Israeli Legislation.com
OrdinanceTax Law

Income Tax Ordinance [New Version]

פקודת מס הכנסה [נוסח חדש]

Published: 1961-04-25Last amended 2026-06-08✓ Amendment status checked against the Knesset legislation record on 2026-09-04
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Unofficial English translation — for reference only. It may contain errors or omissions and cannot be relied on as a legal text. Only the Hebrew text published in Reshumot is legally binding.More

This English text was translated from the official Hebrew using a range of translation tools, and it undergoes ongoing checks and updates. It is not a certified translation.

Despite these checks, it may contain errors, omissions, or imprecise renderings of legal terminology and cross-references, and it may not yet reflect the latest amendments. It cannot be relied upon as a legal text.

The Hebrew text as published in Reshumot (ספר החוקים) and on the Knesset website is the sole authoritative and legally binding version. In any discrepancy, the Hebrew text prevails.

This translation is provided for informational purposes only and does not constitute legal advice. For use in legal proceedings, request a certified Expert Legal Opinion.

Chapter II: The Place

The Place of Income from a Sale Abroad§

4.

A person engaged in Israel in an agricultural or industrial enterprise or in any other productive enterprise, the following provisions shall apply to him:

(1)Where the person sold a product of his enterprise wholesale abroad, or for delivery abroad, whether the contract was made in Israel or abroad, all the profits originating from the sale shall be deemed his income that accrued or was produced in Israel, except that if it is proved to the satisfaction of the assessing officer that the profit arose by reason of an act performed on that product abroad — other than treatment, classification, fattening, sorting, packing or conversion — that increase in profit shall not be deemed income that accrued or was produced in Israel;
(2)If in any other way the person disposed of, used or dealt with a product of his enterprise abroad, the profit that could have been obtained had he sold the product wholesale abroad at the best terms shall be deemed the profit originating from that act and his income that accrued or was produced in Israel.

The Place of Production of Income§

4a.
(a)The place in which income, earnings or profit from any of the sources listed below was produced or accrued shall be —
(1)with respect to income from a business — the place where the income-producing business activity is carried out;
(2)with respect to income from a transaction or from a casual business of a commercial nature — the place where the transaction or business is carried out;
(3)with respect to income from a profession — the place of performance of the service;
(4)with respect to income from employment — the place of performance of the work;
(5)with respect to interest, discount charges and linkage differentials — the place of residence of the payer;
(6)with respect to rental fees or fees for the use of an asset — the place of use of the asset;
(7)with respect to earnings or profit, including royalties, that derive from an intangible asset — the place of residence of the payer;
(8)with respect to a pension, usufruct and annuity — the place of residence of the payer;
(9)with respect to income from agriculture — the place of the income-producing asset;
(10)with respect to a dividend — the place of residence of the body of persons paying the dividend;
(11)with respect to earnings or profit from gambling, lotteries or prize-bearing activities, as referred to in section 2a — the place of residence of the payer of such earnings or profit.
(b)
(1)Notwithstanding what is stated in paragraphs (4) and (8) of subsection (a), the place of production of the income under those paragraphs shall be deemed to be in Israel, if the employer is one of the bodies listed in paragraph (a)(4) of the definition of "resident of Israel" or "resident" in section 1, provided that the employment relations with such an employer commenced when the employee was a resident of Israel;
(2)Notwithstanding what is stated in paragraphs (5), (7) and (8) of subsection (a), the place of production of the income shall be deemed to be:
(a)in Israel, even where the payer is a foreign resident — if the payment constitutes an expense of the permanent establishment of the foreign resident in Israel;
(b)outside Israel, even where the payer is a resident of Israel — if the payment constitutes an expense of the permanent establishment of the resident of Israel outside Israel.
(c)The Minister of Finance, with the approval of the Finance Committee of the Knesset, may determine —
(1)with respect to income that was produced in more than one place and for which no other provision has been made — rules for the attribution of the production of the income to the various places;
(2)the place of production of income in certain cases for which no other provisions have been made.

Special Provisions Regarding the Charter of Watercraft or Aircraft§

5.

