Tax Exemption for a Regular Returning Resident

What Rights and Benefits Are Available to You

A tax exemption for a regular returning resident may provide certain tax benefits under the Income Tax Ordinance, but its scope is narrower than the benefits available to a veteran returning resident or a new immigrant.

In general, the law grants a regular returning resident a time-limited exemption for certain types of passive income from outside Israel, as well as a certain exemption for capital gains from the sale of assets acquired outside Israel while the individual was a foreign resident, all subject to the conditions set by law.

A person returning to Israel after an extended period abroad does not necessarily need to immediately realize assets, change the structure of investments, or discontinue financial activity built outside Israel. However, it is important to understand that the benefits available to a regular returning resident are more limited. They mainly apply to certain passive income and do not provide a broad exemption for all income from outside Israel, unlike the rules that apply to a veteran returning resident. Therefore, before returning to Israel, it is important to examine which assets and income may fall within the benefits, which income may remain taxable in Israel, and whether the timing of the return may affect the outcome.

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

Under the Income Tax Ordinance, a returning resident is an individual who returned to Israel and became an Israeli resident after being a foreign resident for at least six consecutive years. In practice, it is not enough for a person to have stayed outside Israel for that period. To determine the individual’s status, it is also necessary to examine tax residency, and in particular whether Israeli tax residency was in fact severed and whether the individual was a foreign resident throughout the entire required period.

The tax analysis is not based only on the number of days spent in Israel. The Israel Tax Authority also examines the center of life test, meaning where the individual’s family, economic, and personal ties are located, and the circumstances of the individual’s stay outside Israel. Therefore, merely living abroad for six years does not, in itself, guarantee recognition of the status. If, in one of the years, the individual’s center of life remained in Israel, or if the individual maintained strong ties to Israel, the Israel Tax Authority may dispute the claim that the individual was indeed a foreign resident throughout the entire required period.

Tax Benefits for a Returning Resident Under the Income Tax Ordinance

Section 14(c) of the Income Tax Ordinance provides that a returning resident is generally entitled to a tax exemption for five years from the date on which the individual became an Israeli resident, but not with respect to all income from outside Israel. The exemption applies to income produced or accrued outside Israel, or originating from assets outside Israel, that is not business income, and only with respect to the types of income specified in the Ordinance.

The exemption mainly applies to passive income, including pension income, royalties, rental income, interest, and dividends, where the income originates from assets outside Israel acquired by the returning resident during the period spent outside Israel after ceasing to be an Israeli resident. In addition, the law provides an exemption for interest and dividend income originating from assets outside Israel that are preferred securities, as defined in the Ordinance.

It is important to emphasize that the benefit available to a regular returning resident generally does not apply to business income. Therefore, anyone operating a business outside Israel, providing services, working as an employee, or continuing professional activity after returning to Israel should separately examine the classification of the income, where it is produced, and the application of Israeli tax law. Even if the clients or payments are located outside Israel, this does not mean that the income automatically benefits from the exemption.

Tax Exemption on Capital Gains for a Regular Returning Resident

Alongside the exemption for certain passive income, Section 97(b)(2) of the Ordinance grants a returning resident a tax exemption on capital gains from the sale of an asset acquired outside Israel while the individual was a foreign resident, if the asset is sold within ten years from the date on which the individual became a returning resident, all subject to the conditions set by law.

For this purpose, the exemption does not apply if the asset is a right, directly or indirectly, to an asset located in Israel. Therefore, where holdings in companies, rights, or complex investment structures are involved, it is important to carefully examine whether the asset is directly or indirectly connected to assets in Israel, and whether that connection denies the application of the exemption.

If the asset is sold after ten years have passed from the date on which the individual became a returning resident, the law may provide a proportional exemption for the part of the capital gain accrued until the end of the exemption period, while the remaining capital gain may be taxable in Israel, in accordance with the proportional mechanism set out in the Ordinance.

What Is the Difference Between a Regular Returning Resident and a Veteran Returning Resident?

The difference between a regular returning resident and a veteran returning resident is not limited to the length of the period spent outside Israel. A regular returning resident is an individual who was a foreign resident for at least six consecutive years, while a veteran returning resident is an individual who was a foreign resident for at least ten consecutive years. This distinction results in very significant differences in the scope of the tax benefits available to each status. This is precisely why, in certain cases, the timing of the return may have real tax significance. When a person is approaching the ten-year threshold, it is sometimes advisable to consider in advance whether there is a practical basis for completing that period before returning to Israel.

A veteran returning resident generally enjoys a broader exemption on income from outside Israel for ten years, including various types of active and passive income, subject to the law. By contrast, a regular returning resident is entitled to more limited benefits, mainly with respect to certain passive income, such as interest, dividends, rental income, royalties, and pension income, for only five years.

There is also a difference between the two regimes in the scope of assets covered by the benefits. A regular returning resident may be entitled to a tax exemption on capital gains from the sale of an asset acquired outside Israel while the individual was a foreign resident after severing Israeli residency, if the sale is made within ten years from the date of return and subject to the conditions set by law. By contrast, in the case of a veteran returning resident, the regime is broader and may also apply to assets that were not necessarily acquired while the individual was a foreign resident, and in appropriate cases, also to assets acquired after returning to Israel.

The special regimes added in 2026 with respect to certain income in Israel apply to new immigrants and veteran returning residents. They do not generally expand the benefits available to a regular returning resident with respect to employment or business income in Israel.

In addition, a regular returning resident is not entitled to a unique exemption from reporting obligations solely by virtue of that status, whereas the reporting exemption previously available to veteran returning residents and new immigrants was abolished with respect to individuals who became Israeli residents from January 1, 2026.

A regular returning resident is also not entitled to the acclimatization year under Section 14(b) of the Ordinance. In other words, a regular returning resident cannot elect an acclimatization year during which the individual would not be considered an Israeli resident for tax purposes.

In short, the difference between a regular returning resident and a veteran returning resident is not only reflected in the exemption period. It is a real difference in the scope of assets, types of income, and eligibility conditions. While a veteran returning resident may benefit from a broader regime, a regular returning resident is subject to a more limited and specific regime. Therefore, anyone who is close to the ten-year threshold should take into account that the timing of the return to Israel may often have real significance, and it is sometimes advisable to examine this in advance as part of proper tax planning.

Key Benefits for a Regular Returning Resident