Quick Answer: Non-residents earning interest on Israeli sources are subject to a 25% withholding tax under Section 170(a) of the Income Tax Ordinance [New Version] 1961. Several statutory exemptions limit or eliminate this charge: interest on foreign-currency deposits held with Israeli banks is fully exempt, as is interest on bonds listed on the Tel Aviv Stock Exchange held by registered foreign investors. Israel Bonds issued by the Development Corporation for Israel also carry no Israeli withholding. Whether you owe anything hinges on the type of account, the currency, and any applicable double taxation treaty between Israel and your country of residence.

Diaspora families keep money in Israeli bank accounts between visits. Foreign investors hold bonds listed on the Tel Aviv Stock Exchange. Private lenders extend credit to Israeli family members or business partners. In each of these situations, when the interest payment arrives, the question is identical: how much does Israel take?

The answer is scattered across several provisions of the Income Tax Ordinance and a handful of administrative directives that Israeli banks rarely explain upfront. This guide maps the full picture for 2026: which types of interest income are taxed, which are exempt, how withholding works in practice, and what to do when a double taxation treaty reduces your bill further.

1. Overview: Israel's Framework for Taxing Non-Resident Interest Income

Israel taxes non-residents only on income with an Israeli source. For interest, that means interest paid by an Israeli bank, an Israeli company, an Israeli individual, or arising from Israeli government securities. Non-residents with such income fall under Sections 2(4) and 4 of the Income Tax Ordinance [New Version] 1961 (the "Ordinance").

The standard withholding rate on interest paid to a non-resident is 25% under Section 170(a) of the Ordinance. The payer, whether a bank, a company, or a private borrower, acts as the withholding agent and is legally obligated to deduct 25% from each interest payment and remit it to the Israel Tax Authority (ITA, Rashut HaMisim) by the 15th of the month following the quarter in which the payment was made.

Two factors determine whether a specific interest stream is taxable. Currency comes first: interest on foreign-currency deposits at Israeli banks is exempt, while interest on New Israeli Shekel (NIS) deposits is not. Second is the instrument: bonds listed on the Tel Aviv Stock Exchange (TASE) held in a registered foreign-investor account are exempt, but interest on private loans and unlisted debt falls outside that exemption.

In Practice: When you open an account with Bank Hapoalim, Bank Leumi, or any other Israeli bank as a non-resident, the bank's compliance team will ask you to complete Form 902, the official Declaration of Non-Residency (Hatzharat Lo-Toshav). Without this form on file, the bank defaults to the Israeli-resident withholding rate of 15% on your deposit interest. That distinction matters: the 15% resident rate is not a final tax for a non-resident and can create an unexpected filing obligation that the 25% non-resident withholding (which is final) avoids. Complete Form 902 before your first deposit.

2. Interest on Israeli Bank Deposits: Foreign Currency vs. NIS

Foreign-currency deposits: fully exempt

Section 16(a)(1) of the Ordinance exempts interest received by a non-resident on a foreign-currency deposit held with an Israeli bank. "Foreign currency" covers US dollars, euros, British pounds sterling, and any other currency recognized by the Bank of Israel that is not New Israeli Shekels. The exemption is unconditional for genuine non-residents: no cap on deposit size, no minimum holding period, and no treaty requirement. Israeli banks process it automatically once Form 902 is on file, crediting the gross interest with zero withholding.

NIS (shekel) deposits: 25% withholding

If you hold shekels in an Israeli bank account — a common arrangement for diaspora families managing property expenses or funding Israeli relatives — interest on that balance is subject to 25% withholding at source. The bank deducts the tax automatically. No Israeli tax return is needed because the withholding is treated as a final tax. If your home country's double taxation treaty with Israel provides a lower rate, you can file for a refund of the excess withholding, as described in Section 6 below.

In Practice: Israel's three largest banks (Hapoalim, Leumi, and Mizrahi Tefahot) each maintain a dedicated non-resident service desk. Opening a non-resident account (cheshbon lo-toshav) requires your valid passport, proof of foreign residential address (a utility bill or bank statement from your home country), and confirmation of your country of tax residence. Processing typically takes 3 to 7 business days. If you previously lived in Israel and severed Israeli tax residency, the bank may request a letter from the ITA's Non-Resident Unit confirming your current status before applying the exemption. Prepare this documentation before your first visit to the branch.

3. Interest on TASE-Listed Government and Corporate Bonds

Government bonds

Israel issues shekel-linked bonds known as Shahar (CPI-linked), Makam (unlinked treasury bills), and foreign-currency-linked bonds. Interest paid to a non-resident on these instruments when they are listed and traded on the TASE is exempt from Israeli income tax, provided the non-resident does not operate a permanent establishment in Israel through which the investment is held.

