IsraelLawAmong the many unfamiliar elements of an Israeli employment package, the keren hishtalmut is probably the one that confuses foreign professionals most. Nothing quite like it exists in the US, UK, Germany, or most of the countries that send professionals to Israel. It is not a pension, not a bonus, and not a benefit in kind in the usual sense. It is a time-locked, tax-advantaged savings account that matures after six years and can then be spent on anything — the name (hishtalmut means professional training or completion) is historical rather than descriptive; almost nobody uses it exclusively for study courses.
If you are an expat, an oleh, a B/1 work visa holder, or a foreign national running your own Israeli company, knowing exactly how the keren hishtalmut works, what your entitlements are, and what happens if you leave Israel before the six-year window closes can significantly affect how you structure your compensation and your tax position when you eventually depart.
1. What Is a Keren Hishtalmut?
A keren hishtalmut is a dedicated savings fund established in the name of an individual employee and managed by a licensed pension and savings house (beit hashkaa) regulated by the Capital Market, Insurance, and Savings Authority (Rashut Shuk HaHon, Bituach veChisachon). The most widely used fund managers include Clal Insurance, Meitav, Altshuler Shaham, Harel, Phoenix, and Migdal.
Once the fund is opened, contributions flow in monthly from both the employer and the employee, are invested according to a track selected by the employee (typically a diversified mixed or equity-heavy track), and accumulate together with investment returns. The fund is ring-fenced: neither the employer nor a creditor can reach it, and the employee cannot ordinarily withdraw it before the maturity date without triggering the early-withdrawal tax consequences.
Unlike pension savings, a keren hishtalmut is not intended for retirement. Its design — a six-year horizon with full liquidity thereafter — makes it a medium-term savings tool that employees use for property purchases, home renovations, education, travel, or simply as a savings reserve.
The fund management companies operate under licenses issued by the Capital Market, Insurance, and Savings Authority under the Pension Funds Law 5768-2008. Employees can change fund managers once a year without penalty by signing a transfer form (hatavat keren hishtalmut). If you joined an employer whose default fund charges high management fees (above 0.5% per year on assets), it is worth checking the annual fee before the fund runs for years at suboptimal cost. The Authority publishes comparative fee and return data at portal.mof.gov.il. If the fee difference between your employer's default fund and the market's best is even 0.3% annually on a NIS 300,000 balance, that is NIS 900/year — over ten years, compounded, a meaningful figure.
2. Who Is Entitled to a Keren Hishtalmut in Israel?
There is no primary statute that makes a keren hishtalmut mandatory for all employees. Entitlement arises in one of three ways:
- Extension order (tzav harchava) — the Minister of Labor can extend a sectoral collective agreement to cover all employers and employees in an industry, whether or not they are union members. Extension orders covering keren hishtalmut have been issued for: academic staff, clerical and administrative workers, building trade workers, engineers and technicians, hotel workers, journalists, and many other categories. In sectors covered by an extension order, the keren hishtalmut is legally mandatory from the date of employment covered by that order.
- Collective agreement (heskem kibbutzi) — unions representing specific industries negotiate keren hishtalmut contributions as part of the employment package. Where a collective agreement applies, it binds even employees who are not union members at that workplace.
- Individual employment contract — in sectors not covered by an extension order or collective agreement, employers routinely include keren hishtalmut contributions as a contractual term. This is effectively universal in the hi-tech sector, financial services, and the legal and professional services sector. An offer letter that omits keren hishtalmut in a professional Israeli role should prompt a question.
Foreign nationals on B/1 work visas, expert permits, or other Israeli work authorizations are entitled to keren hishtalmut benefits on exactly the same basis as Israeli employees. Nationality and residency status do not affect the labor law entitlement. The fund's tax treatment may differ for those who are not Israeli tax residents, but the entitlement to the fund itself does not.
