Extension of the Period of Eligibility for Tax Benefits for New Immigrants and Veteran Returning Residents

Dear Clients,

We would like to update you on the extension of the eligibility period for tax benefits granted under the Encouragement of Immigration to Israel and Return Thereto Law (Temporary Provision), 2026 (the “Law”). The Law was enacted as part of the Economic Efficiency Law (Legislative Amendments to Achieve the Budget Targets for 2026), 2026 (click here to view the Law).

Subject to its conditions, the Law grants new immigrants and veteran returning residents an exemption from tax on qualifying earned income derived in Israel. The exemption applies for the 2026 through 2030 tax years, up to the annual ceilings set out below, and is in addition to the existing tax benefits for income derived outside Israel.

Extension of the Eligibility Period

As originally enacted, the Law applied to an immigrant who became an Israeli resident for the first time, or a veteran returning resident who resumed Israeli residency, between November 5, 2025 and December 31, 2026.

The extension follows from Section 38 of Basic Law: The Knesset, which provides that an enactment due to expire during certain periods surrounding the end of the outgoing Knesset’s term or the beginning of the incoming Knesset’s term will remain in force until the end of the first three months of the incoming Knesset’s term.

Accordingly, and as published on the Israel Tax Authority’s service website, the eligibility period has been extended until February 10, 2027. This extension is based on the Tax Authority’s position that Section 38 applies to the eligibility period and has not yet been reflected in an updated circular.

Consequently, a new immigrant or veteran returning resident who became an Israeli resident between January 1, 2027 and February 10, 2027 may also be eligible for the benefits, subject to meeting the other requirements under applicable law.

We understand that the Tax Authority is expected to publish an update to Income Tax Circular 7/2026 shortly, reflecting the extension of the eligibility period (click here to view the current Income Tax Circular 7/2026).

Who May Be Eligible?

The benefit is available to a new immigrant who became an Israeli resident for the first time, or a veteran returning resident who resumed Israeli residency, during the eligibility period, subject to the conditions set out in the Law. These include the following:

• A new immigrant must fall within the Law’s definition of an “immigrant”, which includes, among others, a person holding an immigrant visa or certificate under the Law of Return, or a person belonging to a category of persons entitled to an absorption package under applicable law. The definition excludes a person whose Israeli citizenship was revoked under Section 11 of the Citizenship Law.
• A veteran returning resident is generally a person who was a foreign resident for at least ten consecutive years before returning to Israel. To qualify for the benefit, the person must also hold a returning resident certificate issued by the Ministry of Aliyah and Integration.

The relevant date is the date on which the individual actually moved their center of life to Israel. The Law expressly provides that electing an “adjustment year” under Section 14(b) of the Income Tax Ordinance does not change that date. For example, a person who moved their center of life to Israel before November 5, 2025 and elected an adjustment year will not be eligible for the benefit. A person who moved their center of life to Israel during the eligibility period may be eligible even if they elected an adjustment year.

Tax Exemption Ceilings for Earned Income

Subject to the Law’s conditions, the exemption applies to qualifying earned income from employment, a business or a profession, under Sections 2(1) and 2(2) of the Income Tax Ordinance. The income must have been derived or accrued in Israel while the individual was an Israeli resident. According to Income Tax Circular 7/2026, income will qualify only if it reflects the individual’s contribution to generating it.

These are annual exemption ceilings, not income tax brackets. Qualifying income above the applicable ceiling will be taxed in accordance with applicable law.

The benefit under the temporary provision is available through the end of the 2030 tax year. The extension of the eligibility period does not, in itself, extend the tax years in which the benefit is available. For a person who became an Israeli resident during 2026, the exemption ceiling for that year is calculated proportionately to the period of Israeli residency during the year. A person who became an Israeli resident during the extended period, from January 1, 2027 through February 10, 2027, will not benefit from the exemption for the 2026 tax year and will be able to benefit from it only for the 2027 through 2030 tax years. Neither the Law nor the circular addresses whether the 2027 ceiling should be calculated proportionately, or how the days-of-presence test will be applied for tax coordination purposes to a person who arrived during the extended period. We recommend reviewing the updated circular when it is published.

