Recently, Israel enacted a series of significant legislative changes in tax law affecting new immigrants, particularly U.S. citizens who have immigrated to Israel or are considering doing so in the near future.
As a general rule, U.S. citizens remain subject to U.S. tax reporting and tax obligations even after relocating. At the same time, once they become Israeli residents, they are also subject to the Israeli tax system.
Against this background, two legislative changes stand out in particular:
- The enactment of the Encouragement of Immigration to Israel and Return to It Law (the “Encouragement of Immigration Law”), which created a new and significant Israeli tax exemption for certain active income (for example, employment income) derived in Israel.
- An amendment to the National Insurance Law, designed to ease the burden on immigrants from the U.S. who continue to pay social security contributions in the U.S. while employed by a U.S. employer, by granting an exemption from National Insurance payments in Israel.
Both laws are subject to certain limitations and conditions, as discussed below. Still, these benefits may be significant and may materially affect a new immigrant’s tax liability in Israel
The New Israeli Tax Exemption: A Dramatic Expansion of the Benefits Available to New Immigrants
One of the most significant developments is the Encouragement of Immigration Law. Unlike the traditional tax benefit regime for new immigrants, which mainly granted an exemption from tax on income derived outside Israel, the new law also provides a tax exemption for certain active income derived in Israel itself.
The law applies to an individual who became an Israeli resident for the first time, or to a senior returning resident who became an Israeli resident, during the period from November 5, 2025, through December 31, 2026. The law itself came into effect on January 1, 2026, and applies to qualifying income derived or accrued in Israel from the date on which a person first immigrated to Israel or returned after ten years abroad. In other words, it is not enough that a person received an immigrant visa, an immigrant certificate, or otherwise prepared for immigration during the relevant period. It is also necessary to examine when that person actually became an Israeli resident under the ordinary residency tests.
To benefit from the new law, certain formal conditions set out in the law must also be met. For example, in the case of a new immigrant, an immigrant visa, an immigrant certificate, or eligibility for the absorption basket is required. In other words, not everyone who arrived in Israel intending to relocate there automatically falls within the scope of the law. It is necessary to determine whether the individual qualifies as an “Israeli resident” under the applicable legal tests, foremost among them whether that person’s center of life is in fact located in Israel.
Which Income Qualifies for the Exemption, and What Falls Outside the Scope of the Law?
The new exemption does not apply to all income, but only to “qualifying income.” This generally includes earned income under Sections 2(1) and 2(2) of the Income Tax Ordinance [New Version], such as employment income, business income, or professional income. In other words, the law is primarily intended for salaried employees and self-employed professionals who derive active income in Israel.
By contrast, passive income does not qualify for the benefit. Interest, dividends, rental income, and capital gains generally remain outside the exemption regime. Certain transparent entity structures, holdings above a material threshold, and certain income received from relatives may also reduce or eliminate the benefit.
Accordingly, while the law opens up significant opportunities, it is far from sweeping, and each case requires an individual review of the type of income and the operating structure.
The new exemption is subject to caps set by law, and the benefit will be granted only up to the applicable cap, which varies by year and depending on whether the income was received from a relative, as follows:
Year | Income Cap | Income Cap Received from a Relative |
2026 | 600,000 ₪ | 140,000 ₪ |
2027 | 1,000,000 ₪ | 140,000 ₪ |
2028 | 1,000,000 ₪ | 140,000 ₪ |
2029 | 350,000 ₪ | 140,000 ₪ |
2030 | 150,000 ₪ | 150,000 ₪ |
In addition, for 2026, the cap is examined on a pro rata basis according to the period of Israeli residency during that year.
From a practical perspective, for U.S. citizens this creates a meaningful opportunity to reassess their tax structure. In appropriate circumstances, it may be possible to apply the exemption to a substantial portion of the active income derived in Israel. The timing of the move to Israel, the start date of residency, the type of income, the form of employment, and the distinction between salary and other income may all affect the outcome.
New Immigrants Operating Through a Foreign Company
In addition to the exemption granted by the Encouragement of Immigration Law with respect to active income earned by a new immigrant, the law also exempts from tax the business income of a foreign company derived in Israel as a result of the personal efforts of a new immigrant or a senior returning resident. This provision may be particularly important in cases involving remote work from Israel, relocation, or the management of a foreign company’s activities from Israel.
The exemption will be granted only if, but for the personal efforts of that immigrant or senior returning resident, the foreign company would not have had business income derived in Israel. In addition, certain limitations apply to the exemption. For example, one limitation provides that the exemption will not apply to a foreign company in which the new immigrant holds 10% or more of the shares. Accordingly, new immigrants operating through a foreign company should carefully review the statutory limitations in order to confirm whether the exemption applies.
