The New Tax Exemption for New Immigrants and Veteran Returning Residents on Income in Israel

By CPA Amir Gonen, tax partner | Category: International Tax | Reading time: approx. 5 minutes

A veteran returning resident working in Israel was used to a clear distinction: income produced abroad may enjoy a ten-year exemption, while salary for work in Israel is taxable. The Law to Encourage Immigration to Israel and Return to It (Temporary Provision), 5786–2026, adds an exemption on income from work and business in Israel as well. The benefit may be significant, but it is intended for a defined group of new immigrants and veteran returning residents, and it depends on when the person became an Israeli resident, on the type of income, and on further conditions.

Who Is Eligible for the New Exemption

The benefit applies to a new immigrant who became an Israeli resident for the first time, or to a veteran returning resident who became an Israeli resident again, in the period between 5 November 2025 and 31 December 2026. A veteran returning resident is, as a rule, someone who was a foreign resident for at least ten consecutive years before returning. For the purposes of the temporary provision, a returning-resident certificate from the Ministry of Aliyah and Integration is also required.

The decisive date is the date on which the center of life moved to Israel. Receiving a certificate, or entering Israel for a visit, does not replace the residency test. So someone who was already an Israeli resident before the period began does not enter the track merely because they received the certificate in 2026. Electing an adjustment year does not postpone the decisive date for eligibility under the temporary provision either.

Read our full article: Relocation and Severing Israeli Tax Residency — and Returning-Resident Status →

The Exemption Ceilings in the Benefit Years

The exemption applies to qualifying income produced in Israel while the individual was an Israeli resident, in the tax years 2026 to 2030, up to the following ceilings:

In 2026 the ceiling is calculated pro rata to the period of Israeli residency in that year. Someone who returns towards the end of the year is not entitled to a full annual ceiling. This is a ceiling on exempt income, not the amount of tax saved; income above the ceiling is taxable under the regular rules.^[1]

Which Income Is Included

The temporary provision refers to taxable income from personal exertion from a business, a vocation or employment, under sections 2(1) and 2(2) of the Income Tax Ordinance. It may therefore apply both to an employee's salary and to profit from self-employed activity. For a self-employed person, the taxable income from the activity is examined — after allowable expenses — not the turnover.

Under this temporary provision the exemption does not apply to dividends, interest, rent or capital gains. Other exemptions or tax tracks may be available for such income and should be checked separately. Income attributed from a partnership or a transparent company also requires a check of the exceptions in the law and of the holding percentage. The law also includes a special provision for income attributed to an individual under section 62A of the Ordinance.

Read our full article: The 2025 Arrangements Law — Trapped Profits and Section 62A →

Working in Israel for an Employer Abroad

The employer's location, and the account into which the salary is paid, do not by themselves determine where employment income was produced. As a rule, salary for work physically performed in Israel is Israeli-source income, even when the work is done remotely for a foreign company. The new temporary provision may exempt that salary, up to the ceiling, if the employee meets its conditions.

Where the work is done partly in Israel and partly abroad, the income must be attributed to the activity in each place. The existing exemption on foreign income under section 14 of the Ordinance is preserved, and the Israeli part is examined under the temporary provision. It is worth documenting the working days and the nature of the activity in each country.^[2]

A separate exemption for the foreign company. Besides the exemption for the employee, the law also exempts from tax a foreign-resident body of persons on its business income produced in Israel by reason of the personal exertion of the new immigrant or veteran returning resident, in the tax years 2026 to 2030 — provided the company would have had no business income in Israel without them. This exemption does not apply where the new immigrant or returning resident is a material shareholder in the company, even if it is wholly owned by them. Where the foreign company is a transparent entity, the exemption does not apply to the part of the income attributed to a rights holder who is an Israeli resident.^[1]

Income from a Relative and Income Through a Company

A special ceiling was set for qualifying income received from a relative: ILS 140,000 in each of the years 2026 to 2029, and ILS 150,000 in 2030. Here too the 2026 ceiling is pro rata to the period of residency. The definition of a relative also includes companies in certain holding situations. Where there is income from a relative alongside income from another source, this does not increase the general ceiling for that year.

