Short answer: If you are a foreign resident for Israeli tax purposes, interest on a foreign-currency deposit at an Israeli bank is exempt, provided you sign the bank's foreign-residency declaration (Form 2402) on time and meet a few other conditions. Interest on a shekel deposit is not covered by that exemption: the bank withholds 15% on unlinked deposits and 25% on linked ones. Interest on most TASE-listed bonds is exempt for foreign residents, while interest on a private loan to an Israeli borrower is taxable, subject to any treaty cap.

This guide is for people who live abroad and earn interest from Israel: diaspora families who keep an account for visits, former residents who left money behind, investors in Israeli bonds, and relatives who lent money to someone in Israel. It covers what is taxed, what is exempt, how to claim the exemption at your bank, and how to get money back if too much was withheld.

1. How Israel Taxes Non-Resident Interest

A foreign resident is taxed in Israel only on income from Israeli sources. Interest paid by an Israeli bank, an Israeli company, an Israeli individual or the Israeli government is Israeli-source income. Whether it is actually taxed depends on two things: the type of instrument and whether a specific exemption applies.

"Foreign resident" here means someone who is not an Israeli tax resident. Israel decides residency mainly by where your center of life is. Day counts create a presumption: 183 days or more in Israel in a tax year, or 30 days or more in the year and 425 days or more over that year and the two before it, presume Israeli residency, though the presumption can be rebutted. Having an Israeli passport or ID card does not make you a resident by itself. See our guide to Israeli tax residency rules for the full test.

The main rules for foreign residents, in brief:

  • Foreign-currency bank deposits: exempt, subject to conditions (Section 2 and 3 below).
  • Shekel bank deposits: taxed like an Israeli resident's deposit, with tax withheld by the bank.
  • Bonds of Israeli companies traded on the TASE and longer-term government bonds: generally exempt (Section 4).
  • Private loans and other interest: taxable, with the payer required to withhold under Section 170 of the Income Tax Ordinance (Section 5).
  • Treaties: can cap the Israeli rate on taxable interest (Section 6).

2. Interest on Israeli Bank Deposits

Foreign-currency deposits: exempt if you meet the conditions

Under an order issued under Section 16 of the Income Tax Ordinance (the Income Tax Order on exemption from tax on a foreign resident's deposit, 2002), a foreign resident is exempt from tax on interest paid on a deposit in foreign currency held with an Israeli banking corporation. The exemption has applied to interest paid since January 1, 2003. The conditions are cumulative:

  • The deposit is in foreign currency (US dollars, euros, pounds and so on), held with a bank or with the Accountant General.
  • You declared your foreign residency on Form 2402 by the start of the tax year, or within 14 days of first opening the deposit, whichever is later.
  • The deposit is not recorded, and is not required to be recorded, in the books of a permanent establishment you have in Israel, and the interest is not business or professional income.
  • You have no partners in the deposit who are Israeli residents.
  • The deposit was not used to fund, or as security for, a loan the bank gave to your relative or to a company you control, if they are Israeli residents.

The last condition targets "back-to-back" arrangements, where a foreign relative's deposit secures an Israeli family member's loan. If it applies, the interest is taxable.

Shekel deposits: withholding at ordinary rates

The deposit exemption covers foreign-currency deposits only. Interest on a shekel deposit is taxed, and the bank withholds at the rates that apply to individuals: 15% on a deposit that is not fully linked (most ordinary shekel deposits) and 25% on a deposit linked to the CPI or to a foreign currency. Transition rules apply to some deposits opened before January 1, 2012.

One related point: an exchange-rate gain on a foreign-currency deposit is a separate question from interest. If that matters to you, raise it with an adviser rather than assuming the interest exemption covers it.

The 2026 surtax

Israel's surtax under Section 121B of the Ordinance is 3% on an individual's taxable income above NIS 721,560 a year, plus an additional 2% on capital income (including interest) above the same threshold, introduced for 2025 onward. The rules contain no general carve-out for foreign residents, but they reach only income that is taxable in Israel. Exempt interest does not count, and for most people with an ordinary deposit the threshold is far out of reach.

In Practice: Each year your bank issues an annual certificate on Form 867 showing the interest paid and any tax withheld. Keep it even if nothing was withheld. It is the document you will need if you claim an Israeli refund, and it helps when you report the interest at home. Israel exchanges account information under the OECD Common Reporting Standard (and with the US under FATCA), so assume your home tax authority will learn about the account.

3. How to Claim the Non-Resident Exemption at Your Bank

  1. Tell the bank you are a foreign resident. Ask for the foreign-residency declaration for Income Tax Ordinance purposes. Banks label it Form 2402 or 2402א.
  2. Sign it on time. For the deposit exemption, the declaration must be in place by the start of the tax year, or within 14 days of opening the deposit, whichever is later. Banks ask you to sign again every three years.
  3. Bring supporting documents. Expect to show your passport and proof of your address abroad. Banks may ask Israeli citizens who live abroad for more evidence of non-residency, and some ask for an additional declaration.
  4. Hold the money in foreign currency if you want the exemption. A shekel deposit stays taxable even with a signed declaration.
  5. Check the first interest credit. If tax was withheld from a qualifying foreign-currency deposit, ask the bank to check whether your declaration is on file and current.
  6. Update the bank if you move back. Once you become an Israeli resident, the exemption stops, and you should not keep claiming it.

If the declaration lapses or a condition fails, the bank withholds tax as it would for an Israeli resident. Tax already remitted can usually be recovered only through an Israeli tax return (Section 7).