The National Insurance Relief – A Practical but Only Partial Solution
Alongside the Encouragement of Immigration Law, a new arrangement was also enacted in the field of National Insurance, intended to address one of the issues affecting immigrants from the U.S. – the double payment of social security contributions. For years, individuals who moved to Israel but continued paying social security contributions in the U.S. found themselves, in some cases, also exposed to National Insurance payments in Israel. This is because there is no social security treaty between Israel and the U.S., which would otherwise be expected to prevent double payments of National Insurance in situations of this kind.
Under the new arrangement, an Israeli resident who is a new immigrant from the U.S. and who pays U.S. social security contributions on the same income will be exempt from paying National Insurance in Israel with respect to that income. This exemption applies for five years from the date of immigration to Israel
The law applies to National Insurance contributions from January 2026 onward, and it may also be relevant to immigrants who already arrived in Israel in recent years, with respect to the remainder of their first five years beginning on January 1, 2026.
Despite the relief the law is intended to provide, the legislation has several limitations:
- It is only a temporary order, not a permanent arrangement. The arrangement was enacted for ten years, with the possibility of extending it for two additional periods of up to five years each.
- As noted, each immigrant’s personal eligibility is limited to the first five years.
- Another important drawback is that the exemption does not apply to health insurance contributions. In other words, even where the exemption from National Insurance contributions applies, health insurance contributions must still be paid in Israel.
- The exemption does not apply where the new immigrant has additional income other than the income on which U.S. social security contributions are being paid, unless that additional income is de minimis.
In addition, there is no economic logic in granting an exemption from National Insurance contributions on income generated in Israel when the objective is to “protect” National Insurance paid unnecessarily in another country, solely because of the taxpayer’s poor tax planning. In our view, the law is a populist law that unnecessarily harms the state’s tax revenues. U.S. citizens living in Israel can achieve the same objective, and an even better tax result, by using employer of record (EOR) companies that employ those individuals as salaried employees, in which case no U.S. tax would apply at all.
Beyond these drawbacks, the arrangement is in effect only a “band-aid,” while the need for a social security treaty between Israel and the U.S. still remains. So long as there is no comprehensive treaty, there will continue to be significant dependence on the eligibility conditions, the practical interpretation adopted by the authorities, and the specific features of each employment model.
What About Individuals Who Immigrated to Israel Before the Legislative Changes?
These changes are not relevant only for those considering immigration in the future. U.S. citizens who already moved to Israel in recent years should also examine the possible impact of the legislative changes on their situation. In particular, some of them may be able to benefit from the new National Insurance arrangement with respect to the remainder of their first five years beginning in January 2026.
With respect to the tax exemption under the Encouragement of Immigration Law, the exemption does not apply to individuals who immigrated to Israel before November 5, 2025. However, the law provides that the immigration date for this purpose is not determined by the date of receipt of an immigrant visa or an immigrant certificate, but rather under the ordinary residency tests. New immigrants who arrived in Israel recently should therefore examine the exact date on which they became Israeli residents, in order to determine whether they qualify for the exemption.
Want to Check How Best to Plan Your Move to Israel?
In summary, the new legislation in Israel creates a real opportunity for immigrants from the U.S. Although these benefits are temporary, they present a significant opportunity for new immigrants, especially those from the U.S. Accordingly, for those who have already moved to Israel or are considering moving in the coming year, now is the time to examine eligibility for the new tax benefits.
Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team is made up of professionals with years of experience at the Israel Tax Authority, together with experience at leading firms and law offices, bringing a combination of legal and economic perspective. We advise private and public companies, Israeli and foreign companies, global venture capital funds, and clients seeking focused advice in clear and accessible language. We also work with a network of professional contacts at accounting firms and law offices around the world in order to provide a full-service solution in cross-border matters.
Whether you have already moved to Israel or are considering doing so in the near future, now is precisely the time to examine whether you fall within the scope of the law and qualify for the tax benefits, and what steps are best for you in order to benefit from the tax advantages in the most effective way, taking into account your employment model, the precise date of your move to Israel, and any additional income you derive, in Israel and abroad.
FAQ
Who may be eligible for the new Israeli tax exemption?
New immigrants and senior returning residents who became Israeli residents during the period from November 5, 2025 through December 31, 2026, subject to compliance with the conditions of the law and the residency tests.
What income is covered by the new exemption?
The exemption mainly applies to active income from personal effort, such as salary, business income, or professional income. It generally does not apply to passive income such as interest, dividends, rent, and capital gains.
Is a new immigrant from the U.S. also exempt from National Insurance in Israel?
In some cases, yes. A new immigrant from the U.S. who pays U.S. social security contributions on the same income may be exempt from National Insurance contributions in Israel for five years, but not from health insurance contributions.
Can someone who already moved to Israel also benefit from the changes?
Yes, in some cases. The National Insurance relief may also apply to individuals who already immigrated in recent years, with respect to the remainder of their first five years beginning in January 2026. By contrast, the new tax exemption depends, among other things, on the date on which the individual actually became an Israeli resident.
