One of the most significant and least fully appreciated benefits of making Aliyah is Israel’s extraordinary tax incentive package for new immigrants. The centrepiece is a ten-year exemption on foreign-sourced income and capital gains: a provision that can be worth hundreds of thousands of dollars in tax savings for Olim who retain assets, income, or business interests in their home countries. Understanding these benefits fully, structuring your affairs to take maximum advantage of them, and knowing the traps to avoid is among the most financially important things any new Oleh can do. This guide explains the Israeli tax benefits for new Olim in plain language.
Israel’s Tax System: The Basics
Israel taxes its residents on worldwide income: meaning that once you are an Israeli tax resident, your income from all sources globally is in principle subject to Israeli income tax. Israeli income tax rates are progressive, ranging from 10% on the first bracket to 47% on the highest bracket, plus national insurance (Bituach Leumi) contributions of approximately 3.5-7% of income up to a ceiling. For Israeli-sourced income: your Israeli salary, Israeli business income, Israeli rental income, Israeli capital gains: these rates apply from day one of your Aliyah. But for foreign-sourced income and capital gains, the law provides an extraordinary exemption specifically for new Olim.
The 10-Year Foreign Income Tax Exemption
Under Section 14 of the Israeli Income Tax Ordinance, an Oleh Chadash (new immigrant) is entitled to a complete exemption from Israeli income tax and capital gains tax on all income and gains derived from sources outside Israel for a period of ten years from the date of Aliyah. This is not a deduction or a reduced rate: it is a complete exemption. The scope is broad: foreign employment income, foreign business income, foreign rental income, foreign interest and dividends, foreign capital gains, and foreign pensions and annuities are all covered. An Oleh who arrived in 2020 benefits from the exemption on all qualifying foreign income until 2030.
What the Exemption Covers: Practical Examples
Foreign rental income: An Oleh who retains a property in the UK, USA, Australia, or France pays zero Israeli income tax on rental income for ten years. On rental income of USD 30,000 per year, the tax saving could be USD 10,000-15,000 annually: or USD 100,000-150,000 over the full period.
Foreign investment portfolio: An Oleh with a significant stock portfolio abroad pays zero Israeli tax on dividends, interest, and capital gains from those foreign investments for ten years: creating a powerful incentive to maintain foreign investment portfolios during the exemption period.
Foreign pension income: Pension payments from a foreign state pension (UK State Pension, US Social Security, Australian Superannuation) received during the ten-year exemption period are generally exempt from Israeli tax. Note that the source country may retain taxing rights under a bilateral tax treaty.
Foreign business ownership: An Oleh who retains an ownership interest in a foreign company may benefit from the exemption on dividends and on capital gains if the company is sold during the exemption period. Detailed rules apply depending on the structure of the foreign company and the Oleh’s level of control.
Interaction with Foreign Tax Obligations
The Israeli tax exemption does not override your obligations in your home country. Common scenarios requiring careful planning include: the United States (which taxes its citizens on worldwide income regardless of residence. American Olim must continue filing US tax returns); the United Kingdom (which may retain taxing rights on UK-sourced income under the UK-Israel tax treaty); Australia (which has specific residency severance rules); and South Africa (which has specific SARS tax emigration requirements). Israel has bilateral tax treaties with most major developed countries: understanding the relevant treaty is essential for structuring your foreign income optimally during the exemption period.
Additional Tax Benefits for Olim
Beyond the ten-year income tax exemption, Israeli law provides several additional tax benefits for new Olim. Purchase tax (mas rechisha) on the first property purchase in Israel is reduced for Olim: potentially saving tens of thousands of shekels. New Olim also receive enhanced income tax credits (nekudot zikui) for the first three and a half years of Aliyah. Sal klitah cash grants and Nefesh B’Nefesh grants are not subject to Israeli income tax. New Olim are also exempt from customs duty on one shipment of personal belongings and on the import of one private vehicle within specified timeframes.