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4. Bonds: TASE, Government Bonds and Israel Bonds

Bonds of Israeli companies traded on the TASE

Section 9(15)(d) of the Ordinance exempts a foreign resident from tax on interest on bonds issued by an Israeli-resident company and traded on the Tel Aviv Stock Exchange. The exemption does not apply where the interest is attributable to a permanent establishment in Israel, and it excludes holders with certain close ties to the issuer, such as substantial shareholders. Banks apply it through the same Form 2402 declaration.

Israeli government bonds and Makam

According to Bank Leumi's published guidance for foreign-resident individuals, interest is exempt from withholding on TASE-listed government bonds and Makam (short-term treasury bills) with a term of more than 13 months from issue, and on Israeli government bonds issued abroad. Withholding still applies to Makam and government bonds with a term of 13 months or less, and to certain CPI-linked government bonds traded on the TASE that were issued before May 8, 2000.

Israel Bonds sold abroad

"Israel Bonds" sold through the Development Corporation for Israel are State of Israel bonds issued abroad, so they fall within the category that banks treat as exempt for foreign residents. The redemption forms ask foreign holders to confirm their foreign residency, and they warn that Israeli withholding may apply where the law requires it. If you hold these bonds, keep that residency confirmation current. Israeli exemption does not affect your home-country tax: a US holder, for example, still reports the interest on a US return.

5. Interest on Private Loans to Israeli Borrowers

Interest a foreign resident receives on a private loan to an Israeli individual or company is Israeli-source income, and none of the deposit or bond exemptions apply. Under Section 170 of the Ordinance, the Israeli payer must withhold tax from the interest and pay it to the Israel Tax Authority (ITA). For an individual lender, withholding is typically at 25% unless the tax office approves a lower rate.

If a treaty or exemption applies, the payer can ask the assessing officer to reduce withholding by filing Form 2513, the ITA's declaration of a payment to a foreign resident and request to reduce withholding, with documents on the nature of the payment. The service is free. Doing this before the first interest payment is much simpler than unwinding over-withholding later.

Hypothetical example: A parent living in Canada lends money to a daughter in Israel for an apartment and receives annual interest. The daughter is the payer, so the withholding duty sits with her. If she pays the full interest without withholding, she is exposed for the tax that should have been withheld, and her parent's Israeli liability remains open. A written loan agreement, an agreed schedule and a withholding approval from the tax office up front avoid that. Whether the loan should carry interest at all, and at what rate, is worth settling with an adviser before the money moves.

6. Treaty Relief on Israeli Interest

Israel has income tax treaties with dozens of countries, and most cap the tax Israel may charge on interest paid to a resident of the other country. A treaty helps only where Israel actually taxes the interest, for example on a shekel deposit or a private loan. Two common examples:

  • United Kingdom: 5% on interest on bank loans and 10% on other interest, with a full exemption for some categories, including interest paid by the Israeli government and, under conditions, interest on TASE corporate bonds (HMRC treaty summary).
  • United States: 17.5% in general under Article 13 of the US-Israel treaty, with 10% on interest on loans from banks and similar financial institutions.

Treaty rates are not applied automatically. You will usually need a certificate of residency from your home tax authority (for US residents, IRS Form 6166). The payer or bank then needs to apply the reduced rate, often on the strength of an approval from the ITA. If tax was already withheld at the domestic rate, the difference is recoverable only through an Israeli return. For the treaty network more broadly, see our guide to Israel's double taxation treaties.

7. If Tax Was Withheld: Refunds and Filing

Tax gets over-withheld for predictable reasons: the Form 2402 was never signed or has lapsed, a treaty rate was not applied, or money sat in a shekel account when a foreign-currency deposit would have been exempt. The bank cannot refund tax it has already passed to the ITA.

  1. Fix the cause first, by signing a current Form 2402 or getting treaty approval, so the problem does not repeat.
  2. Collect the bank's annual Form 867 for each year affected.
  3. File an Israeli annual return (Form 1301) for each year, showing your foreign residency and claiming the exemption or treaty rate. Include proof of residency abroad.
  4. Mind the time limit. Individuals who are not required to file can generally ask for a refund for up to six prior tax years.

Many non-residents whose only Israeli income is bank interest with tax withheld at source never file. Filing becomes necessary if you want a refund, have other Israeli income, changed residency during the year, or receive a demand from the ITA. Our guide to Israeli tax refunds covers the refund process generally.

8. New Immigrants and Returning Residents

The non-resident rules stop applying when you become an Israeli resident. From that point, your Israeli interest is taxed as a resident's would be, and you should update your bank.

New immigrants (olim) and veteran returning residents get a 10-year exemption on foreign-source income. Interest from an Israeli bank or Israeli bonds is Israeli-source income, so that exemption does not cover it as such. Withholding rules contain a separate provision for deposits of new immigrants, and banks use the same Form 2402 declaration for it, so ask your bank how it applies to your account. Our guide to the oleh tax exemption explains the 10-year exemption itself.

For people who become new immigrants or veteran returning residents from January 1, 2026, Amendment 272 to the Ordinance removed the old exemption from reporting foreign income and assets. The 10-year tax exemption itself remains. If you are planning a move, see our guide to new immigrant tax reporting from 2026 and to returning resident status.

Three common mistakes: (1) Leaving money in shekels and assuming the foreign-resident exemption covers it. It covers only foreign-currency deposits. (2) Letting the three-year Form 2402 declaration lapse, after which the bank starts withholding. (3) Assuming an Israeli exemption also means no tax at home. The US, UK and most other countries tax their residents on worldwide income, and Israeli-exempt interest is still reportable there.