How to Claim the Tax Benefits of Returning to Israel – Tax Benefits for a Veteran Returning Resident and a New Immigrant

Planning to return to Israel? Get to know the tax benefits available to you

A returning resident is a unique tax status that grants significant benefits to Israelis returning to the country. If you are planning to return to Israel after years of living and working abroad, you may be eligible for these benefits.

The State of Israel encourages its citizens to return through economic incentives designed to ease the transition and bring high-quality human capital back to Israel. These benefits may provide an exemption from tax on foreign-source income for a period of up to ten years. This is a significant economic advantage for anyone who holds assets, investments, or business activity outside Israel. Since the outbreak of the “Swords of Iron” war (or “Am KeLavi”), we have seen a growing wave of Israelis considering returning home out of a sense of belonging, solidarity, and a desire to be close to family and the nation. Alongside the emotional and value-based aspects, it is important to understand the economic and legal aspects of returning as well, so the move can be made properly and thoughtfully.

Claiming these benefits requires meeting clear conditions and submitting a properly prepared application to the Israel Tax Authority. Early understanding of the rules, proper planning, and professional guidance can make the difference between a smooth and simple process and a prolonged, complex process מול the authorities.

Who Is a Veteran Returning Resident

The term “Veteran Returning Resident” was established under Amendment 168 to the Income Tax Ordinance [New Version], enacted in 2008 in order to encourage aliyah and the return of Israelis from abroad. A Veteran Returning Resident is a person who was previously an Israeli resident, severed their Israeli residency, stayed outside Israel for an extended period of time (more than ten years), and is now returning to Israel and transferring their center of life here.

It is important to distinguish between three concepts:

• A regular returning resident – a person who stayed outside Israel for more than six years and is entitled to limited benefits.
• A Veteran Returning Resident – a person who stayed outside Israel for more than ten years and is entitled to broader benefits, including an exemption from tax on foreign-source income.
• A first-time Israeli resident – a new immigrant who was not previously an Israeli resident. A first-time Israeli resident is entitled to broad benefits, similar to those granted to a Veteran Returning Resident.

Important to know: a “Returning Resident” certificate issued by the Ministry of Aliyah and Integration does not grant eligibility for tax benefits. Only an approved tax ruling from the Israel Tax Authority determines status for tax purposes.

Tax Benefits for a Veteran Returning Resident

A Veteran Returning Resident is entitled to a range of significant tax benefits designed to ease the return to Israel and prevent double taxation on income generated outside the country.

Among the main benefits:

• Exemption from tax on passive foreign-source income, such as interest, dividends, rental income, and royalties.
• Exemption from tax on foreign capital gains, including the sale of securities, shares, or assets acquired while living abroad.
• Exemption from reporting foreign assets and income, for ten years from the date of return to Israel – effective 01.01.2026, the exemption granted to new immigrants and Veteran Returning Residents from filing reports on income and assets outside Israel for 10 years was repealed, but only with respect to those who become Israeli residents as of that date.
• The benefit period lasts ten years from the date of return to Israel.

*For example, if you own shares in a U.S. company that owns an office building in Tel Aviv, you will not be entitled to a capital gains exemption on those shares, because they grant an indirect right in an asset located in Israel.

For more on Amendment 168 and the issues that may arise at the end of the exemption period, click here.

The economic significance of these benefits is substantial. For example, a person who meets the definition of a Veteran Returning Resident or a new immigrant and owns a rental apartment in London or an investment portfolio in the United States will not be subject to tax in Israel on the income from those assets for ten years. This is unlike an Israeli resident who is not a new immigrant or a returning resident and is taxed in Israel on worldwide income.

Conditions for Obtaining Veteran Returning Resident Status

To obtain this status, several basic conditions must be met:

• The applicant was previously an Israeli resident.
• The applicant severed Israeli residency and transferred their center of life abroad.
• The applicant stayed outside Israel for more than ten years.
• The applicant returned to Israel and transferred their center of life here.