Some smaller Israeli employers — particularly in retail, food service, and domestic care — either do not know about their keren hishtalmut obligation under the applicable extension order, or omit it deliberately. An employee whose employer fails to make the required contributions can file a claim at the Regional Labor Court. The limitation period under the Employment Claims Law 5716-1956 is 7 years, so an employee who worked for six years without a keren hishtalmut contribution can recover the entire employer contribution plus linkage and interest in a single claim — often a six-figure sum. The Labour Inspectorate (Agaf Pikuach Avoda) of the Ministry of Labor at any regional office can also be approached to file an administrative complaint; the Ministry's helpline is 1-222 (inside Israel).
3. Contribution Rates: How Much Goes In Each Month?
The standard contribution rates set by most extension orders are:
| Contributor | Standard Rate | Hi-Tech / Senior Roles |
|---|---|---|
| Employer | 7.5% of monthly salary | 8.33% or 10% (contractual) |
| Employee | 2.5% of monthly salary | 2.5% (fixed by most orders) |
| Combined total | 10% per month | 10.83%–12.5% |
These percentages are applied to the employee's gross monthly salary. Most extension orders define the contribution base as the basic wage, excluding irregular bonuses and expense reimbursements — but including regular fixed additions such as housing supplements and seniority payments. Your employment contract should specify the contribution base; if it does not, the applicable extension order's definition governs.
Example: An expat software engineer earning NIS 30,000 per month gross under a standard 7.5% / 2.5% structure accumulates:
- Employer contribution: NIS 30,000 × 7.5% = NIS 2,250/month
- Employee contribution: NIS 30,000 × 2.5% = NIS 750/month
- Total monthly accumulation: NIS 3,000
- Annual accumulation: NIS 36,000, before investment returns
Over six years at a moderate investment return of 5% per year, that NIS 36,000/year contribution would grow to approximately NIS 245,000 — all withdrawable tax-free after the maturity date.
Salary negotiations in Israel's hi-tech sector routinely include the keren hishtalmut rate as a distinct line item. A candidate negotiating for a raise from NIS 30,000 to NIS 33,000 should note that the employer's keren hishtalmut obligation rises with salary — from NIS 2,250/month to NIS 2,475/month. Some employers present a "total cost of employment" (osher la-ma'asik) figure that bundles base salary, pension, keren hishtalmut, and National Insurance contributions together. Always ask for the breakdown: a NIS 40,000 total employment cost may translate to a NIS 31,000 net salary if pension and keren hishtalmut contributions are high — or NIS 34,500 if the employer is skimping on mandatory benefits and offering most of it as cash. The breakdown matters for your long-term financial planning.
4. The Tax Advantage: Why Keren Hishtalmut Beats a Savings Account
The tax treatment of the keren hishtalmut is what makes it genuinely valuable. It operates on two levels:
During the contribution phase: employer contributions are not taxable income
Under Section 3(e) of the Income Tax Ordinance, the employer's monthly contribution to a keren hishtalmut is not treated as taxable employment income for the employee, provided it does not exceed 7.5% of the employee's monthly salary and the salary does not exceed the statutory ceiling. For 2026, the monthly salary ceiling for this exemption is approximately NIS 15,712 (updated annually by the Tax Authority to reflect average wage changes). On salary up to that ceiling, the employer's 7.5% contribution — up to approximately NIS 1,178/month — flows into the fund free of income tax. On salary above the ceiling, contributions on the excess are taxable as income in the month they are paid.
The employee's own 2.5% contribution comes from after-tax salary — there is no deduction at contribution time. This is the asymmetry that makes the employer contribution so valuable: the employee contributes NIS 750 from their own after-tax pocket, and receives NIS 2,250 from the employer entirely free of income tax.
At withdrawal after 6 years: zero tax on the entire balance
This is the defining feature. Under Section 9(16a) of the Income Tax Ordinance, a withdrawal from a keren hishtalmut after 72 months from the fund's opening date is entirely exempt from income tax and from capital gains tax on the investment returns generated inside the fund. The employee receives the full accumulated balance — the original employer contributions, the employee contributions, and all dividends, interest, and capital gains earned over the six years — without any withholding.
