Israel Tax Circular 07/2026: New Immigrant Tax Relief

On July 5, 2026, the Israel Tax Authority published Income Tax Circular 07/2026 concerning the temporary provision under the “Law to Encourage Immigration and Return to Israel.” The circular explains the eligibility requirements for the tax exemption on earned income in Israel, the limitations on the benefit, and the procedures for claiming it through an annual tax return, tax coordination, and a reduction of advance tax payments.

The temporary provision grants a tax exemption on earned income in Israel for a limited period and subject to fixed annual caps, in addition to the existing tax benefits for new immigrants and veteran returning residents under the Income Tax Ordinance.

The temporary provision applies to a new immigrant or veteran returning resident who became an Israeli resident between November 5, 2025 and December 31, 2026. Following the extension of its application under Section 38 of Basic Law: The Knesset, and in accordance with the Israel Tax Authority’s position, the eligibility period was extended until February 10, 2027.

Key Provisions

At the heart of the arrangement is a tax exemption on taxable earned income under Sections 2(1) and 2(2) of the Ordinance, namely income from a business, profession or employment, provided that the income was produced or accrued in Israel while the individual was an Israeli resident.

The annual caps are as follows:

Income above the cap, as well as capital income, interest, dividends and “other income” does not benefit from the exemption.

The circular also makes a practical distinction between substantive eligibility for the benefit and the ability to receive it during the tax year. Final eligibility is assessed through the annual tax return, but employees may request tax coordination and self-employed individuals may request a reduction in advance tax payments, subject to lower caps and strict criteria, particularly regarding days spent in Israel.

Eligibility Requirements for a Qualifying Individual

Eligibility is conditional on the individual becoming an Israeli resident during the qualifying period, either for the first time as a new immigrant or as a veteran returning resident. In this regard, the test is the date on which the individual’s center of life was actually transferred to Israel, rather than merely the date on which a certificate was received from the Ministry of Aliyah and Integration. The circular clarifies that electing an adjustment year under Section 14(b) does not change the residency date for purposes of the temporary provision.

In addition, a person seeking the benefit as an immigrant must also meet the definition of “immigrant” under Section 1, and a person seeking it as a veteran returning resident must hold a returning resident certificate. The circular emphasizes that a discrepancy between the date on which administrative approval was issued and the date of actual settlement will not assist the taxpayer if their center of life moved to Israel outside the qualifying period.

What Is Qualifying Income and What Is Excluded?

As noted, qualifying income is taxable earned income. However, the circular expressly excludes from the benefit “other income” as defined in Section 62A(d) of the Ordinance, including interest, dividends, rent, and proceeds from the sale of assets and real estate. It also imposes a restriction on income attributed to an individual from a “transparent entity.” As a general rule, income attributed from a partnership, family company or house company will not be considered qualifying income, because it is the entity’s income attributed to the individual for tax purposes only.

However, the circular adds two important exceptions. First, the restriction applies only where the individual is a substantial shareholder in the transparent entity, not where the holding is non-substantial. Second, where the transparent entity is wholly owned by the individual, the income may benefit from the exemption, based on the view that the situation is equivalent to that of a self-employed individual. It was further clarified that salary, management fees and consulting fees paid to an individual by a transparent entity are not excluded merely because they are received from such an entity.

The examples in the circular illustrate the distinction: an active partner holding 5% of a partnership may benefit from the exemption on their share of the profits, whereas a 15% holding in a house company will be considered a substantial holding and will therefore not qualify for the exemption. By contrast, a salary paid to a partner for work performed in Israel may be exempt.

Income from a Related Party and the Reduced Exemption Cap

Where qualifying income is received from a “related party,” the benefit is limited to a cap of NIS 140,000 per year, and NIS 150,000 in 2030. The definition of “related party” in Section 88 is broad and also includes corporate relationships, but the circular creates an important exception for a company wholly owned by the individual, which will not be considered a “related party” for this purpose. It was also determined that the benefit for income from a related party may be claimed only through an annual tax return, and not through tax coordination.

Tax Coordination, Advance Payments and the Days-of-Presence Criterion

To receive the benefit during the tax year, caps of NIS 300,000 have been established for a person who is not required to file an annual tax return and NIS 500,000 for a person registered as required to file a return. In 2026, the cap is calculated proportionately from the date on which the individual became an Israeli resident until the end of the year.

The central criterion for preliminary assessment is the number of days the individual and their spouse spent in Israel during the years 2016-2025. The basic rule is up to 90 days in each year, with a limited exception for only three years, and subject also to a cumulative three-year test of fewer than 425 days during the years 2018-2025. The circular provides examples in which exceeding the 90-day rule still permits tax coordination, as well as a case in which failure to meet the 425-day test prevents the preliminary relief but does not necessarily affect substantive eligibility through the annual tax return.

Borderline Cases and Areas of Uncertainty

The circular creates a detailed implementation framework, but several points are likely to raise questions. First, the clarification that qualifying income must reflect the “individual’s contribution” does not include a clear practical test, particularly in cases involving an active business with employees, intangible assets or entrepreneurial profit that does not arise solely from personal work. Second, the distinction between a wholly owned transparent entity and a transparent entity in which the holding is substantial but not complete may give rise to disputes, particularly where effective control exists even without 100% ownership. Third, the relationship between the temporary provision and existing provisions of the Ordinance concerning center of life, the adjustment year and wallet companies requires monitoring, since the circular provides that, solely for purposes of this temporary provision, a wallet company will not be treated as a transparent entity.

Practical Implications

In practical terms, the provision is relevant to new immigrants, veteran returning residents, Israeli employers, partnerships and professional advisers assisting with relocation to Israel in 2025-2026. The date on which the center of life was transferred, the type of income, the ownership structure, the existence of related-party relationships, and the number of days the individual and their spouse spent in Israel during the preceding decade should be examined now. Anyone seeking relief during the year should prepare to submit Form 116ע, instead of Form 116, and attach certificates, entry and exit records, income documents and a simulator printout.

Our Firm’s View

In our view, the circular is a step in the right direction, but it is incomplete. It improves certainty but does not resolve the main disputes likely to arise in its implementation, particularly in complex international structures. For professional advisers and taxpayers, the implication is clear: checking formal eligibility is not enough. A precise factual, residency and accounting foundation must be established in advance so that the benefit can be defended before the Israel Tax Authority if and when it is examined in depth.

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