In a significant policy shift designed to bolster the Israeli economy and encourage immigration amidst rising global challenges, the Israeli Ministry of Finance has published a legislative memorandum that promises to rewrite the tax playbook for New Immigrants (Olim) and Veteran Returning Residents (Toshavim Hozrim Vatikim).
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For decades, the primary fiscal incentive for moving to Israel has been the well-known "10-Year Tax Holiday" under Section 14 of the Ordinance. While this law provided a sweeping exemption on income generated outside of Israel, it left a significant gap: income earned within Israel was taxed at standard, often high, marginal rates from the very first day of residency. This created a paradoxical situation where immigrants were incentivized to live in Israel but keep their economic activities abroad.
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The proposed legislation, introduced as part of the Economic Efficiency Law for the 2026 budget, aims to resolve this by introducing a dramatic tax exemption on Israeli-sourced active income for those establishing residency in the 2026 tax year. This move effectively creates a "Double Tax Holiday" opportunity, making Israel a far more competitive destination for high-net-worth individuals, entrepreneurs, and professionals.
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The Rationale Behind the Reform

The explanatory notes of the memorandum cite two primary drivers for this initiative. First, there is a recognition of the increasing global antisemitism acting as a push factor for Jewish communities worldwide. Second, economic data consistently shows that the immigration of high-socioeconomic populations drives business activity, consumption, and overall growth. By expanding tax benefits to local income, the state aims to incentivize these individuals not just to reside in Israel, but to actively integrate into the local labor market and economy.
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A New Exemption Structure for 2026

The core of the proposal is a tax exemption on "Qualifying Income," defined strictly as income from personal exertion. This benefit is structured as a Temporary Order (Horat Shaa) specifically for individuals who become residents during the 2026 tax year.

Unlike previous benefits that were often flat or permanent, this exemption is designed with a declining ceiling over a five-year period to assist immigrants during the most capital-intensive years of their initial settlement. For the tax years 2026 and 2027, the exemption applies to the first NIS 1,000,000 of active income. This ceiling then gradually decreases to NIS 600,000 in 2028, NIS 350,000 in 2029, and finally NIS 150,000 in 2030.
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It is important to note that any income exceeding these annual ceilings will be taxed according to standard marginal tax brackets. However, the taxpayer retains the right to utilize standard credit points (Nekudot Zikui) and other existing benefits on that taxable portion, ensuring that the effective tax rate remains attractive even on income above the cap.
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Defining "Qualifying Income" and Eligibility

The legislation is precise regarding eligibility. The benefit is targeted exclusively at New Immigrants holding a valid Oleh certificate and Veteran Returning Residents—generally defined as individuals who have resided outside of Israel for at least ten years and have been recognized as such by the Ministry of Aliyah and Integration.
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Furthermore, the type of income eligible for this exemption is strictly limited to "income from personal exertion," such as salaries, business income, and income from self-employment generated within Israel. Passive income sources, such as rent, dividends, and interest, are explicitly excluded from this specific benefit, as are payments received from relatives, a provision intended to prevent artificial tax planning.
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However, the memorandum proposes a crucial exception for business owners. Income derived from a company that is wholly owned by the immigrant will be eligible for the exemption. This is a vital provision for entrepreneurs, allowing them to operate through their own Israeli companies and enjoy the tax break on their drawn salaries or management fees, provided they control 100% of the entity.
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Strategic Implications: The "Double Tax Holiday"

The most profound impact of this proposal lies in its interaction with existing tax laws. Until now, Olim faced a dichotomy where foreign income was tax-free while local income was fully taxed. The new proposal bridges this gap, creating a comprehensive tax shield.
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An eligible individual arriving in 2026 could potentially structure their affairs to enjoy a zero percent tax rate on foreign passive and active income under Section 14, alongside a zero percent tax rate on the first NIS 1 million of local active income under the new law. This combination positions Israel as one of the most attractive tax jurisdictions in the Western world for active business owners and high-income professionals looking to relocate in the coming year.
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Key Takeaways

• A "Double" Tax Holiday: Unlike the traditional Section 14 exemption which only covers foreign income, this new proposal exempts Israeli-sourced active income. This creates a powerful double tax benefit for Olim who plan to work or run businesses within Israel.
• Significant Value: The exemption cap starts at NIS 1 million for the first two years. For high earners, this translates to substantial tax savings during the most expensive years of relocation.
• Limited Window: This is a "Temporary Order" (Horat Shaa) specifically targeted at individuals establishing residency in 2026. Those arriving earlier or later may not be eligible for this specific structure.
• Focus on "Active" Income: The benefit is strictly for income derived from personal exertion (salary, business income). Passive investment income generated in Israel remains taxable under standard rules.
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FAQ

Q: Does this new benefit replace the famous "10-Year Tax Holiday" (Section 14)?
A: No. It is in addition to it. Section 14 provides an exemption on income generated outside of Israel. This new proposal provides an exemption on active income generated inside Israel. An eligible individual could potentially enjoy tax-free income from both foreign sources (under Sec. 14) and local sources (under this new law, up to the ceiling).

Q: If I move to Israel in December 2026, do I get the full NIS 1 million exemption for that year?
A: No. The legislative memorandum specifies that for the 2026 tax year, the exemption ceiling will be calculated proportionally based on the number of days you were a resident of Israel during that year.

Q: I am a "Regular" Returning Resident (lived abroad for 6 years). Am I eligible?
A: No. The proposal currently applies only to New Immigrants (Olim) and Veteran Returning Residents (Toshav Hozer Vatik—generally those who lived abroad for at least 10 years).

Q: Does this apply to income from my own company?
A: Generally, yes. While income from "relatives" is usually excluded to prevent tax planning abuse, the memorandum proposes a specific exception allowing the exemption for income derived from a company wholly owned by the Oleh.

Q: What happens to income above the NIS 1 million ceiling?
A: Income above the ceiling will be taxed according to standard Israeli marginal tax rates. However, you will still be eligible for standard credit points (Nekudot Zikui) and other benefits available to new immigrants on that taxable portion.

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