Corporate bonds: what changed in 2009

Since 1 January 2009, interest received by a "foreign investor" on corporate bonds listed on the TASE is also exempt. Two conditions must be satisfied:

  • The investor must be a foreign resident (not an Israeli tax resident)
  • The investor must not have a permanent establishment in Israel through which the investment is made

The exemption is claimed through the TASE's foreign-investor registration process. Once your brokerage account is registered as a foreign-investor account, your Israeli broker or custodian (among Israeli firms, Clal Finance, Excellence, IDB, and Psagot all offer this service) will pay interest on qualifying bonds without withholding.

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In Practice: At the end of each calendar year, your Israeli broker sends you an Annual Tax Statement on Form 867 (Teudat Mas Shnatit). This document categorizes the year's income into taxable and exempt items. Interest exempt under the TASE foreign-investor rules appears under the code for "foreign-investor exemption." Keep Form 867 even though no Israeli tax was withheld: your home-country tax return will likely require you to report this income regardless of Israeli treatment. US citizens must report it on Form 1040, Schedule B. The Israeli exemption is a withholding exemption, not a global income exclusion.

4. Israel Bonds: The Diaspora Investment

"Israel Bonds" sold through the Development Corporation for Israel (DCI) are a distinct category from TASE-listed bonds. They are not traded on any stock exchange. They are US-dollar-denominated redeemable securities issued by the State of Israel and sold primarily in North America, Europe, Latin America, and other diaspora communities worldwide.

Israeli tax treatment

Because Israel Bonds are dollar-denominated and interest is paid to holders living outside Israel, the applicable provision is the same Section 16(a)(1) foreign-currency exemption that covers bank deposits. The Development Corporation for Israel confirms in its standard disclosures that no Israeli withholding tax applies to interest paid on Israel Bonds to non-Israeli residents.

US tax treatment

For US citizens and residents, Israel Bond interest is fully taxable as ordinary income under US federal law. The DCI issues Form 1099-INT annually. No special exclusion applies; the bonds are treated identically to any interest-bearing investment for US tax purposes.

In Practice: Israel Bonds available through the DCI in 2026 include the eMazel Tov Bond (2-year term, minimum approximately USD 10, popular for gifts and celebrations), the Independence Bond (3-year term, minimum USD 100), the Jubilee Issue Bond (5-year term, minimum USD 500, one of the most widely purchased retail products), and a Floating Rate Bond pegged to the 6-month US Treasury bill rate plus a spread. Purchases are made online through the DCI platform or through local Jewish federation campaigns. Bonds are not transferable and cannot be pledged as collateral. Redemptions require 30 days' advance notice submitted to the DCI directly. Interest rates are updated periodically; verify current rates at the DCI website before purchasing.

5. Interest on Private Loans to Israeli Borrowers

If you have lent money privately to an Israeli individual or company — a promissory note, a family loan, or a commercial loan agreement — the interest you receive is Israeli-source income and falls outside both the bank-deposit and TASE exemptions. It is subject to 25% withholding under Section 170(a) of the Ordinance.

Who must withhold

The Israeli borrower is the withholding agent. Under the Income Tax Regulations (Withholding from Interest, Dividends, and Certain Other Payments) 1990, the borrower must deduct 25% from each interest payment and pay it to the ITA by the 15th of the month following the payment month.

Failure to withhold

If the borrower neglects to withhold, the ITA can assess them for the unwithheld amount plus interest under Section 190A of the Ordinance, calculated at an annual rate linked to the Israeli CPI. The non-resident lender may simultaneously receive a demand to file an Israeli annual return (Form 1301) and pay the tax directly.

Below-market and interest-free loans

The deemed-interest rules under the Ordinance apply to loans between related parties where the rate is below the "prescribed rate" set annually by the ITA. For 2025, the ITA set the prescribed rate at 3.47% per annum; the 2026 figure is published by the ITA each February. The difference between the prescribed rate and the rate actually charged is treated as deemed interest income in Israel, taxable to the lender.

In Practice: A diaspora parent lending money to an Israeli child to help finance a property purchase should structure the arrangement with three elements in place: (1) a written loan agreement (heskem halvaa) signed before an Israeli attorney or notary, setting an interest rate at or above the ITA's current prescribed rate; (2) actual interest payments made on a documented schedule rather than accumulated and paid only at redemption; and (3) the Israeli borrower's bank tracking withholding obligations from the outset. An undocumented "soft loan" with no interest payments and no withholding remitted creates tax exposure for both parties if the ITA or an Execution Office reviews the transaction years later in connection with a property dispute or estate proceeding.

