Quick Answer: New immigrants to Israel who make Aliyah under the Law of Return qualify for a 10-year income tax exemption on all foreign-source income under Section 14(a) of the Income Tax Ordinance. This covers dividends, interest, capital gains, rental income, and business income earned entirely outside Israel. During this period, Olim are also exempt from reporting foreign income to the Israel Tax Authority (ITA) under Section 134A. The exemption does not cover salary or business income from work physically performed in Israel — even for a foreign employer. Planning what to do before year 10 ends matters more than most new immigrants realize, and most leave it far too late.

The 10-year tax exemption is probably the most misunderstood financial benefit of making Aliyah. Some new immigrants arrive assuming they simply "don't pay tax in Israel for 10 years" — which is not accurate. Others are unaware the exemption exists at all and file unnecessary tax returns from their first year, or fail to plan around assets they could protect tax-free.

The exemption applies specifically to foreign-source income: earnings from assets, businesses, investments, or employment located outside Israel. Understanding exactly where that line falls, what you still need to report, and how American tax obligations interact with the Israeli exemption can save a new immigrant a substantial amount of money — or cost them equally if they get it wrong.

1. Who Qualifies for the Exemption?

Section 14(a) of the Income Tax Ordinance (*Pekudat Mas Hachnasa*) grants the exemption to two groups:

  • Olim chadashim (new immigrants) — people who move to Israel for the first time under the Law of Return 5710-1950 and become Israeli tax residents for the first time. This is the most common track.
  • Returning residents (toshav chozer) — Israeli nationals who had emigrated, lived abroad for at least 10 consecutive years, and then returned to become Israeli tax residents again. They receive a parallel but separately structured exemption.

The 10-year clock begins on the date you make Aliyah and are recognized as an Israeli tax resident. If you land in Israel and receive your Oleh certificate on 1 June 2026, your exemption period runs through 31 May 2036. There is no partial-year proration for the calendar year you arrive: the period is exactly 10 years from the date of Aliyah.

The exemption does not apply to people who already held Israeli tax residency before making Aliyah, or to foreign nationals who come to Israel on temporary work permits without becoming permanent tax residents.

In Practice: Starting the Clock

The Ministry of Aliyah and Integration issues your teudat oleh (Oleh certificate) at Ben Gurion Airport or at an Israeli consulate abroad. The date on this certificate is the date the ITA and courts use as the start of the 10-year period. Keep the original certificate. The ITA does not automatically register your Oleh status — when you first engage with the ITA (opening a tax file, responding to a withholding question, or filing your first return), your attorney or accountant must present the teudat oleh to establish the exemption period on your file. Missing this step causes complications later — the ITA has no record of your exemption window and may withhold or assess tax in error until you produce the certificate.

2. What Income Is Exempt?

Section 14(a) exempts all "foreign-source income" — a term the Ordinance defines broadly as income from assets, activities, or employment whose source lies outside Israel. Six main categories are covered:

Dividends from foreign companies

Dividends paid by companies incorporated and operating outside Israel are fully exempt, regardless of the dividend amount or your ownership percentage. This applies whether the dividend comes from a US public company, a European family business, or a private investment holding.

Interest from foreign bank accounts and bonds

Interest earned on accounts or deposits held at banks located outside Israel is exempt. This includes interest from US savings accounts, UK bonds, French brokerage cash accounts, and similar instruments. Note that interest on an account at an Israeli bank — even if the account is denominated in foreign currency — is Israeli-source income and is not exempt.

Capital gains from foreign assets

Profits on the sale of foreign shares, investment funds, and real estate are completely exempt from Israeli capital gains tax during the 10-year period. Gains that would otherwise be taxed at 25% — or 30% for shareholders holding 10% or more — are tax-free while the exemption runs. For an Oleh arriving with a substantial US or European portfolio, this category alone can be worth more than everything else in the exemption combined.

Rental income from foreign property

Rents received from residential or commercial properties located outside Israel are fully exempt. An Oleh who retains an apartment in New York, London, or Paris and rents it out does not owe Israeli tax on that rental income for 10 years from making Aliyah.

Business income from activities conducted entirely outside Israel

If you own a business — whether a sole proprietorship, a foreign LLC, or a foreign limited company — that operates exclusively outside Israel, the income it generates is exempt. "Exclusively outside Israel" is the key phrase: as soon as any meaningful part of the business activity is conducted from within Israel, the position becomes more complicated. This is where most disputes with the ITA arise.

Passive foreign-source income generally

Royalties from foreign intellectual property, foreign pension payments, annuities from foreign insurance policies, and similar receipts from sources outside Israel fall within the broad exemption. Foreign pension income is a nuanced area — see our separate guide on foreign pension tax for new immigrants for the detail.

What is not exempt: Salary or fees for work physically performed in Israel (even if your employer is foreign and pays from abroad); income from Israeli bank accounts, Israeli shares, or Israeli rental property; and income from any business managed or operationally based in Israel.

