New Tax Exemption on Israeli-Source Income for New Immigrants and Veteran Returning Residents
The new tax exemption on Israeli-source income for new immigrants and veteran returning residents is an important development to be aware of. As of January 1, 2026, a temporary order entered into force under the Encouragement of Immigration to Israel and Return to Israel Law (Temporary Order), 2026, which provides a temporary exemption from tax on certain income produced or accrued in Israel by new immigrants and veteran returning residents.
The temporary order provides a temporary tax exemption for certain income produced in Israel by new immigrants and veteran returning residents. In doing so, it expands, for a limited period, the existing benefits under the law, which until now applied mainly to income sourced outside Israel. The exemption is subject to the conditions, limitations and caps set out in the law.
The purpose of expanding the exemption is to encourage immigration and return to Israel by creating a positive incentive for settling in Israel and integrating economically in the country.
To understand the significance of the new exemption, it is first important to review the arrangement that has applied until now under the Income Tax Ordinance to new immigrants and returning residents.
A veteran returning resident is an individual who returns to Israel after having been a foreign resident for at least 10 consecutive years. As a rule, 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.
A regular returning resident is an individual who returns to Israel after having been a foreign resident for at least 6 consecutive years. A regular returning resident is entitled to a more limited arrangement, which applies mainly to passive income sourced outside Israel, and for only 5 years.
It is important to emphasize that recognition as a regular returning resident or a veteran returning resident requires an individual examination. The Israel Tax Authority examines not only the length of stay outside Israel, but also the number of days spent in Israel, the date of severance of tax residency, and the individual’s center of life. In this context, the authorities examine, among other things, family and economic ties, place of residence, and the way the individual actually manages day-to-day life. Therefore, living abroad is not necessarily sufficient to obtain the status. In some cases, it is also necessary to examine the date on which the individual again became an Israeli tax resident. The classification may materially affect the scope of the benefits and the way eligibility for them is assessed.
For further reading, see: “How to Make Use of Tax Benefits When Returning to Israel – Tax Benefits for Veteran Returning Residents and New Immigrants”
Who Is Eligible for the New Exemption?
The exemption applies to a new immigrant who became an Israeli resident for the first time, and to a veteran returning resident who became an Israeli resident, during the period from November 5, 2025 until the end of the 2026 tax year.
What Israeli-Source Income Is Covered by the New Exemption?
The exemption applies to employment income or business income, provided that the income was produced or accrued in Israel while the individual was an Israeli resident. In other words, this is Israeli-source income, not foreign-source income. This point is especially important in cases where an individual continues to work or operate both in Israel and outside Israel. In such cases, it is necessary to distinguish between income that may be covered by the new exemption and other income whose tax treatment is examined under the existing arrangements in the Ordinance.
Exemption Caps by Tax Year
The law establishes a graduated mechanism of exemption caps by tax year:
Tax Year | Exemption Cap |
2026 | 600,000 ₪ |
2027 | 1,000,000 ₪ |
2028 | 1,000,000 ₪ |
2029 | 350,000 ₪ |
2030 | 150,000 ₪ |
Received Income from a Relative? Note That the New Exemption Is More Limited
If a new immigrant or veteran returning resident has income that may qualify for the new exemption, but that income was received from a relative, more limited rules will apply. In such a case, instead of the regular exemption caps for the years 2026-2029, an exemption cap of 140,000 ₪ will apply for each year.
If, in the same tax year, a new immigrant or veteran returning resident has both income eligible for the exemption under the regular track and income received from a relative, the exemption may be available under each of the tracks. However, the total amount of income exempt from tax may not exceed the exemption caps set under the regular track.
How Is the Cap Calculated If You Did Not Immigrate at the Beginning of 2026?
For the 2026 tax year only, the temporary order provides that the exemption cap must be calculated proportionately to the period during which the individual was an Israeli resident in that year. Therefore, a person who became an Israeli resident during 2026, and not at the beginning of the year, may be entitled only to a proportionate part of the annual cap, and not necessarily to the full amount. In such cases, the determination of the residency date has real financial significance. Where there is also uncertainty regarding the date of severance of prior residency or the commencement of Israeli residency, an individual review at an early stage may help avoid uncertainty and disputes later on.
Cancellation of the Adaptation Year During the Temporary Order Period
Under the temporary order, for the purpose of determining the date on which a person is first considered an Israeli resident, or a veteran returning resident, the provisions of Section 14(b)(1) of the Income Tax Ordinance will not apply. In simple terms, this provision concerns the “adaptation year” – a mechanism that, under certain conditions, allows the recognition of Israeli tax residency to be deferred during the first year after immigration or return to Israel. The temporary order clarifies that, for purposes of eligibility for the new exemption, this deferral will not be taken into account.
Activity Through a Foreign Company
In certain cases, the law also grants an exemption for business income of a foreign-resident entity, where the income was produced in Israel due to the personal efforts of a new immigrant or veteran returning resident who is eligible for the exemption, during the tax years 2026 through 2030. The condition is that, without those personal efforts, that entity would not have produced business income in Israel.
