ISRAEL: An Introduction to Tax

The Israeli Tax Regime for New Immigrants: Incentives and Challenges

Introduction

As part of its efforts to encourage the immigration of skilled and valuable investors to Israel, Israeli tax law grants a unique tax regime for new immigrants. This regime includes extensive exemptions and tax reliefs on foreign-sourced income and assets, designed to ease the financial and administrative challenges of immigration.

However, recent global shifts aimed at reducing tax benefits for immigrants, influenced by organisations that emphasise balanced tax policies and transparency, such as the OECD, have begun to shape Israeli policy in this area.

This article reviews the Israeli tax framework for new immigrants, its aims and the policy challenges it faces, while using trusts as a case study.

The Israeli tax regime for new immigrants

New immigrants are entitled to a ten-year tax exemption on foreign-sourced income and gains, including salaries, dividends, interest, royalties, capital gains and rental income. Furthermore, individuals who immigrate before 1 January 2026, are additionally entitled to a ten-year exemption from reporting such foreign-sourced income and gains.

The exemption does not apply to Israeli-sourced income or capital gains. In addition, the exemption does not apply to assets received by new immigrants as a tax-free gift from an Israeli resident.

These tax benefits also apply to “long absent returning residents”, defined as individuals who have resided outside Israel for at least ten years. In contrast, “short absent returning residents”, who have resided outside Israel for less than ten years, but longer than six years, are only eligible for a limited set of tax benefits.

The aims of the Israeli tax regime for new immigrants

The tax benefits aim to fulfil several key purposes:

• First, the tax benefits encourage immigration by neutralising the tax consideration in the decision to move to Israel, which allows potential immigrants belonging to the Jewish diaspora to focus on their connection to the State of Israel.
• Second, the tax benefits provide economic relief to immigrants, who are often navigating existing changes in the business and economic environment.
• Third, these tax benefits maintain Israel’s attractiveness compared to many other countries that offer economic incentives to attract affluent populations.

Trusts: a case study

Trusts are a useful tool in wealth planning for individuals. Generally, the taxation of a trust is based on its classification for Israeli tax purposes, which follows the tax residency of the settlors and beneficiaries. The residency of the trustee is irrelevant for this purpose.

In general, an Israeli resident trust is subject to tax in Israel on its entire worldwide income and capital gains. An Israeli resident trust is a trust that meets one of the following conditions:

• in its year of establishment, the trust had at least one Israeli resident settlor and at least one Israeli resident beneficiary, and in the current tax year, at least one Israeli resident settlor or beneficiary;
• all its settlors have died, and it has at least one Israeli beneficiary; and
• the trust does not qualify as any another type of trust.

However, if all the trust’s settlors and beneficiaries are entitled to new immigrant tax benefits, then the trust should also be entitled to these benefits. Accordingly, the trust will be tax exempt on foreign-sourced income and gains during the settlor’s exemption period, provided all the beneficiaries remain entitled within their exemption period or are foreign residents. Additionally, such a trust will be exempt from reporting obligations on foreign-sourced income and assets outside of Israel, provided the settlor arrived in Israel before 1 January 2026, and the trust does not hold any Israeli assets.

As can be seen from the above, the tax regime applicable to trusts reflects the global shift towards limiting new immigrants tax benefits. For example, it strictly requires that both the settlor and the beneficiaries be new immigrants. If even one beneficiary is an Israeli resident, the exemption for the entire trust is revoked.

Accordingly, as the shift toward limiting new immigrant tax benefits continues, the tax regime that applies to trusts is also subject to review, and each case should be considered individually.

Limiting benefits: the global trend and its impact on Israel

In recent years, we have seen a global shift to reduce tax benefits for new immigrants. For example:

• the UK government has announced plans to abolish the non-domiciled resident regime, which allows non-domiciled residents to benefit from tax advantages on income generated outside of the UK; and
• the non-habitual resident (NHR) tax regime in Portugal, which provided a ten-year tax exemption on foreign income and a reduced tax rate on local employment income, was abolished on 1 January 2024.

This global trend is influencing Israeli tax policy as well. Currently, new immigrants are not only exempt from taxes on foreign-sourced income, but also from reporting it. However, in response to OECD pressure, from 1 January 2026, this reporting exemption will be eliminated, for new immigrants who arrive in Israel after this date. These individuals will be required to report their foreign income and assets while maintaining the tax exemption on them.

There are no substantial changes to the core tax benefits under the Israeli tax regime for new immigrants. The only adjustment is the enhancement of transparency regarding income and assets sourced outside Israel, which will continue to be exempt from Israeli taxation. Currently, there is no indication of any intention to amend the Israeli tax regime further.

Conclusion

The Israeli tax regime for new immigrants is a significant tool for strengthening the Israeli economy by encouraging the immigration and integration of skilled individuals into the country. However, in response to recent global shifts toward reducing tax benefits, Israel is required to balance the incentives it offers with the need to adapt to global changes, such as those in the United Kingdom and Portugal discussed above.

Considering these evolving challenges and global shifts, it is crucial for policymakers and new immigrants alike to stay informed and adapt to the changing landscape of Israeli tax law. As we look ahead to 2025, continued assessment of and potential adjustments to the Israeli tax regime for new immigrants will be essential to ensure it remains competitive and supportive of those choosing to become Israeli residents.