Mixed Income for a Veteran Returning Resident or New Immigrant

A veteran returning resident or new immigrant with income from Israel and abroad – how to assess Israeli tax liability

The Income Tax Ordinance [New Version] grants new immigrants and veteran returning residents tax benefits on income from outside Israel, subject to the conditions prescribed by law. Accordingly, where activity is carried out partly in Israel and partly outside Israel, mixed income may arise. This requires an examination of the source of the income in order to determine which part may benefit from the exemption and which part may be subject to tax in Israel.

The key question in such cases is not only who the client is or where the consideration was paid, but where the activity was actually performed, what the nature of the service was, and whether it is possible to separate the foreign component from the Israeli component of the income.

What is the legal basis for the tax exemption for a new immigrant and a veteran returning resident?

Under the Ordinance, an Israeli resident is subject to tax on income from anywhere in the world, while a foreign resident is subject to tax in Israel on income produced or accrued in Israel. Alongside this rule, the Ordinance grants a new immigrant and a veteran returning resident, subject to its conditions, a tax exemption for the period prescribed by law on certain income sourced outside Israel.

A veteran returning resident is an individual who returned to Israel after being a foreign resident for at least 10 consecutive years. In general, a new immigrant and a veteran returning resident are entitled to a 10-year tax exemption on active and passive income produced or accrued outside Israel, or sourced from assets outside Israel.

The status of a regular returning resident or a veteran returning resident is not determined automatically. The length of stay outside Israel is only one part of the examination. The number of days spent in Israel, the date of severance of tax residency, and all the circumstances relating to the individual’s center of life over the years are also examined. All of these may affect eligibility for benefits and their scope.

For further reading, see the article “How To Claim The Tax Benefits Of Returning To Israel – Tax Benefits For A Veteran Returning Resident And A New Immigrant“

As of January 1, 2026, a temporary provision entered into force, establishing a temporary tax exemption on certain income produced or accrued in Israel by new immigrants and veteran returning residents. The exemption applies to new immigrants and veteran returning residents during the period from November 5, 2025 through the end of the 2026 tax year. Subject to the conditions, limitations, and caps set by law, the exemption applies in the tax years 2026 through 2030. Before relying on the provision in practice, it is advisable to review the updated wording of the legislation and its precise application to the circumstances of the case.

For further reading on the temporary provision, you may also read the article “New Tax Exemption on Income in Israel for New Immigrants and Veteran Returning Residents.”

Mixed activity in Israel and abroad

When a new immigrant or veteran returning resident conducts business or professional activity partly in Israel and partly outside Israel, it is necessary to examine where the work was actually performed, the nature of the services, and whether a reasonable allocation can be substantiated between the income generated outside Israel and the income generated in Israel.

Sometimes it is easy to attribute a particular part of the work to one country. In other cases, it is less straightforward, for example in an ongoing project, remote work for a foreign client, meetings held in Israel where another part of the performance took place outside Israel, or a single payment for work spread across several periods and several countries.

How to examine the allocation of income between Israel and abroad

The position of the Israel Tax Authority is that where mixed activity is involved, Israel may tax the part of the income derived from activity performed in Israel. Accordingly, a separation must be made between the Israeli income and the foreign income. The starting point is an allocation based on the ratio of working days or days of business activity in each country, but this is not the only method. Where it can be shown that another method more accurately reflects what actually occurred in practice, that method may also be considered, provided it is based on facts, documentation, and economic logic.

In appropriate cases, the allocation may be based on both quantitative and substantive indicators. It is possible to consider the scope of working hours, the extent of the activity in each country, the nature of the work, and the relative contribution of each component to the overall service.

For example, where the engagement includes several types of services, each with a different weight. Counting days of presence in each country is not always sufficient. Sometimes, weight should also be given to the type of work performed in each place.

In addition, there are cases where it is not correct to rely on the payment date or the project completion date. For example, in complex projects or activity that continues over time. In such situations, it is necessary to examine when each part of the output was created, where the work was performed, and what its relative scope was.

It should be noted that evidence is an important part of income classification. Even where, substantively, it is possible to argue that part of the activity was performed outside Israel, it is necessary to know how to prove this. Work logs, correspondence, engagement agreements, travel dates, project documents, payment requests, invoices, entry and exit records from Israel, flight tickets, hotel reservations, car rentals, and sometimes also the pricing structure between the service components – all of these can help substantiate a correct and persuasive allocation of income.

A common mistake is to assume that foreign income is automatically tax exempt. In practice, the Israel Tax Authority examines the nature of the activity, and not only its formal framework. Anyone who has returned to Israel or immigrated to Israel and continues to work both here and abroad should examine not only whether an exemption is available, but also how to apply it correctly. In many cases, this is a question with a real financial impact.

How should the review be carried out in practice?

A structured review usually includes an examination of residency status, mapping the sources of income, reviewing where the work was actually performed, and finally assessing whether all of the income, or only part of it, may benefit from the exemption during the benefit period.

The longer the activity continues, the more countries it involves, or the more types of services it includes, the greater the need for advance planning. An orderly review before reporting, and sometimes already at the engagement stage, can reduce errors and strengthen the professional position.

Nimrod Yaron & Co. specializes in Israeli and international taxation and advises individuals, entrepreneurs, controlling shareholders, and companies on residency, foreign income, international taxation, and allocation of income between Israel and abroad.

Our firm has experience advising new immigrants, veteran returning residents, and business owners with income from Israel and abroad. If you wish to examine your eligibility for tax benefits, the proper classification of income, and the appropriate allocation method, we will be pleased to assist with a precise legal and tax review, the formulation of a reporting strategy, and proper preparation in dealing with the Israel Tax Authority.

For an initial consultation call – click here.