TAX NEWSFLASH – NOVEMBER 2025

NEW DRAFT CIRCULAR — REPEAL OF REPORTING EXEMPTION FOR NEW IMMIGRANTS AND VETERAN RETURNING RESIDENTS AS OF 2026

On 26 October 2025 the Israel Tax Authority (the ITA) published a draft Income Tax Circular concerning Amendment 272 to the Income Tax Ordinance [New Version] 5721-1961 (the ITO), which regulates repeal of the reporting exemption that is granted to new immigrants and veteran returning residents on foreign (non-Israeli) sourced assets and income. This entails a significant change in the reporting regime that has endured for more than 15 years, and which is expected to affect all taxpayers who will be conferred with Israeli residency status as of 1 January 2026.

Background for the change — an OECD requirement and the need for enhanced transparency

The reporting exemption for new immigrants and veteran returning residents was established in Amendment 168 to the ITO in 2008, with the aim of encouraging immigration to Israel and the return of human capital. Nevertheless, an audit conducted by the Global Forum on Transparency and Exchange of Information for Tax Purposes, an international body operating under the OECD, revealed that Israel is not compliant with the international tax transparency standards, due to a lack of access to information about the income and assets of new immigrants and veteran returning residents, as well as trusts and entities under their control.

Following the findings of the audit, Amendment 272 to the ITO was enacted, that was published on 7 April 2024. The amendment repealed the reporting exemption that is granted to new immigrants and veteran returning residents, and established that as of 1 January 2026, those individuals will be subject to reporting/the filing of full reports to the ITO—also with respect to foreign-sourced income and assets, even if they are tax-exempt. It should be emphasized that the tax exemption itself remains intact, but only the exemption from reporting has been repealed.

Scope of applicability—who will be required to report?

Individual beneficiaries (new immigrants and veteran returning residents) — will be required to submit annual reports to the Tax Assessing Officer encompassing all their income, including foreign (non-Israeli) sourced tax-exempted income, by means of Appendix D1 to Form 1301. The report will include the amount of the income, its classification, the country in which it was produced, and the profit or loss that was generated.

Report on foreign sourced assets as part of a declaration of capital — an individual beneficiary will be required to include his foreign-sourced assets and obligations within the ambit of a declaration of capital, to the extent the Tax Assessing Officer will demand same.

Body of persons controlled by an individual beneficiary — a foreign company that is controlled and managed from Israel by a new immigrant or veteran returning resident, will not, in light of this, be deemed an Israeli resident company throughout the period of benefits, pursuant to the provisions of the ITO. Amendment 272 provides that the ITA is authorized to demand from that company an individual report—including annual report, financial statements or ancillary documents—pursuant to sections 131 and 135 of the ITO. This, therefore, entails a reporting duty that is subject to the requirement of the Tax Assessing Officer, and is not an automatic obligation.

Trusts and beneficiaries –

• Settlors: an individual beneficiary who immigrates after 1 January 2026, will be required to submit a notice about creation of the trust or transfer of an asset to a trust (Form 147) within 90 days from the date of transfer, regardless of the location of the asset.
• Trusts: a trustee of a beneficiary trust (in which the settlors or beneficiaries are individual beneficiaries or foreign residents) will be required to submit an annual report encompassing all the trust income, including foreign-sourced income, as well as a declaration of capital as required by the Tax Assessing Officer. It should be emphasized that the date on which the trust becomes an Israeli resident trust—whether following the immigration of the settlor or if due to a change in the residency of the beneficiary—will be deemed the determining date for the purpose of application of Amendment 272. Accordingly, a trust that becomes an Israeli resident trust prior to 1 January 2026 will continue to benefit from the reporting exemption until expiry of the period of benefits, while a trust that becomes an Israeli resident trust after such date will be subject to reporting fully on all income generated by it, even if deemed tax-exempt.
• Beneficiaries: an individual beneficiary over 25 years of age, who is a beneficiary of a trust having assets valued at more than NIS 500,000, will be required to submit an annual report even if he did not actually receive a distribution. In addition, he will be required to report on any distribution received by him from the trust, regardless if sourced in Israel or abroad, as well as from a trust whose assets are valued at less than NIS 500,000.

Acclimation Year – important clarification

The draft clarifies that individuals who immigrated to Israel during 2025 and opted for an Acclimation Year, will be regarded as foreign residents throughout that year, but will fall within the realm of application of the amendment with effect from 2026. In other words, they will also be subject to reporting on their income and assets effective as of the end of the Acclimation Year. In practice, this speaks of a fundamental disadvantage when opting for the Acclimation Year, since even if it facilitates deferment of the applicability of the residency for one year, it nonetheless results in the individual falling within the realm of Amendment 282 and being subject to the comprehensive reporting duties already from the end of that year.