Salary from a wholly owned company. The law excludes from the definition of a "relative" a company wholly owned by the new immigrant, so income from it is not limited to the special ceiling for income from a relative. The wording of the exclusion in the law refers to a "new immigrant" only. Income Tax Circular 07/2026 is worded more broadly and refers to an "individual": in the Tax Authority's position, a company wholly owned by the individual will not be treated as a "relative", and income from it can enjoy the full exemption ceiling. So for a veteran returning resident, entitlement to the full ceiling rests on the Tax Authority's position in the circular, not on the wording of the law itself. Nor does the personal exemption make the company's profits as a whole exempt from tax.^[1][2]

Ceasing Residency May Cancel the Benefit Retroactively

The law includes a condition that should be taken into account already when planning the return: the benefit is denied from the outset if the individual ceased to be an Israeli resident during 2028 or 2029 and stayed in Israel for fewer than 75 days in one of those years. These are two cumulative conditions. A short stay in Israel is not in itself enough to deny the exemption if Israeli residency continues. So the continuation of residency in the following years should be examined as well.^[1]

How to Claim the Benefit in Practice

Income Tax Circular 07/2026 distinguishes between the full eligibility review in the annual return and advance relief during the year. An employee can request a tax coordination, and a self-employed person can request a reduction of advance payments, using Form 116E (116ע) together with the required documents.

In the advance track the Tax Authority set ceilings lower than the statutory ones: up to ILS 500,000 a year for someone registered as required to file an annual return, and up to ILS 300,000 for someone not so registered, subject to the relevant statutory ceiling. In 2026 these amounts are also calculated pro rata. The balance of the entitlement can be claimed in the annual return.

The advance track is subject to further checks, including the history of stays in Israel of the applicant and of their spouse. Failing to qualify for this track does not necessarily deny the entitlement under the law, which can be examined in the annual return. Relief for income from a relative is granted, according to the circular, only through an annual return. An exemption from withholding tax does not cancel an obligation to file a return that exists for another reason.^[2]

Read our full article: The Annual Income Tax Return →

Read our full article: Form 5329 — and What Changed for Immigrants and Returning Residents →

An Example of Applying the Exemption

Suppose a veteran returning resident returned to Israel in 2026, meets all the conditions of the law, and in 2027 earns ILS 1.2 million from work in Israel for an employer who is not a relative. Assuming the whole salary is qualifying income, ILS 1 million will be exempt under the temporary provision, and the balance of ILS 200,000 will be taxable under the rules that apply to them.

By contrast, a veteran returning resident who moved their center of life to Israel already in 2024 is not entitled to the new exemption on the same salary. The fact that they are still within the ten-year period of the exemption on foreign income is not enough. The example shows why two people with the same salary and the same general status may reach different tax results.

What to Check Before the End of 2026

Anyone planning a return to Israel should examine when the center of life will actually move and the documentation supporting it, alongside the employment terms and the structure of the activity. Anyone who has already returned in the qualifying period should check whether tax was withheld from their salary without the benefit being examined, and what is required for the tax coordination and the annual return. Where there is activity through a company, income from a relative or work in several countries, it is advisable to carry out the review before changing agreements or the way funds are withdrawn.

Sources

1. Law to Encourage Immigration to Israel and Return to It (Temporary Provision), 5786–2026, sections 1–6; Sefer HaHukim 5786, pp. 416–418 (Hebrew). View the source
2. Israel Tax Authority, Income Tax Circular 07/2026 of 5.7.2026, in particular sections 4–11 and 14–15 (Hebrew). View the source

This article is for general information and does not replace advice tailored to your circumstances. It deals with income tax; other liabilities are examined separately.

Kind regards,
Hager-Alperowitz & Co. — Certified Public Accountants