Unprecedented Tax Benefits for New Immigrants and Returning Residents (2026 Temporary Provision)

A Revolution in Israeli Individual Taxation – Tax Exemption Now Extends to Domestic Israeli Income

Dear Clients and Friends,

As part of the Economic Efficiency Law enacted on March 31, 2026, a dramatic temporary provision has been approved that significantly alters Israel's tax landscape. The new legislation—"The Encouragement of Aliyah and Returning to Israel Law"—introduces unique tax incentives designed to attract new immigrants (Olim Hadashim) and veteran returning residents, offering an unprecedented tax relief never before seen in Israeli law.

For the first time, a tax exemption will be granted on income sourced from personal exertion within Israel (such as salaries or vocational income). This is in addition to the traditional 10-year tax holiday on foreign-sourced income (under Section 14(a) of the Income Tax Ordinance).

Eligibility Criteria and Key Timelines

Access to these exclusive benefits is strictly time-limited and subject to specific conditions:

1. Limited Window of Opportunity: The benefit applies solely to individuals who became Israeli tax residents for the first time or veteran returning residents between November 5, 2025, and December 31, 2026.

2. New Reporting Obligations (Amendment 272): Please note that as of January 1, 2026, the comprehensive reporting exemption on foreign assets and income has been abolished. Consequently, new immigrants and returning residents must still report their global income and assets, even if the income itself is exempt from tax.

3. Residency Retention Requirement: The benefits will be retroactively revoked if the individual ceases to be an Israeli resident during the tax years 2028–2029 and spends fewer than 75 days in Israel during either of those years.

What Qualifies as "Eligible Income"?

The tax exemption applies exclusively to active income derived from personal exertion (under Sections 2(1) and 2(2) of the Income Tax Ordinance), meaning employment wages or active business/vocational profits. Important Exclusions:

• Passive Income: Interest, dividends, rental income, and capital gains from the sale of assets or securities (even if classified as business income under Section 62A(d)) are excluded.

• Transparent Entities and Wallet Companies: Income attributed to "wallet companies" or heavily personal-exertion-based corporations (under Section 62A) is excluded, except for a transparent entity fully owned (100%) by the individual.

Exemption Caps and Brackets (Tax Years 2026 – 2030)

The exemption is capped annually over a 5-year period as follows:

• Tax Year 2026: Up to 600,000 ILS (Calculated proportionally/pro-rata based on the actual residency period in 2026).

• Tax Years 2027 – 2028: Up to 1,000,000 ILS per tax year.

• Tax Year 2029: Up to 350,000 ILS (Gradual phase-out of the benefit).

• Tax Year 2030: Up to 150,000 ILS (The final year of the temporary provision's validity).

Anti-Tax Planning Provision (Related Parties): To prevent artificial income shifting, if the eligible income is received from a "related party" (family members or an entity in which the individual holds a 25% or greater interest), the exemption cap is drastically reduced to only 140,000 ILS for the years 2026–2029.

Significant Relief for Foreign Corporate Activities

The law introduces crucial relief for entrepreneurs: business income from a foreign company derived in Israel due to the individual's personal exertion will be exempt from Israeli tax, provided that the non-resident company had no other business income generated in Israel but for the individual's exertion. This clause serves as a strong defense against claims that the individual’s relocation creates a "Permanent Establishment" (PE) for the foreign company in Israel. However, this exemption will not apply to material shareholders in the foreign company or certain transparent entities.

Critical Perspective and Conclusion

While this law provides a rare financial opportunity, it has drawn public criticism for creating tax inequality between new arrivals and long-term Israeli residents, who bear a full tax burden on their domestic income. This marks a clear departure from historic policies where tax holidays for Olim were strictly confined to offshore activities.

Our Recommendation: Given the structural complexity of this legislation, the new global reporting mandates, and anti-avoidance measures, we strongly advise anyone considering Aliyah, returning to Israel, or restructuring existing operations to contact our firm immediately for advanced tax planning and comprehensive strategic guidance.