6. Claiming Double Tax Treaty Relief on Israeli Interest Income

Israel has double taxation treaties with more than 60 countries, including the United States, the United Kingdom, Germany, France, Canada, Australia, and the Netherlands. Almost every treaty includes an "Interest Article" that caps the Israeli withholding rate below the 25% domestic rate.

Typical treaty rates

Most of Israel's treaties cap the withholding rate somewhere between 10% and 17.5%: the US-Israel Treaty (Article 11) sets a 17.5% ceiling, the UK, Germany, and Canada treaties come in at 15%, and the Netherlands treaty allows as low as 10% in most cases. Treaty rates do not apply automatically — you must actively claim them.

How to activate the reduced rate

  1. Obtain a Certificate of Residency from your home-country tax authority. For US residents, this is IRS Form 6166.
  2. Submit ITA Form 2513 (Application for Reduced Withholding Rate) to the Israel Tax Authority's International Taxation Division, 125 Menachem Begin Boulevard, Tel Aviv. This can be filed online through the Shaam Online portal or by postal mail.
  3. The ITA reviews the application and issues a Tax Withholding Certificate (Teudat Nikui Mas) specifying the reduced rate.
  4. Present the certificate to your Israeli bank or borrower. From that point forward, they apply the treaty rate to future payments.

Processing time: 30 to 60 days in most cases. Apply before the first interest payment date of each calendar year to avoid withholding at the full 25% rate while the application is pending.

Claiming a refund for excess withholding

If 25% was already withheld and the applicable treaty rate is lower, the excess is recoverable by filing an Israeli annual income tax return (Form 1301) for the relevant year. Israeli tax year returns must be filed by 30 April of the following year (or 31 May if filed electronically). The ITA processes refunds within approximately 3 to 6 months of a complete filing, though complex cases or those requiring manual review take longer.

In Practice: The ITA's International Taxation Division handles all non-resident applications including Form 2513 filings. A Form 2513 submitted to a standard regional tax office will be forwarded, but this adds several weeks of delay. For complex situations, such as multiple income sources, disputed residency status, or an ITA audit inquiry, the Division can be reached through the Shaam Online portal (currently available only in Hebrew) or through a licensed Israeli tax attorney or CPA who holds a valid power of attorney (yipuy koa) to represent you before the ITA. The ITA charges no fee for processing Form 2513, but incomplete applications are returned and the clock restarts.

7. Filing Requirements and Common Mistakes

When non-residents are not required to file

As a general rule, a non-resident whose only Israeli-source income is interest subject to final withholding at source has no obligation to file an Israeli annual income tax return. Withholding at 25% or at the applicable treaty rate is a final tax on that income.

When a return is required or advisable

  • You want to claim a refund because the applicable treaty rate is below the 25% withheld
  • You have additional Israeli income sources (rental income, capital gains, a salary) alongside the interest
  • You changed your residency status during the year
  • The ITA has issued a demand to file (haazanat gvia)

The statute of limitations

Under Section 145 of the Ordinance, the ITA has four years from the end of the relevant tax year to issue a tax assessment on a return that was filed. For income that went entirely unreported and no return was filed, this period extends to six years from the end of that tax year. The ITA has used this extended period in international income cases when CRS (Common Reporting Standard) data from foreign tax authorities surfaced previously undisclosed Israeli income.

Common mistakes non-residents make

The most common slip is skipping Form 902 when opening an Israeli bank account. Without it, the bank defaults to the 15% Israeli-resident withholding rate, which does not work as a final tax for a non-resident and generates an unexpected filing obligation that the 25% non-resident rate avoids.

A different mistake, just as frequent: assuming that because Israel exempted the income, a home-country tax obligation also disappears. The Section 16(a)(1) exemption is Israeli domestic law only. The US, UK, Germany, and most other countries tax their residents on worldwide income regardless of where it was earned or how local law treats it.

Private loan arrangements are especially prone to gaps. Both the foreign lender and the Israeli borrower are legally responsible for the withholding mechanism, but many family arrangements proceed on a handshake. When the ITA or an estate proceeding later surfaces the interest — sometimes years on — penalties accumulate on both sides from the original payment date.

Finally, non-residency is not permanent by default. Spending 183 or more days in Israel during any calendar year triggers tax residency under Section 1 of the Ordinance. At that point the non-resident exemptions disappear and all worldwide income enters the Israeli tax system, often catching people off guard mid-year.