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Are compensation payments received for personal injury taxable in Israel?

No — for the physical injury components. Section 9(9) of the Income Tax Ordinance (New Version) 5721-1961 explicitly exempts compensation for personal physical injury from income tax. This covers pain and suffering, loss of function, and medical expenses. However, the exemption does not extend to all components of a damages award: compensation for lost future income — replacing what would otherwise have been taxable salary — is subject to Israeli income tax. Israeli courts and the Israel Tax Authority assess each damages head separately.

The basic rule under Section 9(9) of the Income Tax Ordinance (New Version) 5721-1961 treats compensation for physical injury as a tax-exempt receipt. This covers general damages for pain and suffering (*nichui al kev visevel*), loss of physical function, aesthetic damage, and reimbursement of medical and rehabilitation expenses. The exemption applies regardless of whether the compensation is agreed in a settlement or awarded by a court, and regardless of whether it is paid as a lump sum or periodic instalments. Israeli courts have consistently held that such payments restore the person to the position they should never have left, rather than constituting a receipt of new income or wealth.

The taxable component of a personal injury award is the element representing lost earnings — compensation for income the claimant would have earned but for the injury. Israeli courts separate damages awards into distinct heads, and where a settlement does not expressly allocate between heads, the Israel Tax Authority (*Rashut HaMisim*) may argue for a division that maximizes the taxable portion. For non-resident claimants, the analysis adds a further layer: if the lost income would not have been Israeli-source income to begin with, the income-replacement component may not be taxable in Israel even if the injury occurred there. Our full guide to Israeli income tax for non-residents explains when Israel can tax non-residents on different categories of receipt.

⚖ In Practice
  • Governing law: Section 9(9), Income Tax Ordinance (New Version) 5721-1961 (Pekudat Mas Hachnasa)
  • Competent authority: Israel Tax Authority (Rashut HaMisim); disputes go to the Tax Assessing Officer and, on appeal, the District Court
  • Tax-exempt components: General damages (pain, suffering, physical disability), medical costs, rehabilitation costs, care costs
  • Taxable components: Lost earnings and loss of earning capacity — the portion replacing would-be salary income
  • Settlement structuring: Expressly allocate compensation heads in any settlement agreement; failure to do so gives the ITA discretion to characterize the entire payment, often unfavourably

From the full guide: Israeli Income Tax for Non-Residents: Rates, Rules, and Treaty Relief

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Get a Free Consultation with Adv. Eli ShimonyPrepared under the direction of Adv. Eli Shimony, Eli Shimony Law Office · Editorial policy

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