New Court Rulings in Israel – Israeli Court Narrows the Tax Benefits for New Immigrants

Media Centre

New Court Rulings in Israel – Israeli Court Narrows the Tax Benefits for New Immigrants

7 December 2020

Dear Clients, Colleagues and Friends,

Two new court rulings that were published in the last couple of weeks, cast some light on the interpretation of the tax benefits provided to New Immigrants, and the ongoing trend of minimising the application of these benefits.


New Immigrants and Long Absent Returning Residents (individuals who return to Israel, after more than 10 consecutive years of being foreign residents) (“New Immigrants“) are exempt from tax and reporting on foreign sourced income and capital gains for a period of ten years (the “Exemption“). The Exemption includes an exemption from the obligation to submit capital declarations.

Over the last few years, the Israeli Tax Authority (the “ITA“), has interpreted this Exemption regime in a very limiting manner.  The interpretation of the ITA was recently examined by the Israeli court in the following two cases:

The Talmi Case

The first ruling is a decision of the Israeli Supreme Court, in the case of Yehuda Talmi v. The ITA, regarding the application of the Exemption with respect to mixed employment income (that is, income for employment, which was performed part in Israel, and part overseas). (“Mixed Income“)

By way of background, Israeli law determines that the source of employment income is the place from where the work is performed. Accordingly, income for work that is performed from Israel is considered as Israeli sourced income, which is subject to tax in Israel, while income for work that is performed outside Israel is considered as foreign sourced income and is exempt to New Immigrants during their Exemption period.  The identity of the employer does not affect the determination of the source of the employment income.  The ITA takes the view that when the employment is mixed (i.e. performed in and outside Israel), the Israeli income which is subject to tax should be determined based on the ratio of the working days that the individual spent in Israel.

The Appellant, who was entitled to the 10 year Exemption, claimed that despite the fact that he worked part of the time from Israel, his entire employment income should be exempt from tax.  The Appellant’s reasoning was that his income should be viewed as income from a “foreign asset” and not as employment income.  The alleged “asset” was the product and methods that the Appellant developed while residing outside of Israel, or alternatively his employment contract with a foreign company.

The Supreme Court ruled in favour of the ITA and accepted its position that the Appellant had no “foreign asset” in this case, and that his income was active employment income.  The Supreme Court also confirmed the ITA’s position that New Immigrants should allocate their Mixed Income between the “Israeli income” and “overseas income”, based on the days worked in and outside Israel.  In this regard, the Appellant failed to prove his claim that another allocation method should apply.

The Court emphasised that the purpose of the Exemption is to provide “tax neutrality” for individuals who consider immigrating to Israel.  Accordingly the Exemption should not apply to income which would be subject to tax in Israel regardless of the tax residency of the individual, such as income from employment or business carried on in Israel.

It should be noted that the Court decision mentions that in certain cases, royalty income directly connected to business activity, such as marketing intangibles, work methods and financial instruments that were developed abroad while the individual was a foreign tax resident, may be exempt from tax. This determination of the Supreme Court will therefor leave a wide window for legitimate tax planning for certain New Immigrants.

The Morchan Case

In the case of Morchan v. The ITA and the Israeli Police, the Claimant was suspected of criminal offences.  As part of the criminal investigation she was requested to provide information on her worldwide economic activity. The Claimant claimed that as a New Immigrant she has the right not to provide the authorities with any information on her foreign economic activity.

The Supreme Court dismissed the petition and ruled that the discretion of the law enforcement authorities is wide. Accordingly, the Court will interfere in such discretion only when the decisions of the law enforcement authorities are extremely unreasonable.

With regard to the application of the Exemption from reporting which is given to New Immigrants, the Supreme Court mentioned that the Exemption should not be used as a shelter for criminal activity, and that the Exemption from reporting does not provide immunity from criminal investigation and prosecution. In any event, the question whether the Exemption applies to the Claimant is a matter of fact, and open to dispute, and should be settled according to proper legal procedures.

Although this ruling refers to criminal procedure, it reflects the general atmosphere of the ITA and the Court, not to allow the abuse of the Exemption for inappropriate purposes.

Please do not hesitate to contact us with any questions or if you require any clarification regarding any of the matters above.


The Tax Department

Herzog Fox & Neeman


Meir Linzen | Managing Partner
Head of Tax Department


Guy Katz | Partner
Tax Department

Search by +