However, this exemption will not apply in two main situations: if the individual is a material shareholder in the foreign-resident entity, or if the entity is a transparent entity, with respect to the portion of income attributed to a rights holder who is an Israeli resident.
In Which Cases Is the Exemption Not Available?
The law also includes an important restriction on the application of the benefit. Under this restriction, the exemption provisions will not apply to an individual who ceased to be an Israeli resident during one of the tax years 2028 or 2029, and stayed in Israel for fewer than 75 days in one of those years. The purpose of this provision is to limit situations involving artificial or partial use of the benefit.
When Is an Individual Review Required for a New Immigrant or Veteran Returning Resident?
- When there is uncertainty regarding tax residency – for example, when the individual ceased to be considered an Israeli resident, when the individual again became an Israeli resident, when the exemption period begins, or how the center of life tests should be applied in the circumstances. In such cases, an individual review, legal advice or a legal opinion may provide certainty and reduce risks.
- Mixed activity – when the individual carries out activities both in Israel and outside Israel, has mixed income, more than one source of income, or difficulty distinguishing between the portion produced in Israel and the portion produced outside Israel. In cases of mixed activity by returning residents and new immigrants, the tax benefits are not necessarily granted on the full amount of income, but only on the portion that qualifies under the law. Therefore, the allocation between income components becomes a central question. In some cases, an individual review is required in order to properly classify the income and assess the scope of benefits that may be used. The new temporary order provides some relief in such cases as well, but it offers only a partial solution. Therefore, where there is uncertainty regarding the date of severance of residency, the classification of income, the application of benefits to income produced in Israel, the existence of mixed income, or activities, holdings and assets outside Israel, an individual examination of the circumstances is required in order to make optimal use of the benefits.
For further reading, see the article “Veteran Returning Resident or New Immigrant with Income from Israel and Abroad – How Is Tax Liability Examined?”
Summary
The new exemption expands, for a limited period, the benefits granted to new immigrants and veteran returning residents, including with respect to certain income produced or accrued in Israel. This relief may be significant during the first years of adjustment in Israel, but it applies only under a temporary order and is subject to caps, conditions, proportional calculations and special restrictions that must be examined on a case-by-case basis.
Where there is uncertainty regarding the date of severance of residency, the classification of income, the application of benefits to income produced in Israel, the existence of mixed income, or the existence of business activity, holdings and assets outside Israel, it is advisable to conduct an individual review at an early stage. Such a review may include an examination of the type of income, the residency date, the activity structure, the identity of the payer and the reporting method. In appropriate cases, it may also be advisable to consider a preliminary approach to the Israel Tax Authority in order to obtain certainty regarding status or the application of the benefits.
If you are a new immigrant or returning resident, or if you are considering immigrating or returning to Israel, we recommend understanding the tax implications in advance and examining how to make proper use of the benefits. Tax advice may help maximize the benefits and reduce uncertainty vis-à-vis the Israel Tax Authority.
Nimrod Yaron & Co. has experience advising new immigrants, returning residents and veteran returning residents on Israeli and international tax matters, severance of residency, and eligibility for tax benefits. Our team is composed of professionals with years of experience at the Israel Tax Authority, as well as experience at leading firms and law offices, bringing together both legal and economic perspectives. We would be pleased to assist with eligibility reviews, examination of the residency severance date, income classification, analysis of mixed income or activities and assets outside Israel, planning the reporting process, and preparing a legal opinion where needed.
For an initial consultation, please contact us.
FAQ
Does the new exemption also apply to income produced in Israel?
Yes. The temporary order provides, subject to certain conditions, a temporary exemption also for certain income produced or accrued in Israel.
What happens if I work both in Israel and with foreign parties?
In such cases, it is important to make an accurate distinction between the income components, the place where the income was produced, and the identity of the payer, in order to examine the scope of the exemption. Where there is uncertainty regarding the classification, the allocation between Israel and abroad, or the application of the benefit to part of the income, it is advisable to conduct an individual review.
Why is it important to examine the residency date?
The residency date may have a direct impact on eligibility itself, the amount of the cap, and the way the benefit is calculated in 2026.
Is it enough for an individual to have stayed abroad for 10 consecutive years in order to be considered a veteran returning resident?
Not necessarily. The Israel Tax Authority does not examine only the length of stay abroad, but also the number of days the individual spent in Israel, the date of severance of residency, and the center of life test, which includes, among other things, family, economic and practical ties.
Does a regular returning resident enjoy the same benefit as a veteran returning resident?
No. A regular returning resident generally benefits from a more limited arrangement. It is therefore important to examine which status applies to you and the scope of the benefits attached to that status.
Is it advisable to obtain a legal opinion before immigrating or returning to Israel?
Where there is uncertainty regarding the date of severance of residency, the classification of income, or activity in Israel and abroad, it is advisable to seek professional advice in order to obtain certainty and reduce risks.
