Income Tax Circular 07/2026: A Major Tax Exemption for New Immigrants and Veteran Returning Residents — The Complete Guide to the "Encouragement of Aliyah and Return to Israel" Temporary Order

On March 31, 2026, the temporary order known as the "Law for the Encouragement of Aliyah and Return to Israel" (2026) came into force, and in July 2026 the Israel Tax Authority published Income Tax Circular 07/2026, detailing how it is to be applied. The order grants an unprecedented income tax exemption — of up to NIS 1,000,000 per year — on income from personal exertion earned in Israel, for new immigrants (olim) and veteran returning residents who relocated their center of life to Israel between November 5, 2025 and December 31, 2026. This article reviews in detail the eligibility conditions, the exemption ceilings, the important limitations, and how to claim the benefit in practice.

Background: What Is the Purpose of the Temporary Order?

The temporary order was enacted as part of the Economic Efficiency Law for 2026, and its purpose is to encourage immigration to Israel and the return of Israelis who have lived abroad for many years. Its central instrument is a tax exemption on income from personal exertion — that is, income from employment, from a business, or from a profession — produced in Israel.

An essential point from the outset: the benefit is granted in addition to every other benefit available under Israeli law to new immigrants and veteran returning residents — including the well-known ten-year exemption on foreign-source income under Sections 14 and 97(b) of the Income Tax Ordinance. In other words, a new immigrant may enjoy both the existing exemption on foreign income and the new exemption on Israeli-source earned income at the same time.

The Tax Benefit: Exemption Ceilings for 2026–2030

The exemption is granted to a "qualifying individual" — a new immigrant or a veteran returning resident who became an Israeli tax resident between November 5, 2025 and December 31, 2026 (the "qualifying period") — on income from personal exertion, over five tax years, according to the following ceilings:

* For an individual who became an Israeli resident during 2026, the 2026 ceiling is prorated according to the number of days from the date of arrival until the end of the year.

Taxable income exceeding the ceiling, as well as any income that is not from personal exertion — such as interest, dividends, rental income and capital gains — is taxed at the ordinary rates set out in the Ordinance.

Example from the Circular: A new immigrant who arrived on January 1, 2026 and earned NIS 750,000 in Israeli employment income plus NIS 100,000 in residential rental income will enjoy an exemption on NIS 600,000 of his salary; the remaining NIS 150,000 of salary is taxed at the regular progressive rates, and the rental income is taxed separately under the ordinary statutory tracks.

Who Is Eligible? The Cumulative Conditions

1. Becoming an Israeli resident during the qualifying period

The individual became an Israeli resident between November 5, 2025 and December 31, 2026, in one of two ways:

• New immigrant (oleh) — became an Israeli resident for the first time during the qualifying period; or
• Veteran returning resident — an individual who was a "foreign resident" for at least 10 consecutive years before returning, and who relocated his or her center of life to Israel during the qualifying period.

The "center of life" test looks at the totality of ties: days of presence in Israel, the location of the permanent home, the location of the family (spouse and children), the place of business and economic interests, social activity and membership in organizations and institutions. The assessing officer will examine whether the totality of ties clearly indicates that the center of life moved to Israel during the qualifying period.

2. Formal status as an "oleh" or "returning resident"

The individual must hold an immigrant (oleh) visa or certificate under the Law of Return (or belong to a category entitled to an absorption basket), or a returning-resident certificate issued by the Ministry of Aliyah and Integration.

What Counts as "Qualifying Income"?

The exemption applies only to "qualifying income", which must meet all of the following conditions:

1. Income from personal exertion under Section 2(1) or 2(2) of the Ordinance — business, profession, and employment.
2. Not "other income" as defined in Section 62A(d) of the Ordinance — interest, linkage differentials, discount fees, dividends, rent, consideration from the sale of assets, securities, or real-estate rights — even where classified as business income.
3. Not income attributed from a "transparent entity" — see below.
4. Produced in Israel while the individual was an Israeli resident. A business that continues generating profits after the individual has ceased Israeli residency will not enjoy the exemption on those profits.
5. Reflecting the individual's personal contribution to generating the income.

The transparent-entity limitation — and when it does not apply

Profits attributed to an individual from a "transparent entity" — a partnership, a family company, a house company and the like — are not qualifying income. The purpose of the limitation is to prevent the shifting of profits to a qualifying individual through the allocation of rights in transparent entities. However, it has two important exceptions:

• The limitation applies only where the individual is a substantial shareholder (as defined in Section 88 of the Ordinance) in the transparent entity. A partner holding less than 10% will enjoy the exemption on income attributed from the partnership.
• The limitation does not apply to an individual who holds the transparent entity in full (100%) — a situation equivalent to operating as an independent business.

In addition, salary, management fees and consulting fees received by the individual from the transparent entity are not excluded — they can enjoy the exemption. It was also clarified that, for the purposes of this temporary order only, a "wallet company" (Section 62A) is not treated as a transparent entity.

Example from the Circular: A new immigrant who is an active partner in a consulting partnership holding 5% of the rights — his share of the partnership's profits (NIS 500,000) is fully exempt, since he is not a substantial shareholder. By contrast, his share of the profits of a house company in which he holds 15% does not qualify for the exemption.