In Practice: Section 14(a) and Capital Gains Timing

Section 14(a) of the Income Tax Ordinance exempts capital gains on foreign assets sold during the exemption period. "Sold during the period" means the date of the sale transaction, not the date of purchase or the date proceeds are received. An Oleh who sells US shares in year 9 of the exemption period and receives the wire transfer in year 11 is still exempt — the gain crystallized at the sale date. The ITA has confirmed this interpretation in Circular 1/2011, but given the sums involved in large portfolio liquidations, obtain advance confirmation in writing from the ITA or a formal legal opinion before relying on this for major transactions.

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3. The Remote Work Problem

The most common mistake new Olim make with the exemption: assuming remote work for a foreign employer is automatically covered. It usually is not.

The Israel Tax Authority's position rests on Section 4A of the Income Tax Ordinance, which provides that employment income is sourced in the country where the work is physically performed. This means that if you sit in Tel Aviv and write code, draft legal documents, or conduct sales calls for a San Francisco employer, that salary is Israeli-source income — not foreign-source income — and the Oleh exemption does not apply.

The exemption was designed to protect wealth accumulated abroad — not to exempt Israeli residents from tax on work they perform in Israel. Where the money comes from is irrelevant; what matters is where you were sitting when you earned it.

There are three scenarios where the remote work question becomes more nuanced:

  • Split presence: If you work partly in Israel and partly in your origin country (visiting the employer's office, attending conferences), the income attributable to working days spent outside Israel may qualify for the exemption or for treaty relief under Article 15 of Israel's relevant double tax treaty.
  • Short-term assignees in their first partial year: If you arrive in Israel mid-year and spend fewer than 183 days in Israel in that calendar year, the standard residency test and treaty rules may mean your salary for that year is not Israeli-taxable at all — a different analysis from the Oleh exemption.
  • Truly foreign business income: If you are a director of a foreign company and receive director's fees for attending board meetings held outside Israel, that income has a strong argument for being foreign-source. The ITA scrutinizes this more carefully when the Oleh is the majority shareholder and the company exists primarily to route the Oleh's personal income.

In Practice: ITA Position on Remote Work

The ITA issued Ruling 3234/22 confirming that salary for services rendered in Israel is Israeli-source income under Section 4A, even when paid by a foreign employer to an Oleh during the 10-year exemption period. The ruling also clarified that an Oleh working remotely in Israel for a foreign employer is generally required to register as an employee for Israeli income tax withholding purposes — or register as self-employed and pay advance tax installments — within 90 days of commencing work. Employers with no Israeli establishment are not required to withhold but the Oleh bears personal liability. Penalties for late registration under Section 191 of the ITO start at NIS 1,000 and increase if the ITA initiates contact before voluntary registration.

4. Reporting Obligations: What You Do (and Don't) Have to File

Section 134A of the Income Tax Ordinance releases Olim from the obligation to report exempt foreign income to the ITA. A regular Israeli resident must disclose all worldwide income on Form 1301 each year. An Oleh with only foreign-source exempt income may have nothing to file at all.

You are still required to file with the ITA in the following situations:

  • You have any Israeli-source income — salary, Israeli rental income, interest on Israeli bank deposits, or proceeds from Israeli investments. Even one shekel of Israeli-source income creates a filing obligation for that year.
  • You received a formal demand (*hafnaya*) from the ITA requiring you to file a return.
  • You want to claim a refund of tax withheld at source on Israeli income (for example, withholding on interest from an Israeli bank account).

Voluntary filing: Many Olim choose to file voluntarily even when not technically required, for two reasons. First, it creates a documented record of what foreign assets existed before Aliyah — useful if the ITA later disputes whether a particular asset was acquired during or before the exemption period. Second, it establishes a paper trail of annual compliance that protects against any suggestion of deliberate concealment in later years, after the exemption expires.

In Practice: Form 1301 and the Oleh Exemption Declaration

When an Oleh does file Form 1301 — either because they have Israeli income or voluntarily — they declare the Oleh exemption using the dedicated fields in Schedule B of the form. The ITA's digital filing system (accessible via shaam.gov.il) requires entry of the teudat oleh number and Aliyah date to activate the Section 14(a) exemption fields. Foreign income amounts are entered but flagged as exempt; they do not flow into the taxable income calculation. If you are unsure whether you need to file, a brief consultation with an Israeli certified public accountant (*roa cheshbon*) or tax attorney costs considerably less than an ITA audit triggered by years of missed filings.

5. US Citizens Making Aliyah: A Second Layer of Obligations

For US citizens, making Aliyah adds a parallel set of tax obligations that the Israeli 10-year exemption does nothing to eliminate. The United States taxes its citizens on worldwide income regardless of where they live and regardless of any exemption granted by a foreign country.