In our opinion, although Amendment 272 is designed to enhance tax transparency and bring Israel into line with international standards, it also carries with it a real risk of disproportionate use of the powers of the Tax Assessing Officer vis-à-vis new immigrants and veteran returning residents. Expansion of the reporting duties, coupled with the authority to demand documents, reports and detailed data, may in fact deter that very same high-quality and economically viable population which the legislature has sought to lure to Israel with the aid of the existing exemptions. We would note that, in our view, the draft Circular in its current form, excessively broadens the scope of the reporting duties and the requirement for the furnishing of unnecessary data will disproportionately burden immigrants and veteran returning residents.

In this context, see the ruling of Judge Yardena Seroussi in the case Tax App. 21579-01-20 Meir v. Eilat Tax Assessing Officer (published in Nevo, 17.4.2022), in which she harshly criticized the conduct of the Tax Assessing Officer vis-à-vis a returning resident who sought to claim an exemption from tax pursuant to section 14 of the ITO. The judge emphasized that even though the burden for proving the entitlement to the exemption is imposed on the taxpayer, the Tax Assessing Officer should nevertheless act with caution and proportionality, while preserving the social-fiscal purpose of the exemption—to encourage immigration to Israel and lure a high-quality population and economically viable investors.

WALLET COMPANIES AND PERSONAL LABOUR- INTENSIVE COMPANIES: NEW CLARIFICATIONS BY THE ITA

On 31 December 2024, the Knesset adopted into legislation the Economy Efficiency Law (Legislative Amendments for Achieving the Budget Targets for 2025) (Taxation of Undistributed Profits), 5785-2024 (Amendment 277), which entered into effect on 1 January 2025. Amendment 277 significantly broadens the application of section 62A of the ITO, in order to address the phenomenon of “wallet companies” and reduce the possibility of tax deferral by means of the two-stage taxation model.

The main points of Amendment 277 stipulate that the taxable income of a closely-held company, which derives from the activity of an individual who is the controlling shareholder therein, will be deemed income generated by him and taxed at a marginal tax. Amendment 277 narrows the exception in section 62A(a)(1) with regard to activity as an officer who provides management services, such that a holding of 25% (controlling shareholder only) and more in the other company, the recipient of the services, will constitute an exception to marginal taxation, instead of 10% (substantive shareholder) as existed prior to the enactment of Amendment 277. In addition, the general exception in section 62A(a)(2), which allows a substantive shareholder in a company, the recipient of the services, to provide such company (through another company) with services of the type performed by an employee on behalf of his employer, has been rescinded altogether. Moreover, a definite presumption was established whereby the actions of an individual will be deemed actions performed by an employee on behalf of his employer, if 70% or more of the income of the closely-held company derives from services provided to one person or his relative, the foregoing for at least 22 months out of a period of three years (instead of 30 months out of four years prior to the enactment of Amendment 277). Amendment 277 even incorporates a new taxation regime, section 62A(a1), which imposes marginal tax on personal labour-intensive companies, which are companies with high profitability that derives from active activity engaged in by a substantive shareholder in the company.

New draft Circular—highlights and clarifications for implementation of the Law

On 20 November 2025 the ITA published a comprehensive draft Circular detailing the provisions of Amendment 277 and clarifying its policy regarding their implementation. This Circular replaces Income Tax Circular 10/2017 and incorporates important highlights and interpretations of the law, as follows:

General clarifications and the application of section 62A of the ITO:

• Definition of “controlling shareholder”, times for examination and the attribution of income in the case of a change in controlling shareholder: the draft clarifies that the term “controlling shareholder” is deemed to refer only to an individual resident of Israel, and clarifies that the dates for examining the holding rates of the means of control are at the end of the tax year or on any day during the tax year and in the subsequent year. Thus, in certain cases, an increase in the holding rate in a later year may necessitate modification of the reporting for the preceding year. In addition, the taxable income of the closely-held company will be attributed to the controlling shareholder holding the company on 31 December of the relevant year, even if the controlling shareholders were replaced during the year. Accordingly, the assumption is that the shareholders will take into account the applicable tax within the framework of the share consideration.
• Attribution of expenses and set-off of losses: the draft clarifies that as distinct from other “transparent” companies, the taxable income sourced from the activity of the controlling shareholder should be calculated separately from the company’s activities. Moreover, the draft provides that a set-off of losses between the diverse activities of the company and the income attributable to the controlling shareholder will not be possible, but that losses stemming from the activity of the controlling shareholder can be set-off against other income of the company.

Clarifications regarding activity of the type performed by an employee on behalf of his employer (sections 62A(a)(2) and 62A(a)(3)):

• Clarifications regarding activity “performed by an employee on behalf of his employer” (section 62A(a)(2)): the draft clarifies that it is not obligatory that activity pursuant to section 62A(a)(2) contain all the characteristics that exist in an employment relationship.
• The exclusion with respect to the employment of employees (section 62A(a)(5)): the conclusive presumption in section 62A(a)(3) will not apply to a closely-held company that employs four employees or more, and applies only where the applicability of section 62A(a)(2) of the ITO entered into effect solely due to the presumption in section 62A(a)(3). In other words, if the activity of the individual is considered the type performed by an employee on behalf of his employer in a material manner (even without the presumption), then the employment of employees will not constitute an exception, even if there will be more than four employees, and the income will still be attributed to the individual.
• Clarifications regarding the conclusive presumption (70% of the income from a service that is provided to one person) (section 62A(a)(3)): the draft Circular emphasizes that the presumption is conclusive and cannot be contradicted, and that as a rule, even if the presumption exists, it applies from the date provision of the service commenced and not only from the date of completion of the required period. The implication is that if a closely-held company satisfies the presumption criteria, the income will be attributed to the shareholder retroactively from the date of commencement of provision of the service. Accordingly, in the case of compliance with the presumption in later years (according to the short period), an amended report will need to be submitted also for the preceding years in which the presumption existed.

