Since 2007, Israel has offered olim (new immigrants) and returning residents (RR) a highly attractive tax incentive: a 10-year exemption on foreign-source income (commonly referred to as the “tax holiday”). A major accompanying benefit was the exemption from reporting foreign assets and income during this period.

Together, these benefits were designed to encourage aliyah and attract internationally active individuals to Israel.

However, for olim and returning residents who move to Israel from January 2026 onward, the exemption from reporting foreign assets and income has been cancelled. At first glance, this may appear to be a relatively modest procedural change. In practice, however, it creates what can be described as a “hole in the wall” — a new window through which the Israel Tax Authority (ITA) can see into the foreign assets, companies, and business activities of olim.

This change also comes alongside another recent development. The ITA has expanded the information required under Form 150, which now includes additional disclosure regarding non-Israeli entities held by the taxpayer. This is another example of the ITA seeking greater visibility into foreign assets and structures, even in situations where a full Israeli tax return is not otherwise required.

The cancellation of the reporting exemption reflects a broader international trend toward increased tax transparency.

Tax authorities worldwide are receiving growing amounts of financial information through international reporting frameworks and automatic exchange of information agreements. As a result, maintaining a reporting exemption has become increasingly difficult and less consistent with the growing international cooperation between tax authorities aimed at improving transparency and compliance.

This change significantly increases exposure to Israeli tax risks and makes advance planning far more important than in the past.

Under Israeli tax law, a non-Israeli company may be treated as an Israeli resident company if it is effectively controlled and managed from Israel. In addition, where a foreign company has mainly passive income, and most of its shareholders are Israeli residents, it may be classified as a Controlled Foreign Corporation, resulting in attribution of income to Israeli shareholders, even if no dividends are distributed.

The tax holiday provisions generally protect olim and RR from Israeli taxation on income from foreign companies that they control or on income attributed under the CFC rules during the holiday period.

However – and this is critical – the tax holiday does not protect against claims that a foreign company has a permanent establishment (PE) in Israel.

This has always been the case, but with the cancellation of the foreign reporting exemption, the likelihood that the ITA will identify and challenge such situations is now significantly higher.

A PE is generally a fixed place of business through which a foreign company carries on part of its business in another country. Where a PE exists, the country where it is located may tax the portion of the company’s profits attributable to that PE.

In practice, even if an  immigrant benefits from the tax holiday, a foreign company that he or she owns or works for may still become partially taxable in Israel if substantive business activity is carried out from the Jewish state.

For example, if a shareholder who also acts as CEO relocates to Israel and continues to manage the company partly from Israel, the ITA may argue that the CEO’s activities create a PE. As a result, a portion of the company’s profits could be taxed here.

In such situations, the same income may already be taxed in the country where the company is incorporated or operates. This can lead to double taxation and complex discussions between tax authorities regarding how the profits should be allocated between jurisdictions. While tax treaties often provide mechanisms to resolve such issues, the process can be lengthy and uncertain.

The risk becomes more acute if the executive maintains a designated office in Israel, or if Israeli-based staff support the company’s operations.

Importantly, PE exposure is not limited to shareholders or top executives.

A key employee relocating to Israel can also create PE risk – even if that employee holds no equity. For example, if a certain manager, or a vice president  (VP) continues performing substantive work from Israel, the ITA may argue that the company has established a PE in Israel.

This risk is increasingly common in today’s remote-work environment. In the past, PE questions were typically associated with factories, offices, or “fixed place of business.” Today, however, business decisions, negotiations, and operational management can all take place remotely through video conferencing, cloud systems, and digital collaboration tools. As a result, individuals working from Israel for foreign companies may unintentionally create a taxable presence for their employee.

Another important consideration is what happens when the 10-year tax holiday expires.

At the end of the holiday period, the protections and exemptions expire. While certain types of capital income may be apportioned between the holiday period and the taxable period, ordinary income generally becomes fully taxable in Israel from the first day after the holiday ends.

At that point, a company that is, in substance, controlled and managed from Israel, or that qualifies as a CFC, may become fully subject to Israeli tax. What was once a theoretical risk can quickly become a full-scale tax exposure.

Anyone planning to relocate to Israel, or any employee of a foreign company who expects to perform part of their role from Israel, should engage in tax planning before moving.

This planning should be conducted with both Israeli and foreign tax advisors and revisited well in advance of the end of the tax holiday period.

Key steps may include:

• Clearly defining the individual’s role and authority within the foreign company
• Implementing proper legal and operational documentation
• Structuring management and decision-making processes to limit Israeli PE exposure
• In some cases, restructuring entities to ring-fence Israeli activity
• Regularly reviewing the factual situation as business activities evolve

At the same time, Israel continues to balance increased tax transparency with policies aimed at encouraging aliyah.

Finance Minister Bezalel Smotrich has recently proposed legislation that would grant certain new immigrants a temporary Israeli tax exemption of up to NIS 1 million over five years, with the benefit gradually decreasing each year. The proposal is still subject to the legislative process, but it reflects the ongoing effort to maintain Israel’s attractiveness for internationally active individuals.

With the end of the foreign reporting exemption, the margin for error has narrowed significantly. The tax holiday remains a powerful incentive, but it no longer provides the same level of practical invisibility it once did. For olim and internationally active professionals, understanding how Israeli tax rules interact with foreign business activities is becoming increasingly important.

In practice, this often requires careful planning, clear documentation, and a cross-border perspective that takes into account both Israeli and foreign tax systems.

The writers are attorney-CPAs at Shavit Tax Lawyers.