What counts as "foreign income" in Israel?
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
What are the 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.
Israel's 10-year exemption for new olim applies specifically to foreign-source income, meaning income that arises from an asset or activity located outside Israel. Foreign dividends, interest from foreign bank accounts, capital gains on foreign assets, rental income from property abroad, and distributions from foreign pensions (US 401(k)/IRA, UK pension, Canadian RRSP) all qualify and are exempt from Israeli tax for the 10 years after aliyah. What does NOT qualify is Israeli-source income: salary for work performed in Israel (even from a foreign employer paid into a foreign account), dividends from Israeli companies, interest from Israeli banks (including foreign-currency accounts), and capital gains from Israeli investments. Israeli mutual funds (kranot) that hold foreign stocks are still Israeli-source, so investing directly in foreign markets is what preserves the exemption. Border cases like RSUs from a US parent earned at an Israeli subsidiary, remote work from Israel for a foreign employer, and foreign business income drawn while living in Israel are typically recharacterized as Israeli-source because the work is performed in Israel. This is educational content, not tax advice; consult a licensed Israeli tax accountant.
The general principle is that 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. The 10-year exemption for new olim applies specifically to foreign-source income, so this distinction determines whether a given stream is exempt from Israeli tax during the exemption period. This is educational content, not tax advice, and the definition involves legal interpretation that can vary based on your circumstances, so consult a licensed Israeli tax accountant.
Five categories clearly qualify. Dividends from companies incorporated outside Israel (US stocks, UK shares, European equities, ETFs domiciled abroad). Interest from non-Israeli bank accounts, including high-yield savings, money market accounts, CD interest, and non-Israeli government bond interest. Capital gains on foreign stocks, foreign ETFs, foreign bonds, and other non-Israeli investments. Rental income from property abroad, calculated net of reasonable expenses such as maintenance, property management fees, and mortgage interest. And distributions from foreign retirement accounts such as a US 401(k), IRA, Roth IRA, UK pension, or Canadian RRSP, which are generally treated as foreign-source during the exemption period.
No. If you perform all your work in Israel for a US or UK company, your salary is Israeli-source income and is taxable in Israel, and the exemption does not apply. This holds even if the foreign employer pays you into a foreign bank account, because income for work performed in Israel is Israeli-source. The company may also withhold tax in its home country, which can create a situation requiring careful treaty analysis. The same logic applies to RSUs or stock options from a US parent company when you actually work for its Israeli subsidiary: that income is generally Israeli-source because the work was performed in Israel.
No. Israeli mutual funds (kranot), including those that hold foreign stocks, are still Israeli-source for tax purposes and are taxed normally. To benefit from the exemption on investment income, you need to invest directly in foreign markets rather than through Israeli-domiciled funds. More broadly, capital gains from Israeli investments, dividends from Israeli companies (even if paid in dollars), and interest from Israeli banks (including foreign-currency accounts) all fall outside the exemption.
No. The Israeli exemption only prevents Israel from taxing the income additionally; your home country may still tax it. For US citizens, the IRS taxes worldwide income regardless of Israeli exemptions, so the practical effect is that US-source investment income is taxed only at US rates during the exemption period rather than also at Israeli rates. For example, qualified dividends taxed at 15% in the US are not additionally taxed by Israel, and Israel cannot add its own 25% capital gains tax on top. For UK assets, if you have become non-UK-resident under the UK's statutory residence test, the UK may not tax most investment income either, which can create a window where neither country claims it. With foreign rental income specifically, the home country may still tax it while Israel does not.
It depends on where the business activity genuinely occurs. If you own a foreign business such as an LLC, Ltd, or S-Corp and draw income from it while living in Israel, the classification turns on where the work actually happens. If you are doing the work from Israel, the income may be recharacterized as Israeli-source rather than foreign-source. This is described in the article as a common grey area that requires professional advice.
Maintain clear records regardless of whether you are required to report foreign income during the exemption (the current reporting rules are covered in the 2026 reform article). Keep annual statements from all foreign accounts, records of purchase dates and prices for foreign assets, and documentation of rental income and expenses. These records matter if you are ever audited, and they become especially important when your exemption period ends and the linear calculation applies to capital gains, at which point they can be very valuable.
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.
