Following the recent announcement made by Israel’s Minister of Finance, and the subsequent statement issued by the Ministry of Finance regarding a proposed immigration-incentive program for 2026, a legislative memorandum on the matter has recently been published. It appears that the legislative process is expected to be expedited and is unlikely to encounter significant opposition.
At the same time, and perhaps in the opposite direction, Amendment 272 to the Israeli Income Tax Ordinance was recently enacted. This amendment introduces a certain deterioration in the position of new immigrants and veteran returning residents who immigrate to or return to Israel as of 2026 onward, as they will now be required to report their foreign-source income- even if such income remains exempt from Israeli tax.
Naturally, the existing legal infrastructure in Israel, since the enactment of the so-called “Immigrants’ Law” in 2007 (formally Amendment 168 to the Ordinance), is what effectively grants the much-desired ten-year tax exemption to individuals who immigrate to Israel or return after having been foreign residents for at least ten consecutive years (referred to in the legislation as “veteran returning residents”). For convenience, both categories will be referred to below as “immigrants”.
What, then, is the relationship between the existing law, the recently enacted amendment, and the anticipated reform? And perhaps more importantly- can or should the direction be reconsidered at this late stage of the legislative process? These questions are addressed below.
The Established Legal Framework- The “Immigrants’ Law”
The Immigrants’ Law, enacted in 2008 with effect from the beginning of 2007, granted sweeping benefits to new immigrants and veteran returning residents. The rationale underlying this reform was straightforward: income that Israel did not tax prior to an individual’s immigration should remain outside the Israeli tax net even after immigration. From the immigrant’s perspective, moving to Israel should not worsen- and in many cases should improve- their overall tax position.
The “Immigrants’ Law”- Principal Benefits:
Ten-Year Tax Exemption
A full exemption from Israeli income tax for ten years from the date of immigration on all types of foreign-source income, including income from activities commenced or assets acquired after immigration.
Ten-Year Reporting Exemption
An exemption from filing annual tax returns and capital declarations in respect of foreign income and assets during the ten-year exemption period.
One-Year Adjustment Period
An optional “adjustment year” during which the individual is treated as a foreign resident for all tax purposes. Its primary purpose is to allow an immigrant who later regrets the move to return abroad without interrupting their foreign residency continuity.
Non-Application of the Control and Management Test
Under Israeli law, a foreign company whose control and management are exercised from Israel is generally deemed an Israeli resident company, subject to Israeli tax on worldwide income.
However, the Immigrants’ Law provides that a foreign company controlled and managed from Israel by a new immigrant or veteran returning resident (or on their behalf) will not be deemed an Israeli company solely on that basis.
The Hidden Pitfalls of the Immigrants’ Law
Is All Foreign Income Truly Exempt?
The law failed to adequately address the taxation of active income– such as employment income or income from personal services- earned while the immigrant is physically present in Israel. Many immigrants mistakenly assumed that continuing employment with a foreign employer after immigration would still qualify as foreign-source income and therefore be tax-exempt.
In practice, Israeli law sources such income based on the place where the work or services are performed. Consequently, income earned while working from Israel becomes Israeli-source income, taxable at ordinary marginal rates. Numerous immigrants, unaware of this distinction, have accumulated significant tax liabilities, including interest and indexation.
Foreign Companies and Permanent Establishment Risk
A similar issue arises in relation to foreign companies owned by immigrants who actively participate in the income-generating activities of those companies. In such cases, part (or all) of the company’s income may be attributed to Israel due to the immigrant’s activities, effectively creating a permanent establishment in Israel.
Moreover, according to the Israeli Tax Authority’s position (not explicitly anchored in legislation), dividends distributed from such income- even if formally considered foreign-source income- would be taxable in Israel.
Moreover, in some cases multinational companies have even prevented senior executives from immigrating to Israel due to permanent establishment risks, or decided to terminate their position, creating a substantial barrier to immigration.
The “Blind Spot” of the Tax Authority
From the Tax Authority’s perspective, the most problematic feature of the Immigrants’ Law was the reporting exemption. This exemption effectively deprived the Authority of the ability to verify whether an immigrant truly qualified for tax exemptions, particularly in cases involving partial activity conducted in Israel.
The Major Missed Opportunity
Critics of the Immigrants’ Law argued that it created unjustified inequality between immigrants and “ordinary” Israeli residents. The allegedly balance between the desire to encourage immigration and remove barriers on the one hand, and the desire not to discriminate between people on the other, was in the form of the same wall that separated tax-exempt foreign income from taxable Israeli income.
In practice, however, this structure incentivized immigrants to keep their capital invested abroad, rather than investing in Israeli real estate, high-tech, or capital markets- since Israeli investments would generate taxable income. Even capital generated in Israel is often transferred abroad to earn tax-exempt returns.