Income from a "Relative" — a Limited Exemption

Qualifying income received from a "relative" (as defined in Section 88 of the Ordinance — spouse, parent, descendant, sibling and their spouses, as well as entities in which the person or their relative holds 25% or more of any means of control, among others) is entitled to a limited exemption of up to NIS 140,000 per year only (NIS 150,000 in 2030).

• Exception: A company wholly owned by the individual is not considered a "relative", and income from it enjoys the full exemption ceiling.
• An individual with both relative-source and non-relative-source income enjoys the general ceiling on the total income, but the NIS 140,000 cap applies to the portion received from the relative.
• The benefit on income from a relative is granted only through the annual tax return — not through the withholding-adjustment procedure.

Example from the Circular: A new immigrant employed by a construction company in which his brother holds 50%, at an annual salary of NIS 300,000, will enjoy an exemption on NIS 140,000 only; the remaining NIS 160,000 is taxed at the progressive rates.

How to Enjoy the Benefit During the Year: Withholding Adjustment and Reduced Advance Payments

Full entitlement is examined and approved as part of the annual tax return. However, the Circular allows the benefit to be enjoyed on a current basis:

• Employees — by applying for a tax (withholding) adjustment.
• Self-employed individuals — by applying for a reduction of advance tax payments.

The ceiling in this preliminary track is limited: up to NIS 500,000 per year for an individual registered as required to file an annual return, and up to NIS 300,000 for one who is not so registered. An individual whose qualifying income is higher will claim the balance of the exemption in the annual return. For those who became residents during 2026, these ceilings are also prorated (for example, an individual arriving on July 1, 2026 who is not required to file will have a prorated ceiling of approximately NIS 150,000).

The days-of-presence criterion — a condition for the preliminary track

For the preliminary track only, the assessing officer examines the relocation of the center of life on the basis of the days of presence in Israel of the individual and of his or her spouse during the years 2016–2025:

• The 90-day rule: In each of the years 2016–2025, the days of presence in Israel of the individual and of the spouse did not exceed 90 days (days of entry and exit count as days of presence).
• Permitted deviations: The rule may be exceeded in up to three years, provided the deviating years are not 2016 or 2025; in two of them — up to 182 days each; in a third year — up to 150 days.
• The 425-day test: In each of the years 2018–2025, the cumulative days of presence in that year and the two preceding years must be below 425 days.
• If the couple became a couple during the examined period, the spouse is tested only from the year in which they became a couple.

Filing the application: Form 116E ("116ע") and the required documents

The application is filed on a dedicated form — Form 116ע (which replaces the regular Form 116 and includes everything in it), containing declarations regarding the date of aliyah/return, the spouse's details, compliance with the days-of-presence criterion, relocation of the center of life during the qualifying period, the intention to remain an Israeli resident until the end of the tax year, that the income is not paid by a "relative" and is not from a business received as a gift, and that no National Insurance benefits were received during 2016–2025. The following must be attached:

• The oleh certificate or returning-resident certificate;
• A "traveler border-crossings" printout (entries and exits) from the Population and Immigration Authority for 2016–2025 — for the applicant and the spouse;
• Payslips and income confirmations from all employers and payers;
• The full output of the simulator made available by the Tax Authority for checking the days-of-presence criterion — attaching the simulator output is a mandatory condition for processing the application.

Additional Provisions Worth Knowing

The option to waive the exemption

The individual may waive the exemption, in whole or in part. In certain situations (for example, for international tax reasons) such a waiver may be advantageous — and the law leaves the choice in the taxpayer's hands.

An exemption for a foreign company whose Israeli income derives from the qualifying individual

A unique provision, of particular importance for remote workers and entrepreneurs: where the Israeli-source income of a foreign-resident body of persons is produced in Israel solely by reason of the personal activity of the qualifying individual, the foreign entity is exempt from Israeli tax on the profits deriving from that activity, during 2026–2030 — even if the activity creates a "permanent establishment" in Israel within the meaning of the tax treaties. The exemption does not apply where the individual is a substantial shareholder of the foreign entity, where the foreign resident would have been taxable in Israel even without the individual's activity, and — in the case of a foreign transparent entity — to the share of Israeli-resident rights-holders.

The relationship with the foreign-income exemptions — and "mixed income"

The benefit does not derogate from the exemptions on foreign-source income under Sections 14 and 97 of the Ordinance. Where an individual has "mixed income" — produced partly in Israel and partly abroad — the portion attributable to activity abroad is fully exempt under Section 14, and the portion attributable to activity in Israel is exempt under the temporary order up to the annual ceiling.

Summary

The temporary order opens a significant — but time-limited — window of opportunity for anyone considering aliyah or a return to Israel: relocating one's center of life to Israel by December 31, 2026 is a threshold condition for eligibility. Alongside the generous benefit, the Circular establishes strict control mechanisms: a substantive center-of-life test, a detailed days-of-presence criterion for the preliminary track, limitations on transparent entities and on income from relatives, and a retroactive-cancellation provision. Careful planning of the timing of the move, the employment structure and the manner of profit extraction can dramatically affect the actual value of the benefit.

The above is a general review of Income Tax Circular 07/2026 and does not constitute legal or tax advice, nor should it be relied upon as such. The application of these provisions depends on the specific circumstances of each case. Professional, case-specific advice is recommended.