Defining "Foreign Income"
This is educational content, not tax advice. The definition of foreign-source income involves legal interpretation that can vary based on your specific circumstances. Consult a licensed Israeli tax accountant for guidance.
Israel's 10-year exemption is generous, but it applies specifically to foreign-source income. Understanding exactly what qualifies — and what doesn't — is essential for using the exemption effectively and avoiding inadvertent מס הכנסה (Mas Hachnasa) (income tax) exposure.
The general principle: income is foreign-source if it arises from an asset or activity located outside Israel. Income is Israeli-source if it arises from assets in Israel or work performed in Israel.
What Clearly Qualifies as Foreign Income
Dividends from Foreign Stocks and Funds
Dividends paid by companies incorporated outside Israel are foreign-source income. This includes US stocks (Apple, Microsoft, index funds), UK shares, European equities, and any ETF domiciled outside Israel. It does not matter whether the company does business in Israel — what matters is where the company is incorporated.
Interest from Foreign Bank Accounts
Interest earned in a US, UK, European, or other non-Israeli bank account is foreign-source income. This includes high-yield savings accounts, money market accounts, CD interest, and government bond interest from non-Israeli bonds. Israeli bank interest is fully taxable.
Capital Gains on Foreign Assets
Gains from selling foreign stocks, foreign ETFs, foreign bonds, or other non-Israeli investments are foreign-source. If you sell your US brokerage portfolio during the exemption period, the gains are exempt from Israeli tax. This is one of the most significant practical benefits of the exemption for investors with substantial foreign portfolios.
Rental Income from Property Abroad
If you own an apartment in New York, London, Berlin, or anywhere outside Israel and collect rent, that rental income is foreign-source. The income is calculated net of reasonable expenses (maintenance, property management fees, mortgage interest). Note that your home country may still tax this income — the Israeli exemption only prevents Israel from taxing it additionally.
Foreign Pension Distributions
Distributions from foreign retirement accounts — US 401(k), IRA, Roth IRA, UK pension, RRSP (Canada), or equivalent — are generally treated as foreign-source income during the exemption period. This is particularly valuable for olim approaching retirement age who can draw down foreign pensions without Israeli tax during the exemption window.
What Does NOT Qualify as Foreign Income
- Salary from working in Israel — even if your employer is a foreign company, income for work performed in Israel is Israeli-source
- Dividends from Israeli companies — even if you're paid in dollars
- Interest from Israeli banks — including Israeli bank foreign-currency accounts
- Rental income from Israeli property — taxable from day one under regular rules
- Capital gains from Israeli investments — Israeli stocks, Israeli mutual funds (kranot) are taxable normally
Border Cases and Grey Areas
Israeli Subsidiary of a US Company
If you receive stock options or RSUs from a US parent company but work for its Israeli subsidiary, the income is generally Israeli-source (because the work was performed in Israel), even though it's paid in dollars by a US entity. This is a common and important distinction for high-tech employees.
Remote Work for a Foreign Employer
If you work from Israel for a US or UK company — performing all your work in Israel — your salary is Israeli-source income, taxable in Israel. The exemption does not apply. However, the company may also withhold tax in its home country, creating a situation requiring careful treaty analysis.
Foreign Business Income
If you own a foreign business (LLC, Ltd, S-Corp) and draw income from it while living in Israel, the classification depends on where the business activity genuinely occurs. If you're doing the work from Israel, the income may be recharacterized as Israeli-source. This is a common grey area that requires professional advice.
Document Everything
Whether or not you are required to report foreign income to the Israel Tax Authority during your exemption period (see the 2026 reform article for the current rules), maintaining clear records is essential. Keep annual statements from all foreign accounts, records of purchase dates and prices for foreign assets, and documentation of rental income and expenses. If you are ever audited, or when your exemption period ends and the linear calculation applies to capital gains, these records will be essential — and potentially very valuable.
The next article covers the 2026 tax reform and its new reporting requirements in detail, including what you need to declare and when.