Amendment 272 – A New Reality
Amendment 272, applicable to immigrants and returning residents arriving as of 1 January 2026, abolishes the reporting exemption entirely. While foreign income may remain tax-exempt, immigrants will be required to report such income and assets, including through capital declarations.
This enables the Tax Authority to scrutinize activities that previously escaped review, transforming what was once a theoretical risk into a tangible one.
The amendment also tightens requirements for foreign companies owned by immigrants. Although the control and management exemption remains, such companies may now be required to submit annual tax returns and financial statements upon request, necessitating ongoing accounting records and audited financial statements.
As already stated, the same amendment that denies the exemption from reporting will apply only to immigrants (and veteran returning residents) who will arrive in Israel as of 2026, but the Tax Authority has adopted a controversial interpretation whereby immigrants who arrived in 2025 but elected an adjustment year would be deemed Israeli residents in 2026 and therefore subject to the new reporting regime- a position that is, at best, debatable.
The New Reform Proposal
A legislative memorandum published recently proposes an additional, temporary exemption for immigrants arriving only in 2026, granting tax relief on Israeli-source active income (employment or professional income).
The exemption is capped and gradually reduced over five years:
- 2026- 2027: up to NIS 1,000,000 per year
- 2028: up to NIS 600,000
- 2029: up to NIS 350,000
- 2030: up to NIS 150,000
Foreign-source income remains fully exempt for ten years without a cap.
The exemption is prorated for partial years of residency, which may undermine the incentive for those arriving late in 2026. Anyone who arrives, for example, in December 2026 will indeed enter the application of the law but will lose the exemption for that year. It would perhaps have been appropriate to establish a five-year exemption from the date of Aliyah (provided that it is in 2026), and thus preserve the incentive to make Aliyah throughout the year, since a person’s decision to immigrate to Israel cannot be implemented immediately in a matter of days, not to mention that the legislation itself, if passed and entered the statute book, will at best be in the first quarter of 2026.
Under the proposal, the exemption may apply to salary paid by a wholly owned company of the immigrant, but not where ownership is less than 100%- an unexplained distinction.
Importantly, the exemption applies only to personal income, not to corporate income, necessitating careful planning (e.g., salary withdrawals) to maximize benefits.
Rethinking the Policy
According to the proposed legislation, its purpose is “to encourage potential immigrants and veteran returning residents, who generally belong to a high socio-economic group… to choose immigration to Israel.” However, once enacted, the law would apply to all new immigrants and veteran returning residents arriving in Israel in 2026, including those who would have immigrated anyway, as well as those earning relatively modest levels of income.
According to data published by Israel’s Central Bureau of Statistics, the number of immigrants to Israel in 2024 and in the first half of 2025 shows a significant downward trend. This situation naturally stems, inter alia, from the complex security circumstances. It is possible that once the situation stabilized- we may see an increase in immigration. Moreover, while most immigrants tend to have academic professions and relatively high levels of education, these immigrants are often employed in lower-quality jobs and at significantly lower salary levels- in some cases up to one-third lower than the average salary prevailing in the general population.
As with any fiscal legislation, the legislator presumably weighs the budgetary cost of granting the exemption against the expected benefit derived from an increase in immigration. As stated in the explanatory notes, “past experience shows that immigration to Israel by a strong population generally entails a contribution to the Israeli economy, in various areas such as increased business activity, consumption, and more”.
However, while granting a tax exemption on foreign-source income to a new immigrant effectively costs the state nothing, since such income was not part of the Israeli tax base to begin with, the benefit embedded in the proposed legislation would also- and perhaps primarily- apply to employment income paid by Israeli employers. Such salary constitutes a deductible expense for those employers and thus reduces the tax revenues collected by the state.
Accordingly, if the number of immigrants does not increase as a result of the proposed legislation- or at least not in any meaningful way- the state would, in effect, forgo tax revenues through salary deductions without enjoying the very benefit the law seeks to achieve.
This may therefore be an appropriate juncture to consider a change in direction, aiming at the benefit to the target population identified as the objective of the legislation. Perhaps instead of granting a broad exemption on Israeli-source earned income, including income paid by Israeli employers, it would be preferable to allow an exemption specifically for income derived from foreign sources (foreign employers or foreign clients) that is currently treated as Israeli-source income solely due to the immigrant’s physical presence in Israel at the time the services are rendered or the work is performed, as discussed above.
Such an approach would both remove a significant barrier to the immigration of high-income individuals to Israel and ensure that the exemption does not come at the expense of existing tax revenues, as it would be targeted at foreign-source income. In such a case, it would also be possible to raise the exemption ceiling and attract even stronger populations.
At the same time, consideration should be given to extending the exemption to passive income generated in Israel, with the aim of encouraging economically strong immigrants to bring their capital into Israel for investment purposes- in contrast to the incentive structure currently in place.
Eyal Sando, CPA (LL.B.)