(1) (Repealed) (2) (Repealed) (3) (Repealed) (4) (a) (Repealed) (b) The Minister of Finance, with the approval of the Finance Committee of the Knesset, may exempt from tax, in whole or in part and subject to such conditions as he may determine, rental fees paid for the charter of aircraft or watercraft operating on international routes, as well as interest and linkage differentials on loans for their acquisition; such exemption may be general or for types of charters or loans; (5) (Repealed)

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Chapter III: The Assessment Period

Tax Year§

6.

The tax for each tax year shall be imposed on the taxable income of a person in that year.

Special Assessment Period§

7.
(a)Notwithstanding the provisions of section 6, the Director may determine, at the request of the taxpayers listed below, that the tax in respect of each tax year shall be imposed on their income for a period of twelve consecutive months commencing on a date other than 1 January (hereinafter – special assessment period):
(1)a mutual investment fund in trust, as its meaning in the Joint Investments in Trust Law, 5721-1961;
(2)a government company, as its meaning in the Government Companies Law, 5735-1975;
(3)a company whose shares are listed for trading on a stock exchange recognised for the purposes of the Joint Investments in Trust Law, 5721-1961;
(4)a company in which at least 51% of its share capital and voting power are held, directly or indirectly, by a non-resident company whose shares are traded on a stock exchange outside Israel, or a company in which the right to receive at least 51% of its profits is vested in such a non-resident company;
(5)an institution of higher education whose financial statements submitted to the Council for Higher Education relate to a reporting period of twelve months commencing on 1 October; for this purpose, "institution of higher education" – as defined in section 9(29).
(b)In addition to the provisions of subsection (a), the Director may also determine a special assessment period for a taxpayer who has special relations, whether directly or indirectly, with a company or institution of higher education for which a special assessment period has been determined pursuant to subsection (a)(2) to (5), provided that the Director shall make such a determination only if the taxpayer has consented thereto.
(c)Where the Director has determined a special assessment period for a taxpayer pursuant to subsections (a) or (b), tax shall be imposed for each such period subject to any adjustment that the Director considers just and reasonable.
(d)The Director may make the determination of a special assessment period under this section subject to conditions, and may decline to determine a special assessment period for a company or institution of higher education as referred to in subsection (a)(2) to (5) if a special assessment period has not been determined pursuant to subsection (b) for a taxpayer who has special relations with them, whether directly or indirectly.
(e)Where the Director has determined a special assessment period, he may cancel that determination, whether at the request of the taxpayer or otherwise, if he finds reasonable grounds to do so, and he may determine for the purposes of the cancellation any adjustment that seems to him just and reasonable; a cancellation effected otherwise than at the request of the taxpayer shall take effect at the end of the special assessment period during which the cancellation was made.

Spreading of Income over More than One Year§

8.
(a)The Director may permit key money or a premium under section 2(6) that constitutes a contribution to building expenses, or a similar payment, to be spread as income over the entire term of the lease contract or over any other period that the Director may determine.
(b)Income from the sale of a patent, design or styling by the inventor, or from the sale of copyright by the creator, may be spread by the Director over a period that the Director shall determine; this provision shall not apply to income under section 2(9).
(c)At the request of the taxpayer or his heirs, the following income shall be treated, for the purpose of computing the amount of tax applicable thereto, as if it had been received as stated alongside it:
(1)salary differentials or pension differentials – in the years to which they relate, but not more than six tax years ending in the year in which they were received; for this purpose, "pension" – a pension paid pursuant to a budgetary pension arrangement as defined in section 9(6f), as well as a pension as referred to in paragraphs (2) to (3a) of the definition of "income from personal exertion" in section 1;
(2)annual leave redemption payments received by an employee – in equal annual instalments over a period not exceeding six tax years ending in the year in which they were received, but not more than the years of employment;
(3)income from personal exertion as referred to in paragraphs (5) or (6) of its definition in section 1 – in equal annual instalments over the years of employment in respect of which the grant is paid or the period during which the right to a pension accrued, as the case may be, but not more than the six tax years ending in the year in which the grant or the capitalisation of the pension was received; however, the Director may, if so requested, permit spreading over another period including future years, subject to conditions that he shall prescribe, including the payment of an advance.
(d)Where the Director has permitted under this section or under section 9a(d) the spreading of income and the taxpayer died, or liquidation of the assessed company commenced, before the end of the period determined by the Director, all the income attributable under that spreading to the portion of the years after that tax year shall be added to the income of the taxpayer in the tax year in which he died, or to the income of the company in the tax year in which its liquidation commenced; however, at the request of the heirs of the taxpayer, his estate administrator or the executor of his will, all the income shall be spread anew over the period of years that ended in the tax year in which the taxpayer died, or, at the request of the heirs of the taxpayer, all the income attributable under that spreading to the portion of the years after that tax year shall be treated as the income of the heirs of the taxpayer in those years, in proportion to their respective shares in the estate of the taxpayer, after they have given security to the satisfaction of the Director for payment of the tax that will be due from them under this computation, provided that if an advance has been lawfully paid pursuant to subsection (c)(3) or section 9a(d), or if tax has been withheld at source pursuant to section 164 – the amount of the advance paid or the amount of the tax withheld, as aforesaid, relating to the years after the date of death, shall be treated as the amount of tax due.

