Tax Exemption for Veteran Returning Residents

What Rights and Benefits Are Available to You

Veteran returning residents may be entitled to significant tax benefits under the Income Tax Ordinance [New Version] (the “Income Tax Ordinance”), including tax exemptions on foreign-source income, relief in relation to capital gains, reporting obligations, and additional benefits, subject to the conditions prescribed by law.

Please note that veteran returning residents in 2026 may, in certain cases, also be entitled to additional benefits in relation to income produced or accrued in Israel.

A person returning to Israel is not necessarily required to immediately change the work structure, investments, or business activity they built abroad. In some cases, it may be possible to continue the same activity after returning, subject to an examination of the type of income, the place where it is produced, and the applicable legal conditions. For anyone considering returning to Israel after severing Israeli tax residency, the question is not only whether veteran returning resident benefits are available, but also how to continue the existing activity properly and what is required to substantiate eligibility for the benefits.

Who Is Considered a Veteran Returning Resident Under the Income Tax Ordinance?

Under the Income Tax Ordinance, a veteran returning resident is an individual who returned to Israel and became an Israeli resident again after being a foreign resident for at least ten consecutive years. In practice, it is not enough for a person to have lived abroad for a long period. To benefit from the tax rights and benefits available to a veteran returning resident, it is necessary to show that Israeli residency was fully severed throughout the required period. The tax analysis is not based only on the number of days spent in Israel, but also on the center of life test, which examines where the individual’s family, economic, and personal ties are located and the circumstances of their stay outside Israel.

Therefore, merely staying abroad for ten years is not sufficient in itself to obtain the status. There are cases in which a person lived outside Israel, but in one of the years would not be considered a foreign resident for tax purposes, among other things if their center of life remained in Israel or if they retained strong ties to Israel. Such a situation may not only create an Israeli tax liability for that year, but also break the continuity of the years of foreign residency required for the status. For this reason, it is advisable to examine, already during the stay abroad, the date on which residency was severed, the continuity of the years of foreign residency, and the evidence supporting it.

Tax Benefits for Veteran Returning Residents Under the Income Tax Ordinance

Section 14(a) of the Income Tax Ordinance generally provides that a new immigrant and a veteran returning resident are entitled to a tax exemption for ten years from the date on which they became Israeli residents, with respect to income produced or accrued outside Israel or originating from assets outside Israel. Subject to the conditions under the law, the exemption applies to all types of foreign-source income, including passive income from rent, interest, dividends, royalties, and pensions originating abroad, as well as business income, income from an occupation, and salary income, provided that the work is not performed in Israel.

With respect to capital gains, Section 97(b)(1) of the Ordinance also provides a tax exemption on a capital gain from the sale of an asset outside Israel, provided that the sale is made within the ten-year benefit period and subject to the conditions under the law. If the asset is sold after the end of the ten-year period, an exemption may apply to the proportional part of the gain that accrued until the end of the benefit period, so that Israeli tax liability would apply only to the gain accrued thereafter, all subject to the provisions of the law and the circumstances of the case.

In this context, it is important to remember that the exemption is not necessarily limited only to assets or income that existed before the immigration. In appropriate cases, income or rights created after the immigration may also fall within the scope of the benefits, including assets acquired after the date of immigration and sold during the exemption period, as well as assets inherited by a new immigrant, all subject to the conditions under the law and the circumstances of the case.

The purpose of the benefit is to prevent a situation in which the mere move to Israel creates a tax liability on income and assets outside Israel that were not previously subject to tax in Israel. Therefore, anyone who holds assets, investments, shares, a foreign company, or sources of income outside Israel should examine how each item of income is classified and whether it falls within the scope of the exemption.

Reporting Obligation for Veteran Returning Residents From 2026

Until 2026, veteran returning residents enjoyed, alongside the tax exemption, an exemption from the obligation to report income, assets, and liabilities outside Israel for ten years. Following Amendment 272 to the Income Tax Ordinance, as of January 1, 2026, this reporting exemption was abolished with respect to individuals who became Israeli residents from that date onward. Therefore, individuals who became Israeli residents on or after January 1, 2026 are no longer entitled to an exemption from filing an annual tax return and a statement of capital with respect to income, assets, and liabilities outside Israel.

Even where the substantive tax exemption continues to apply, the reporting obligation may remain in place. Therefore, anyone who holds accounts, investments, companies, or assets outside Israel should also prepare in advance for the reporting aspects.

What Changed in 2026 Regarding the Veteran Returning Resident Exemption?

As of January 1, 2026, a temporary order entered into force that expands, for a limited period, the benefits to certain income produced or accrued in Israel. Until then, the benefits mainly related to income outside Israel. There is now also an exemption track for certain Israeli-source income, but it is subject to conditions, restrictions, and caps. Therefore, before relying on it, it is necessary to examine how it applies in the specific case.

The temporary order applies to a new immigrant who became an Israeli resident for the first time, and also to a veteran returning resident, during the period from November 5, 2025 until the end of the 2026 tax year. The new exemption applies to income from employment or business activity produced in Israel while the individual was an Israeli resident.

For further reading, see also the article “New Tax Exemption on Israeli-Source Income for New Immigrants and Veteran Returning Residents.”

Mixed Income in Israel and Abroad

A veteran returning resident who carries out activity both in Israel and outside Israel should carefully examine how the income is produced. In such situations, the Israel Tax Authority does not examine only who the client is or from which country the consideration was received, but also where the work was actually performed, the type of income, and how it should be allocated between the Israeli portion and the foreign portion. When the activity is carried out through a foreign company, it is also necessary to examine how it is managed in practice, where decisions are made, and whether the work or control over the activity is carried out from Israel.

An advance review of the activity structure, agreements, and supporting documents can help reduce uncertainty and limit unnecessary tax exposure.

For further reading, see also the article “Mixed Income for a Veteran Returning Resident or New Immigrant – How to Examine Israeli Tax Liability.”

Adjustment Year and Additional Benefits for Veteran Returning Residents

• Adjustment year – The law also includes an adjustment year mechanism, which may also be relevant for a veteran returning resident. Under this mechanism, and subject to the conditions under the law and the filing of a request on time, the individual may be treated as a foreign resident during the adjustment year. The adjustment year is included in the count of the benefit period. However, if at the end of the period the individual decides to continue living in Israel, the adjustment year will be taken into account for purposes of counting the exemption periods described above. The request for an adjustment year must be filed within 90 days from the date of arrival or return to Israel, using Form 1130 – Notice of Election of an Adjustment Year.
• Tax exemption on interest from a foreign currency deposit – A veteran returning resident may be entitled to a tax exemption on interest from a foreign currency deposit in Israel for 5 years from the date of return to Israel, if the funds originate outside Israel, the deposit was made in accordance with the conditions under the law, and the income is not part of a business activity or occupation.
• The law also includes relief in relation to a pension originating outside Israel for work performed in a foreign country. In appropriate cases, the tax in Israel on that pension will not exceed the tax that would have been paid on it in the paying country had the individual remained a resident of that country.