Tax Exemption on Israeli-Source Active Income for New and Returning Residents
Further to our newsletter published in January, the Israeli Parliament has recently approved new legislation introducing a temporary tax exemption on certain Israeli-source active income, aimed at encouraging new immigrants and returning residents to relocate to Israel.
The existing benefits available to new immigrants and veteran returning residents (i.e., individuals who have spent more than ten years abroad) provide a 10-year tax exemption on income derived from outside Israel or from assets located abroad, but do not apply to income generated in Israel.
The new law applies to new immigrants (olim) and veteran returning residents who become Israeli tax residents between November 5, 2025 and December 31, 2026. Individuals who arrived earlier in 2025, even if they elected an acclimation year (שנת הסתגלות), will not qualify for the exemption.
The tax exemption applies to employment and business income derived from activities performed in Israel by the individual and does not apply to passive income, such as dividends, rent, or capital gains. Not all business income qualifies for this benefit, and professional advice is therefore recommended.
The benefit applies for five tax years and is subject to the following annual caps (income above these caps is taxable):
2026 – up to NIS 600,000 (prorated based on the individual’s period of Israeli residency during that year)
2027–2028 – up to NIS 1,000,000 per year
2029 – up to NIS 350,000
2030 – up to NIS 150,000
Income from related parties is capped at NIS 140,000 per year (2026–2029).
In addition to applying the tax benefit to the individual’s personal income, the new law also provides a tax exemption on all or part of the business income of a foreign company derived from activities performed in Israel by such individual during 2026–2030, subject to certain limitations, including that the foreign company does not have other business income generated in Israel and that the individual is not a material shareholder in the foreign entity. In such cases, the foreign company will generally not be exposed to a permanent establishment claim in Israel until 2030.
The tax exemption will not apply at all if the individual ceases to be an Israeli tax resident in 2028 or 2029 and spends fewer than 75 days in Israel in each of those years.
As the benefit applies only to individuals who become Israeli tax residents within a limited period, it is important to determine the accurate date of Israeli tax residency.
For further information, please contact Adv. Yair Benjamini or Adv. Shiran Polishuk at our firm.
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