Your Taxes: Good news for Israelis with foreign rental income

An Israeli court has reaffirmed the principle that no National Insurance Institute (Bituach Leumi, social security) payments are due on passive foreign rental income. This will be good news for many olim (immigrants) and other Israelis who have real estate investments outside Israel.

Furthermore, the court criticized the NII for dragging its feet on the matter.

In general, NII payments of up to 12.17% are at stake.

The above principle is hidden in a wealth of technicalities. Let's try to shed some light on the case in question and what the courts say the law means.

The Income Tax Law: For passive Israeli residential rental income above an exempt level (NIS 5,654 per month in 2026), taxpayers may: (b) elect to pay 10% tax on the gross rent; or (b) pay tax at their marginal rate (up to 50%) on net income after deducting expenses and depreciation.

On passive foreign rental income of all sorts, residential or commercial, different rules apply. There is no exempt level. An Israeli resident individual may choose between: (b) elect to pay 15% tax on the gross rent minus depreciation; or (b) pay tax at the marginal rate (up to 50%) on net income after deducting expenses and depreciation and after crediting foreign tax paid.

The National Insurance Law: In general, NII contributions on passive rental income, not from work, range up to 12.17% (2026 rates).

But the National Insurance Law, Section 350(7), says no NII contributions on rental income are due if the taxpayer elects to apply the 10% or 15% tax rates.

Option for those who choose to pay regular tax rateBut what if the taxpayer decides to pay tax at the regular rate up to 50% on net income, e.g., to claim expenses, depreciation, and a foreign tax credit?In 2024, the NII issued Circular No. 1314, stating that it had stopped collecting NII contributions on Israeli residential rental income. But the NII said nothing about foreign rental income.

The court case: The main case concerns an Israeli resident, a yeshiva student (Olach), who rented out three residential properties in Switzerland and decided to pay tax at his marginal tax rate (up to 50%) (Olach vs NII, Jerusalem Labor Court, November 2020).

The NII tried to claim about NIS 29,000 in NII contributions on the rent, based on its reading of the National Insurance Law. Also, the NII claimed the individual derived active business income from the rent and therefore didn't qualify for any NII exemption.

Court judgments: In the Olach case, the Jerusalem Labor Court ruled that no NII payments are due on the foreign rental income taxed at the taxpayer's marginal rate. He could have elected the 15% rate.

The court said it was clear that the individual, a yeshiva student, derived passive income from the three Swiss properties, not active business income.

Furthermore, his marginal tax rate was zero after claiming a foreign tax credit for the Swiss tax on the rent. If the NII imposed NII payments, that would be double taxation.

The court criticized the NII's inconsistency in seeking to collect contributions on foreign rental income rather than on Israeli residential income.

The NII also said the individual was doing tax planning. The court said there was nothing wrong with legitimate tax planning.

Following the Olach case, a class action was lodged on behalf of other similar cases (Soloveitchik vs NII, February 2026). The court reportedly ruled that the NII had not properly complied with the conditions of the “cessation notice” because it continued to claim contributions on foreign rent after the Olach case judgment.

However, the class-action appellant was apparently not personally interested, so the class action was accepted in principle, subject to checking who should be the appellant.

Conclusion: This case will be relevant to many passive investors in foreign real estate, i.e., income tax is applicable, but NII payments are not.

What should you do? Calculate your combined foreign and Israeli tax and NII liabilities under both alternatives – 15% tax or marginal tax. If you already paid the NII on foreign rental income, consider claiming a refund soon, as time limits may apply.

It doesn't matter whether the country concerned has a tax treaty with Israel. Israel has foreign tax-credit rules in the domestic Israeli law for all foreign taxes paid on income and gains.

As always, consult experienced tax advisers in each country at an early stage in specific cases.leon@hcat.coThe writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.