To put this in perspective: if the same NIS 3,000/month had been invested in a standard brokerage account rather than a keren hishtalmut, the annual capital gains would be subject to 25% capital gains tax each year (or at realization). Over six years, that 25% drag significantly reduces the final balance. The keren hishtalmut eliminates this drag entirely for contributions that fall within the ceiling.
New olim (immigrants under the Law of Return) and foreign employees enjoy the keren hishtalmut tax benefit on exactly the same terms as Israeli-born employees. However, the 10-year new-immigrant tax exemption under Section 14 of the Income Tax Ordinance creates an interaction worth noting: if you are already exempt from Israeli tax on foreign-source income during your first decade, the keren hishtalmut's tax exemption may matter to you primarily for the Israeli-source investment gains inside the fund. Once the 10-year exemption ends, the keren hishtalmut becomes even more strategically important as a tax shelter for Israeli investment income. Consult an Israeli tax attorney in years 8–10 of your exemption period to plan the overlap.
5. Withdrawal Rules: The 6-Year Lock-Up and What Happens If You Exit Early
The six-year maturity period is the central rule of the keren hishtalmut. Specifically:
- The 72-month clock starts on the date the fund is opened, not from the date of first employment or first contribution. If your employer opened the fund in month three of your employment, the six-year countdown begins then.
- After 72 months, the fund is "mature" and you may withdraw any amount at any time, in full or in part, tax-free.
- After the first withdrawal from a mature fund, a new six-year clock begins on any new contributions made subsequently — the tax-free status applies per cycle, not permanently.
- If you switch employers while the fund is mid-cycle, the six-year clock continues running from the original opening date, provided you move the fund to your new employer's designated fund rather than withdrawing it.
Early withdrawal
If you withdraw before 72 months have elapsed, the withdrawal is treated as employment income in the year of withdrawal. You pay income tax at your marginal rate on the portion attributable to employer contributions (which were previously tax-exempt) and capital gains tax at 25% on the investment earnings. The principal from your own after-tax contributions is returned without additional tax, since you already paid tax on that salary.
There is also a limited exception: partial withdrawals for recognized study expenses before the six-year mark may qualify for reduced tax treatment under the fund's constitutive rules and applicable Israel Tax Authority circulars, depending on the program and the fund's specific terms. This was the original rationale for the fund's name — but in practice the study-expense route is used by a small minority, and the administrative requirements make it cumbersome for most employees.
One common mistake: employees who change employers sometimes instruct the fund manager to "close the fund and pay it to me" rather than transferring it to a new fund. Closing the fund mid-cycle triggers all the early-withdrawal tax consequences. The correct procedure is to complete a hatavat keren hishtalmut (fund transfer form), which moves the balance — and the existing six-year clock — to a new fund under the new employer's arrangement, without any taxable event. The process takes one to three weeks and requires signatures from you, the old fund manager, and sometimes the new employer. If your HR team at the new employer does not raise this, ask about it specifically before your last day at the old job. The Israel Tax Authority (ITA, Rashut HaMisim, 02-565-5000) can confirm the tax treatment of any specific transfer if you describe the transaction in advance.
6. Keren Hishtalmut for the Self-Employed
Self-employed individuals (atzmaim) can also establish and contribute to a keren hishtalmut, but the rules differ from the employee track in several important respects.
Who qualifies: Any person who files a self-employment income file with the Israel Tax Authority — freelancers, sole traders, company directors who own more than 10% of their company, and professionals in private practice — can open a self-employed keren hishtalmut. There is no employer match; the self-employed person makes both contributions from their own income.
Tax deduction on contributions: Under Section 17(5a) of the Income Tax Ordinance, a self-employed person may deduct keren hishtalmut contributions from taxable income as a business expense, up to the lower of:
- 4.5% of their net professional income for the year, or
- 4.5% of the annual income ceiling (the ceiling is linked to 4.5 times the average monthly wage — for 2026, approximately NIS 690,000/year — so the effective deductible maximum is approximately 4.5% × NIS 690,000 ≈ NIS 31,050/year)
Contributions above these thresholds are not deductible. The total annual contribution limit — including the non-deductible portion — follows a separate ceiling tied to the 7.5% calculation. In practice, a self-employed individual earning NIS 400,000/year who contributes the maximum deductible amount reduces their taxable income by approximately NIS 18,000, saving between NIS 7,000 and NIS 9,000 in income tax depending on their bracket.