Clarifications regarding personal labour intensive companies (section 62A(a1)):

“Income from personal labour-intensive activity” is a residual term that includes any income that is not regarded as “other income” (clear passive income) in relation to income that exceeds the profitability rate. The profitability rate is calculated as the ratio between taxable income from personal labour-intensive activity and income from personal labour-intensive activity, by neutralizing “payments to a related company”, where up to a profitability rate of 25%, corporate tax will be paid, and above that rate, marginal tax will be paid. Below are clarifications as provided in the draft Circular concerning implementation of the terms:

• Transitional provision for 2025: for the purpose of calculating the “profitability rate” for the 2025 tax year, a taxpayer may choose the average profitability rate for the years 2023 until 2025. By opting for this calculation, there should be taken into account also the loss that occurred in 2023 or 2024, but not transferred losses that were set-off during those years.
• “Other income”: consideration from the sale of a right in land by a contractor, which constitutes business income, will not be considered “other income” (and therefore will be considered “income deriving from personal labour-intensive activity”). On the other hand, consideration from an incidental business in land or the sale of an option in land will be considered “other income” (and therefore will not be considered “income deriving from personal labour-intensive activity”). Classifying income as “other income” is not comparable to classifying income not deriving from a business, and income that is considered deriving from a business (such as the lease of office premises by a company engaging in such activity) can also be included as “other income” (and therefore will not be considered “income deriving from personal labour-intensive activity”. Nonetheless, income that is incidentally associated with income deriving from personal labour-intensive activity (such as interest for a payment that is made by way of instalments) will be included as part of this income.
• “Payments to a related company”: these payments will be neutralized when calculating the profitability rate if one of the principal purposes for establishing the related company or furnishing the payment is tax avoidance or an improper tax reduction, or if the paying company did not declare that the payments were not intended for those purposes. The separation of functions (such as employees, manufacturing process) between related companies can serve as an indication of tax avoidance. The draft emphasizes that where there is an artificial separation of activities, they will be examined in parallel on the criminal level as well.

THE ECONOMIC PLAN FOR 2026: PROPERTY TAX, RELIEF FOR THE MIDDLE CLASS AND BENEFITS FOR NEW IMMIGRANTS

The Ministry of Finance has published “the Economic Plan for 2026—Adjustment Measures” and “the Economic Plan for 2026—Structural Changes” (the Plan), that include a series of fiscal measures designed to deal with the country’s fiscal needs in the wake of the “Iron Swords” war. Among the proposed measures, prominent are the renewal of property tax on vacant land for construction and the spacing of income tax brackets. It has been proposed to amend the Property Tax and Compensation Fund Law, 5721-1961 (the Property Tax Law), so that a property tax of up to 1.5% will be reimposed on vacant land for construction (not being agricultural, including business inventory). At the same time, the Plan proposes a spacing of income tax brackets in section 121 of the ITO, beginning from 2026 (subject to amendment of the Property Tax Law), aimed at reducing the tax burden on the middle class by expanding the taxable income ranges. For comparative purposes, the 20% range will be increased from NIS 120,721-NIS 193,800 to NIS 120,721-228,000, the 31% range will be increased from NIS 193,801-269,280 to NIS 228,001-301,200 and the 35% range will apply from NIS 301,201 instead of NIS 269,281.

The Plan also includes new tax relief for new immigrants and veteran returning residents who arrive in 2026, whereby a tax exemption will be granted on personal income generated in Israel, in gradual and decreasing amounts over the years: during 2026 and 2027—up to NIS 1,000,000 per annum; in 2028—up to NIS 600,000; in 2029—up to NIS 350,000; and in 2030—up to NIS 150,000. The foregoing, without derogating from the existing benefits. In addition, it has been proposed to abolish the zero-rated VAT on services for tourists, by repealing section 30(a)(8) of the Income Tax Law. This measure is expected to increase state revenues by about NIS 1.5 billion in 2026. In the context of international taxation the Plan refers to the adoption of the OECD’s Pillar 2 initiative. For additional details on the adoption of Pillar 2, see our October 2025 newsflash.

Advs. Leor Nouman and Moti Saban from our Tax Department are at your service to answer questions regarding these updates and other tax-related issues.

* The newsflash is intended to provide subscribers with general information only and should not in any way be regarded as firm professional advice and/or a definitive legal opinion.