies, so the combined burden is roughly 42%–46% before surtax, and you also pay salary costs and higher accounting fees.
The saving therefore comes mainly from profit you leave in the company to reinvest, and from mixing a reasonable salary with dividends. As a rough rule of thumb, many advisers start the conversation once annual profit is consistently above what you need to live on, often in the ₪400,000–₪600,000 range. Below that, the extra compliance usually eats the benefit.
Non-tax reasons to incorporate
- Limited liability for contracts and debts.
- Bringing in co-founders, issuing shares or options, raising investment.
- Clients who only contract with companies.
- Planning a future sale of the business.
How to register
- Osek: open a VAT file (mostly online), an income tax file with advance payments, and register with Bituach Leumi as self-employed.
- Company: incorporate with the Registrar of Companies, then open income tax, VAT and withholding files and appoint an auditor.
New olim should check how the business interacts with the 10-year exemption before registering; see our guide for olim starting a business.
Further reading
- Register as Osek Murshe (service)
- VAT for freelancers in Israel
- Israeli corporate tax and dividends explained
This guide is general information, not advice for your situation. Tax rates and thresholds change; confirm current figures before acting. Tax-IL advises on tax structure and registrations; bookkeeping, payroll and banking are handled by your accountant and bank.
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