The term “center of life” is a key concept in this process. The Israel Tax Authority examines where the person’s life is actually conducted – place of residence, work, family, social and economic ties, and more. The examination is based on the individual’s personal circumstances, not only on the number of days spent in Israel. Therefore, even if a person appears to have met the stay requirement, the Israel Tax Authority may still view them as an Israeli resident if the substantive connection to the country was not actually severed.

The Process of Applying for Veteran Returning Resident Status

The application is submitted through an accountant, preferably one who specializes in international taxation, through the representatives’ system.

The process includes several main stages:

The handling time for the application ranges from three to eight months, and sometimes longer, depending on the workload and the complexity of the case.

Careful and accurate preparation of the application significantly increases the chances of a smooth and prompt approval.

Common Mistakes in the Process

The process of obtaining this status is sensitive and complex. Small mistakes can lead to rejection of the application or loss of the benefits. Common mistakes include:

1. Relying solely on a Returning Resident certificate issued by the Ministry of Aliyah and Integration – this certificate does not grant tax benefits. The Ministry of Aliyah and Integration is not connected to the Ministry of Finance.
2. Relying on the Population Authority’s day count – the counting of days under the Income Tax Ordinance is different.
3. Filing the application too late – it is advisable to prepare and submit the application before returning or shortly afterward. Late filing may create uncertainty regarding tax status and give rise to disputes with the Israel Tax Authority regarding the effective date of the status and reporting obligations. In some cases, it may even result in the benefits not being fully applied for the period preceding the approval.
4. Insufficient documentation of the stay abroad and the transfer of the center of life abroad. Without supporting documents, it is difficult to prove severance of residency.
5. Lack of professional guidance – trying to handle the process without assistance from a qualified professional may lead to errors such as incomplete collection of documents and supporting evidence, inconsistent presentation of facts (for example, regarding the timing of the severance of residency and the transfer of the center of life), incorrect or incomplete completion of forms and accompanying documents, or wording that fails to clearly present the required factual basis – thereby increasing the risk of delays, follow-up requests, and even rejection by the Israel Tax Authority.

In many cases, there are “gray areas” where it is unclear whether the severance of residency was fully achieved. In such situations, professional advice is critical.

Adjustment Year for a Veteran Returning Resident

In addition to the significant tax benefits granted to a Veteran Returning Resident, returning individuals may also choose an “Adjustment Year.” An Adjustment Year is a period of up to one year during which the individual will not be considered an Israeli tax resident. The purpose of this year is to allow the taxpayer to examine whether they intend to settle in Israel permanently, without immediately committing to Israeli resident status. During the Adjustment Year, foreign-source income is not subject to tax in Israel, and there is no obligation to report it. This benefit was anchored in law in Amendment 168 to the Income Tax Ordinance [New Version] in 2008. The amendment provides exemptions from tax and reporting for individuals, both returning residents and new immigrants, with respect to foreign income and assets. Section 14(b) of the Ordinance sets out the “Adjustment Year” mechanism. Activation of this mechanism depends on the individual’s election. If the individual chooses not to use this mechanism, their tax status will be determined in accordance with the Ordinance.

Nimrod Yaron & Co. specializes in assisting returning residents, new immigrants, and foreign residents in all aspects of international taxation. The firm provides personal and professional service, from the early planning stage through obtaining the tax ruling from the Israel Tax Authority.

Our firm has many years of experience in this field, including in-depth familiarity with the current procedures and case law of the Israel Tax Authority; proven experience in submitting similar applications and handling complex cases; the ability to identify potential issues in advance and resolve them before the application is submitted; and optimal tax planning after obtaining the status, based on each client’s income and asset structure.

Returning to Israel is an exciting and meaningful step, but one that also requires advance planning and an understanding of the tax implications. Veteran Returning Resident status allows for extensive tax relief, but only for those who act properly and regularize their status with the Israel Tax Authority. Our team of experts will help you understand your rights, prepare the required documents, and make sure you receive all the benefits to which you are legally entitled.

To schedule a consultation with the tax experts at Nimrod Yaron & Co., click here.

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