Income Not Covered by the Benefit

The benefit does not apply, among other things, to income from interest, dividends or rent. It also does not apply to income attributed to an individual by a tax-transparent entity, such as a partnership, family company or house company, in which the individual is a substantial shareholder, generally holding 10% or more. Salary, management fees and consulting fees received by the individual from a tax-transparent entity are not subject to this exclusion and may qualify for the exemption. According to the circular, a “wallet company” under Section 62A of the Ordinance will not be considered a tax-transparent entity for this purpose.

Income Received from a Related Party

Qualifying income received from a “related party”, as defined in Section 88 of the Ordinance, is subject to a limited exemption ceiling of NIS 140,000 per year for the 2026 through 2029 tax years. For 2030, the ceiling for income from a related party is NIS 150,000, the same as the general ceiling. A “related party” includes, among others, family members and an entity in which the individual or a related party holds 25% or more. Accordingly, salary from a company in which the individual holds at least 25% of the shares is also subject to the limited ceiling.

Where an individual has both qualifying income from a related party and qualifying income from other sources, the total exempt income is subject to the general annual ceiling, while income from the related party is also subject to the limited ceiling. The benefit for income from a related party may be claimed in the annual tax return, but not through tax coordination.

Claiming the Benefit During the Year

An employee may request the benefit during the year through tax coordination, and a self-employed individual may request a reduction in advance tax payments. The request is submitted using Form 116E, together with, among other things, the certificate from the Ministry of Aliyah and Integration, records of entries into and exits from Israel for the years 2016 through 2025 for the individual and their spouse, and the output from the Tax Authority’s online simulator.

For claims made during the year, the benefit is limited to a ceiling of NIS 500,000 for a person registered as required to file an annual tax return, and NIS 300,000 for a person who is not registered as required to file an annual tax return. For 2026, the ceilings are calculated proportionately. To receive the benefit during the year, the individual and their spouse must meet a days-of-presence test in Israel for the years 2016 through 2025. A person who does not meet the test, or whose income exceeds the applicable ceiling, may claim the benefit or the remaining amount in the annual tax return, where final eligibility will be assessed.

Maintaining Israeli Residency

If both of the following conditions are met, the provisions of the Law will not apply to the individual: (1) the individual ceases to be an Israeli resident during the 2028 or 2029 tax year; and (2) the individual spends fewer than 75 days in Israel in either of those years. In that case, tax on the income for which the exemption was granted will be recalculated as if no exemption had been granted. According to the circular, an individual who leaves Israel temporarily and spends fewer than 75 days in Israel, but whose center of life remains in Israel, has not ceased to be an Israeli resident and therefore will not lose the exemption.

Income from Outside Israel

The benefit under the Law does not detract from existing exemptions under applicable law for income derived outside Israel. Where earned income is derived partly in Israel and partly outside Israel, the portion attributable to activity abroad may be exempt under Section 14 of the Ordinance, subject to its conditions and the period prescribed therein. The portion attributable to activity in Israel is exempt only up to the annual ceiling under the Law.

Exemption for a Foreign-Resident Entity

The Law also provides a tax exemption for business income of a foreign-resident entity, such as a foreign company, derived in Israel solely as a result of the personal efforts of an immigrant or veteran returning resident during the 2026 through 2030 tax years. The exemption applies even if the individual’s activity in Israel creates a permanent establishment for the foreign company. It does not apply if the foreign company would have been liable for tax in Israel even without the individual’s activity, or if the individual is a substantial shareholder in the company. In the case of a tax-transparent entity, the exemption does not apply to the portion of income attributed to holders of interests who are Israeli residents. The foreign company may waive the exemption, in whole or in part.

In light of the extension of the eligibility period, a person considering immigrating or returning to Israel as a veteran returning resident must, in accordance with the Tax Authority’s position, move their center of life to Israel no later than February 10, 2027. We recommend assessing eligibility and how to claim the benefit in advance, taking into account the individual’s circumstances, including the date on which they move their center of life to Israel, their status, the source of income and the required documentation.

The Tax Team at Shibolet & Co. is available to assist you in assessing eligibility for the benefit, planning the timing of your move and submitting applications to the Tax Authority.

This circular contains general information only and does not constitute legal advice or a substitute for legal advice. Each specific case should be assessed in light of its relevant circumstances, and individual advice should be obtained.

Sincerely,

The Tax Team

Shibolet & Co.