During the 1967 war, Israel took control of the West Bank and East Jerusalem. While the West Bank remained under military occupation, Israel annexed East Jerusalem and applied Israeli law there. The annexed area included, however, not only the 6 square kilometers of East Jerusalem prior to 1967, but an additional 64 square kilometers that were part of the West Bank.

In its re-drawing of the Jerusalem borders, one of the factors Israel took into account was demographic: ensuring a large Jewish majority in the city. This was accomplished by including sparsely populated Palestinian areas in the territory annexed, while attempting to exclude the more populated areas. As a result, several villages and neighborhoods were divided in two. In other cases, farmlands belonging to a village were annexed to Jerusalem, while the village itself remained in the West Bank.

Immediately following the occupation of the West Bank, Israel's Parliament passed the "Jerusalem Law", annexing the area within the newly determined municipal boundary, and proclaiming Israeli sovereignty over it. Israel conducted a population census, and Palestinians residing inside what was now under municipal jurisdiction, were granted the status of "permanent resident" and the option of becoming Israeli citizens.

East Jerusalemites found themselves in an awkward situation. In order to become citizens they were obliged to pledge allegiance to Israel. Thus, most declined citizenship, opting to be permanent residents instead. This status resembles the one granted to non-Jewish immigrants: it allows Palestinian Jerusalemites to work in Israel, and enjoy health insurance and social welfare benefits provided to all Israeli residents. However, residents lack political clout and are subject to a variety of measures intended to ensure a Jewish majority in the city. The result is an inequality between Jewish and Palestinian Jerusalemites that is present in all aspects of daily life in the city.

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