Withdrawal rules: The same six-year maturity rule applies. After 72 months, the entire fund — including the deducted contributions and all gains — is withdrawn tax-free under Section 9(16a). The early-withdrawal consequences are the same as for employees: income tax on the previously-deducted contributions, capital gains tax on earnings.
Foreign company directors who receive a salary from their Israeli company (chevre ba'am) face a classification question that affects which keren hishtalmut track applies. If the director is classified as an employee of the company — which is the default under Israeli law for anyone who receives a regular salary and is subject to the company's direction — then the employer (i.e., the company) can contribute 7.5% of the director's salary to a keren hishtalmut as a deductible business expense, and the contribution is tax-exempt to the director up to the ceiling. If the director draws only dividends, there is no keren hishtalmut entitlement on the dividend income. Many foreign investors who run Israeli companies through a self-owned entity structure their compensation as a mix of salary and dividends specifically to access the keren hishtalmut benefit on the salary component. The Israel Tax Authority's Assessment Unit (Pkanut Mas Hachnassa) for your district can issue a ruling (hacharata mekudemet) on the correct classification if there is genuine uncertainty.
7. What Happens to Your Keren Hishtalmut When You Leave Israel?
This is the question every expat asks, and the answer is more favorable than most expect.
The fund continues operating after you leave: Leaving Israel — whether you return your work visa, complete your employment contract, or make aliyah and then emigrate — does not automatically close your keren hishtalmut or trigger a withdrawal. The fund continues to be invested by the fund manager, and the six-year clock continues to run. You are not required to be an Israeli tax resident or to have active Israeli employment for the fund to mature.
Withdrawal after maturity from abroad: Once 72 months have passed, you can instruct the fund manager to pay out the balance. The fund manager will transfer the proceeds in NIS to your Israeli bank account. From there, you transfer the funds internationally through your bank under the Bank of Israel's currency control reporting requirements. There is no exit tax or Israeli withholding on a tax-exempt keren hishtalmut withdrawal, even if you are no longer an Israeli resident at the time of withdrawal.
Double taxation treaty considerations: Your home country may treat the incoming lump sum differently. The US, UK, and most other treaty partners with Israel do not specifically exclude keren hishtalmut withdrawals from their own domestic tax base, and in some cases the foreign tax credit system may not fully offset the home-country tax because Israel collected no withholding. If you are a US person (citizen or green card holder), consult a tax adviser before leaving: FBAR and PFIC considerations may apply to the fund itself during the accumulation phase.
Early departure before 72 months: If you plan to leave Israel before the fund matures and want to avoid the early-withdrawal tax, your options are to leave the fund invested until it matures (the most common choice), or to transfer it to a new fund under a future Israeli employer if you expect to return to employment in Israel. Withdrawing early purely because you are leaving the country is a costly mistake that many expats make in haste — the tax saving from waiting can easily exceed NIS 50,000 for a professional who has been contributing for four or five years.
The most overlooked step when leaving Israeli employment is updating the fund manager with a contact address abroad. If your Israeli employer stops submitting contributions (because your employment ended), the fund manager will still hold your accumulated balance but will eventually flag the account as dormant if they cannot reach you. Under the Unclaimed Assets Law 5770-2010, dormant financial assets are eventually transferred to the state, though they can be reclaimed. Notify the fund manager in writing — by email is acceptable — that you are leaving Israel and provide a foreign address and contact details. You can also appoint a local trusted person (an attorney or family member) under power of attorney to manage the fund on your behalf from Israel until the maturity date. The power of attorney must be general enough to cover financial transactions; a specific power of attorney drafted by an Israeli attorney and apostilled for use abroad is the cleanest solution.
Frequently Asked Questions