Spreading of Income from Works Whose Performance Exceeds One Year§

8a.
(a)In this section –

"prolonged work" – work whose performance exceeds one year, including construction works on a building by one who performs the work pursuant to the order of another person, and excluding the construction of a building by its owner;

"income from prolonged work" – income from prolonged work that constitutes income under section 2(1), whether from performance or from sale.

(b)A taxpayer engaged in prolonged work shall report his income therefrom as follows:
(1)in the tax year in which he completed at least 25% of the monetary scope of the work, as computed for that year, or of the quantitative scope of the work, at his election, he shall report the income that accrued to him, on an estimated basis, from the portion of the work that he performed, and in each subsequent tax year he shall report the income that accrued to him, on an estimated basis, in accordance with the portion of the work that he performed in that year as computed on the basis he first chose for computing the scope of performance; in the tax year in which he completed the work he shall report the full business result, less the income that he reported in the preceding years;
(2)a loss from prolonged work shall be taken into account for the purpose of determining taxable income in tax years preceding the tax year in which the work was completed only after the taxpayer has completed at least 50% of the monetary scope of the work as computed for the year in which he claimed the set-off of the loss, or at least 50% of the quantitative scope of the work;
(3)a taxpayer to whom sub-paragraph (1) or (2) applies shall attach to the return required under section 131 a report certified by a certified public accountant as its meaning in the Certified Public Accountants Law, 5715-1955, setting out the method of determining the income or loss, as the case may be, and the method of computing the scope of performance.
(c)
(1)In this subsection –

"building" – a building constructed by its owner whose construction exceeds one year;

"building fit for use" – a building or part thereof that has been connected to the electricity grid, or a building in respect of which the conditions for obtaining a completion certificate under the Planning and Building Law, 5725-1965 (hereinafter – the Planning Law) have been fulfilled;

"income from a building" – income from the sale of the building that constitutes income under section 2(1);

(2)A taxpayer who has income from a building shall be subject to the following provisions:
(a)in the first tax year in which the building was fit for use, the taxpayer shall report all income that he derived from the building up to and including that tax year, and in each subsequent tax year he shall report the income that he derived from the building in that tax year;
(b)for the purpose of determining the taxable income of a taxpayer from the sale of part of a building fit for use, a portion of the total cost of the building shall be taken into account in proportion to the ratio of the area sold in that tax year to the total area of the building, as detailed in the building permit issued for it under the Planning Law, provided that parking areas sold shall not be included for this purpose in the area sold;
(c)a loss from a building shall not be taken into account for the purpose of determining taxable income in tax years preceding the tax year in which the building was fit for use.

Treatment of Income under Section 2(6) or (7)§

8b.

Income under section 2(6) or (7) shall be included in the taxable income of the taxpayer in the tax year in which he actually received it, even if it is advance income, and expenditure incurred in subsequent tax years in the production of income under those provisions shall be allowed as a deduction from any source in the tax year in which it was incurred, provided that if the expenditure cannot be deducted in the tax year in which it was incurred, it shall be allowed as a deduction in the tax year in which the income was received, and the assessment for that year shall be treated as amended accordingly; however, no obligation to pay interest and linkage differentials under section 159a shall arise by reason thereof.

Date of Charge of Income from Exchange Rate Differentials§

8c.

A person's income from exchange rate differentials shall be treated as income in the tax year in which it accrued, even where reporting is on a cash basis.

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