What happened?
As part of the recently enacted budget legislation, the Knesset passed the “Law for the Encouragement of Aliyah to Israel and Return to Israel (Temporary Order), 5786–2026”. Under this temporary order, and for the first time, the State grants an Israeli tax exemption on certain income generated and accrued in Israel—not only on foreign-source income, as was the practice until now. The exemption applies to “Personal Exertion” income, such as employment income or business income, that is generated or produced in Israel.
Who is this relevant for?
This update is relevant to individuals who intend to immigrate to Israel or return to Israel after an extended stay abroad, by the end of the 2026 tax year (December 31, 2026), or who became Israeli residents as of November 5, 2025 (the “Relevant Period”).
Eligible individuals fall into two main groups:
- New Immigrants (first-time Israeli residents) – individuals who are considered Israeli residents for the first time and hold an oleh visa, oleh certificate, or are eligible for an absorption basket. Importantly, eligibility for the exemption is conditional upon completing formal immigration (Aliyah). Without an oleh certificate or visa, it will not be possible to benefit from the exemption on Israel-source income, even if the individual is regarded as an Israeli tax resident during the Relevant Period.
- Veteran Returning residents – as defined by law, individuals who were foreign residents for at least 10 consecutive years and became Israeli residents again.
What benefit is granted under the temporary order?
Eligible individuals will enjoy an Israeli tax exemption on taxable earned income generated in Israel, up to annual income caps as follows:
- Tax year 2026: exemption on income up to NIS 600,000 (calculated pro rata based on the date of arrival in Israel during the year. For example, if a person becomes an Israeli resident on July 1, 2026, the cap will be NIS 300,000).
- Tax years 2027–2028: exemption on income up to NIS 1,000,000 in each year.
- Tax year 2029: exemption on income up to NIS 350,000.
- Tax year 2030: exemption on income up to NIS 150,000.
The benefit is conditional on continued residence in Israel. It will not apply to an individual who ceases to be an Israeli resident during 2028 or 2029, or who spent fewer than 75 days in Israel in either of those years.
The temporary order excludes income arising from employment by a relative. In such cases, the exempt income cap is significantly lower—NIS 140,000 per year. For this purpose, “Relative” is defined broadly (including spouse, siblings, parent, grandparent, descendant, spouse’s descendants, and the spouse of any of the foregoing; as well as the descendant of a sibling; and a parent’s sibling).
It is emphasized that the exemption does not apply to passive Israel-source income (such as interest, dividends, rental income, or capital gains).
The temporary order also clarifies that the new benefit does not derogate from existing exemptions and benefits under current law, which continue to apply to those eligible.
Relief for foreign companies: PE exemption following relocation of employees / shareholders to Israel
The temporary order includes relief for foreign companies whose employees or shareholders relocate to Israel during 2026, intended to prevent the employee’s activity in Israel from being treated as creating a “Permanent Establishment” (PE) and thereby exposing the foreign company to Israeli taxation and reporting requirements.
The PE exemption will be available if both of the following conditions are met:
- The company has no Israeli business income that is unrelated to the work of that individual (it has no other employees in Israel who are not covered by the Temporary Order); and
- The employee is not a “Substantial Shareholder” in the company (i.e., does not hold 10% or more of any means of control, rights to profits, or rights to appoint a director).
U.S. immigrants: important note
For U.S. citizens planning to move to Israel during 2026 and benefit from the tax relief, it is important to note that U.S. reporting and payment obligations generally remain in effect regardless of residence and relocation. However, U.S. law may provide certain relief with respect to income earned outside Israel (up to a cap of USD 132,900 in 2026). We recommend consulting a U.S. tax advisor to assess eligibility for such relief.
How we can assist
Assessing the application of the new temporary order raises complex questions that may lead to disputes with the Israel Tax Authority—for example, determining the precise date on which an individual became an Israeli resident, the date of termination of residency, and related issues. We therefore strongly recommend consulting with us. Our firm will be pleased to assist with any questions on the matter.
This publication is provided as a general service to the firm’s clients and friends and does not constitute a substitute for specific legal advice. We do not recommend acting on the basis of the information above without obtaining advice from qualified professionals, based on the specific facts and circumstances of each case.
For any questions, please contact:
- Boaz Finberg – boaz.f@arnontl.com
- Ophir Levi – ofirl@arnontl.com
The above content is a summary provided for informational purposes only and does not constitute legal advice. It should not be relied upon without obtaining further professional legal counsel.