Planning Around the End of the Exemption Period
The end of the ten-year exemption period is a significant financial event requiring advance planning. From year eleven, all foreign income becomes fully subject to Israeli income tax at standard rates. Key planning strategies include: considering whether to realise significant capital gains on foreign assets before the exemption expires (selling a foreign property or large investment position in years nine or ten can save substantial tax); reviewing your foreign portfolio structure; and ensuring your Israeli accountant is briefed on all foreign income sources well in advance of year ten.
Working with a Cross-Border Tax Adviser
The Israeli tax exemption is powerful but technical, and the intersection with your home country’s tax obligations creates complexity that generalist accountants frequently mishandle. Olim with meaningful foreign income or assets should engage an Israeli tax adviser with documented cross-border expertise from their first year in Israel, not when the exemption is about to expire. The cost of professional advice is negligible relative to the tax savings at stake. Key questions to ask any prospective adviser: Have you handled Israeli tax returns for Olim with income from my home country? Are you familiar with the bilateral tax treaty between Israel and my country? Can you coordinate with my overseas accountant? The answers will quickly reveal their level of relevant experience.
How long does the Israeli Oleh tax exemption last?
The exemption lasts ten full years from the date of Aliyah. During this period, all income and capital gains from sources outside Israel are completely exempt from Israeli income tax. The exemption period is fixed and cannot be extended. From year eleven onwards, all foreign income becomes subject to Israeli tax at standard rates. Planning around the end of the exemption: particularly regarding whether to realise capital gains on foreign assets before year eleven: is an important financial planning consideration to discuss with an Israeli tax adviser.
Does the Israeli tax exemption apply to my pension from my home country?
Generally yes: pension income from a foreign state or private pension scheme received during your ten-year exemption period is exempt from Israeli income tax. However, your home country may retain taxing rights on that pension income under the bilateral tax treaty between Israel and your home country. Always consult a cross-border tax adviser familiar with both Israeli law and your home country’s treaty provisions before assuming your foreign pension is entirely tax-free.
Do I need to report foreign income to the Israeli Tax Authority during my exemption period?
No: during the ten-year exemption period, you are exempt from reporting foreign income to the Israeli Tax Authority. You do not include foreign income on your Israeli tax return during this period. However, maintain thorough records of all foreign income and assets regardless, as this information will be essential when the exemption period ends. You may still be required to file an Israeli tax return for your Israeli-sourced income even during the exemption period.
Does the Israeli tax exemption apply to American Olim?
Yes. American Olim receive the same Israeli ten-year foreign income tax exemption as all other new immigrants. However, American Olim face additional complexity: the United States taxes its citizens on worldwide income regardless of where they live, meaning American Olim must continue filing US tax returns and may owe US tax on their Israeli-sourced income. The US-Israel tax treaty and the US Foreign Earned Income Exclusion provide some relief. American Olim should work with a tax adviser experienced in both Israeli and US expatriate taxation from their first year of Aliyah.
Can I lose the Israeli Oleh tax exemption?
The exemption is tied to your status as an Israeli tax resident. If you leave Israel for an extended period and cease to be an Israeli tax resident, you may lose the exemption prematurely. Extended absences (typically more than 183 days per year abroad) can trigger a residency challenge. The exemption is not lost by short holidays or business trips abroad. If you are considering spending significant time abroad during your first ten years in Israel, discuss the implications with an Israeli tax adviser before making plans.
Should I sell foreign assets before my tax exemption expires?
For many Olim with significant foreign assets: a property abroad, a large investment portfolio, a business interest: selling during the exemption period (ideally in years eight to ten) rather than after expiry can result in substantial tax savings. Capital gains that would be taxed at 25-33% Israeli capital gains tax rates after the exemption expires are completely exempt during the period. This is one of the most important financial planning decisions a new Oleh with foreign assets will face: engage an Israeli tax adviser with cross-border expertise several years before your exemption expires.