Even while the Israeli Oleh exemption is in full effect, US citizen Olim must:

  • File annual Form 1040 reporting worldwide income to the IRS, including all income that is exempt in Israel.
  • File FBAR (FinCEN 114) for any financial accounts outside the US where the aggregate balance exceeded USD 10,000 at any point during the calendar year. Israeli bank accounts, brokerage accounts, pension funds (*keren pensia*), and even a keren hishtalmut balance qualify as foreign financial accounts for FBAR purposes.
  • File FATCA Form 8938 if aggregate foreign financial assets exceed USD 50,000 (single) or USD 100,000 (married filing jointly) on the last day of the year, or USD 75,000 / USD 150,000 at any point during the year.
  • Report PFICs (Form 8621) for passive foreign investment companies. Many Israeli provident funds, pension funds, and investment-linked insurance policies are treated as PFICs by the IRS, with extremely punitive US tax consequences if not reported correctly.

Real double taxation is generally avoided through the US-Israel tax treaty and the Foreign Tax Credit under Section 901 of the Internal Revenue Code. Because Israel does not tax the Oleh's foreign income, there is typically no Israeli tax to credit against the US liability on that income — but the treaty's tie-breaker rules, the Foreign Earned Income Exclusion (FEIE), and the various treaty-exempt categories mean that most US citizen Olim end up owing US tax primarily on income also taxed in Israel, with the credit eliminating the double exposure.

In Practice: FBAR Penalties and the IRS Streamlined Program

FBAR penalties for willful non-disclosure under 31 U.S.C. 5321 reach the greater of USD 100,000 or 50% of the account balance per violation per year. Non-willful penalties run up to USD 10,000 per account per year. The IRS Streamlined Foreign Offshore Procedures (SFOP) — available to US persons who have lived outside the US for at least 330 days in one of the three preceding calendar years — allow qualifying US citizen Olim to catch up on three years of back tax returns and six years of FBAR filings with a reduced 5% miscellaneous offshore penalty rather than the full penalty structure. Many newly arrived Olim who had Israeli financial accounts before making Aliyah (from prior visits or Israeli family connections) are non-compliant without knowing it. Address this in year one with a dual-qualified US-Israeli tax advisor.

6. Planning Before Year 10 Expires

The 10-year exemption expires silently. The ITA sends no notice. The Aliyah Authority sends no reminder. On day one of year 11, you are a regular taxable Israeli resident — worldwide income, rates reaching 50% at the top when National Insurance is included, no wind-down period.

Most Olim think about this in year 9 at the earliest. Years 7 through 9 are more useful: enough time to model the options, take advice, and actually execute before the clock runs out.

Asset sales during the exemption window

Capital gains on foreign shares or foreign real estate realized before the exemption expires are tax-free in Israel. After year 10, those same gains are taxed at 25% (or 30% for individuals holding 10% or more of a company). Reviewing your foreign portfolio in years 8-9 with an eye to selling appreciated assets before the window closes is one of the cleaner moves available.

Distributing foreign company retained earnings

If you own a foreign company that has accumulated retained earnings over the exemption period, those earnings can be distributed to you as a dividend before year 10 without Israeli tax. Once you become a regular Israeli resident, dividends from your own foreign company will be subject to Israeli dividend withholding at 25-30% — and potentially also to the CFC rules under Section 75B of the Ordinance if the company is characterized as a controlled foreign corporation. A pre-expiry dividend can be a substantial tax-saving event.

The 5-year extension option

Section 14(c) of the Income Tax Ordinance gives Olim a one-time option to extend the exemption by an additional five years specifically for passive income categories: dividends, interest, rents, and royalties from foreign sources. This option is rarely publicized, rarely used, and frequently missed entirely.

To exercise it, you must file a written election with your local ITA district office before the last day of your 10th exemption year. The election form (ITA Form 2402) must be submitted in advance. There is no late-filing mechanism: missing the deadline permanently forecloses the option. The extended exemption does not cover foreign business income or employment income — only passive categories.

Advance tax rulings from the ITA

If you hold complex assets — foreign trusts, mixed-source intellectual property, minority stakes in foreign companies, or structures where Israeli and foreign income are intermingled — applying for an advance ruling (*chuliyat misuy*) from the ITA before your exemption expires protects you from retroactive recharacterization. An advance ruling binds the ITA to a specific tax treatment for your stated facts. The process takes three to six months and requires full disclosure, but it removes the most dangerous exposure in complex Oleh situations: the ITA auditing years after the exemption expires and reclassifying income you treated as exempt.

In Practice: The Section 14(c) Extension Deadline

The Section 14(c) 5-year passive income extension is exercised by submitting Form 2402 to the ITA district office (*misrad mas hachnasa*) that corresponds to your registered address in Israel. The deadline is strictly the last day of the 10-year exemption period — not the date of your annual return for that year, which is typically April 30 of the following year. If your exemption expires on 31 May 2036, Form 2402 must be filed by 31 May 2036. Engaging an Israeli tax attorney at least 12 months before that date gives sufficient lead time to analyze whether the extension is advantageous for your specific asset profile. The ITA does not proactively inform Olim of this option.