Employee Stock Option Taxation

Taxation of employee stock options and RSUs in an Israeli company is determined in most cases under Section 102 of the Income Tax Ordinance. Under the capital gains track through a trustee, where the shares remained with the trustee for at least 24 months from the date of allocation, the gain is taxed at 25% rather than at the marginal tax rate, which can reach 47% plus surtax. An early sale, a publicly traded company, or relocation abroad changes the calculation. Send us your grant letter and trustee report, and we will assess the expected tax before you sell.

Before you sell, and before any major change in the company or your country of residence:

• Your shares have vested and you want to sell, but it is unclear whether 24 months have passed since the date of allocation and deposit with the trustee.

• The company is being acquired, and the consideration for the options will be paid in cash or in shares of the acquiring company.

• The company has gone public or is already publicly traded, and you want to know which portion of the gain will be taxed as employment income.

• You are relocating abroad while some of your options have not yet vested.

• You returned to Israel with options or RSUs received from a foreign employer.

• You are a founder or hold close to 10% of the company, and it is unclear whether you qualify as a controlling shareholder.

Section 102 allows an employing company to allocate shares, options, and RSUs to employees and officers who are not controlling shareholders, under three tracks. The company selects the track, and the selection applies to all employees under the plan.

Capital Gains Track Through a Trustee

This is the most common track. The company files the plan with the assessing officer at least 30 days before the allocation, and if no response is received within 90 days, the plan is deemed approved. The shares or options are deposited with a trustee and remain with the trustee for at least 24 months from the date of allocation and deposit. Tax is imposed at the time of "exercise," meaning when the trustee sells the shares or transfers them to you, whichever comes first. When the conditions are met, the gain is taxed as a capital gain at 25% and is not subject to National Insurance and health insurance contributions. The company, for its part, may not deduct the benefit as an expense.

Employment Income Track Through a Trustee

Under this track, the holding period with the trustee is 12 months, and the entire benefit is taxed at the time of exercise as employment income, at the marginal tax rate plus National Insurance and health insurance contributions. In return, the company may deduct the benefit as a salary expense.

Allocation Without a Trustee

In an allocation of shares, or of options traded on a stock exchange, tax is generally imposed at the time of allocation. For non-traded options, the tax is deferred until the option or the share received upon exercise is sold. In both cases, the benefit does not enjoy the 25% rate of the trustee track.

Publicly Traded Company

When the company's shares are listed for trading on the date of allocation, or were listed within 90 days thereof, the gain under the capital gains track is split (Section 102(b)(3)). The portion equal to the average share price on the exchange during the 30 trading days preceding the allocation (or the 30 trading days following the listing, if the listing occurred later), less the amount you paid for the share, is taxed as employment income, up to the total benefit at the time of exercise. Only the remainder is taxed at 25%.

Controlling Shareholders and Surtax

Section 102 does not apply to a controlling shareholder as defined in Section 32(9): generally, a person who holds 10% or more of the means of control in the company, alone or together with a relative, or who has the right to appoint a director or CEO. Options allocated to such a person are taxed under Section 3(i), usually at the time of exercise. Under all tracks, a person whose taxable income in a given year exceeds NIS 721,560 (the amount is frozen until 2027) pays a 3% surtax on the portion above that amount (Section 121B(a)). On the capital gain component under the capital gains track, an additional 2% applies when capital-source income alone exceeds that amount (Section 121B(a1)). The component taxed as employment income is subject only to the 3%.

In an exit, the capital gains track must be preserved, and a tax ruling is usually requested for that purpose. In a relocation—whether abroad or back to Israel—it is necessary to determine which portion of the gain is taxable in Israel, and the Israel Tax Authority allocates it based on the working days in each country during the vesting period.

Acquisition of the Company

When the company is sold, the options are exchanged for options in the acquiring company or redeemed for cash, sometimes before the trustee holding period has elapsed. To preserve the capital gains track, a tax ruling is requested from the Israel Tax Authority. For common scenarios there are Green Track forms, such as Form 928 for the exchange of options in a share sale transaction and Form 951 for interim approval in an acquisition transaction. In Tax Ruling 9567/15, the sale of shares in the transaction was recognized as an involuntary sale: the cash consideration was taxed at the time the transaction was completed, and after deducting the tax advance, the balance remained with the trustee until the end of the period. Options whose vesting is contingent on an exit or IPO generally do not qualify, in the Israel Tax Authority's view, for the capital gains track.

Relocation Abroad

A person who severs their tax residency while holding options is deemed to have sold them on the day before the severance (Section 100A), even if the allocation was made without a trustee. A person who does not pay the tax on the date of departure is deemed to have deferred it until the actual sale, and under the law the portion taxable in Israel is calculated based on the holding period up to the severance of residency out of the total holding period. For employee stock options, the Israel Tax Authority allocates the gain based on the working days in each country during the vesting period, as it has also done in tax rulings issued to relocating employees. We expanded on this in ourarticle on exit tax on options in relocation. How the date of severance itself is determined is explained on our Severance of Tax Residency.

Returning to Israel with Options from a Foreign Employer

Income Tax Circular 9/2025, published on November 11, 2025, sets out how options and RSUs received while you were a foreign resident and exercised after you became an Israeli resident are taxed. The income from such an exercise is spread in equal portions over the tax years from allocation to exercise, up to a maximum of 6 years. The portion spread to years in which you were a foreign resident is exempt from tax in Israel, and the portion spread to years in which you were already a resident is taxable. The working days in each country during the vesting period determine which portion was generated abroad, and consequently the credit for foreign tax and the exemption for new immigrants and veteran returning residents. The rules for new immigrants and returning residents are detailed on our Taxation of New Immigrants and Returning Residents.

1. You send us the allocation plan, the grant letters, the board resolutions, and the trustee report with the allocation and vesting dates. If you are relocating, include the dates of the move as well.

2. We verify that the allocation meets the track requirements: that the plan was filed with the assessing officer on time, that the documents were deposited with the trustee by the dates set by the Israel Tax Authority, and that you are not a controlling shareholder.

3. We calculate the tax for each tranche separately: the employment income component, the capital gain component and the surtax, and the amount to be withheld at source.

4. In an exit, IPO, or before a relocation, we prepare the application for a tax ruling or the exit tax calculation, and coordinate with the trustee and the payroll department.

5. If the assessing officer reclassifies the benefit, we represent you in an objection, and when necessary, in an appeal as well.

Stock option cases at the firm are handled by Adv. and CPA Shlomi Vaknin and his team. Shlomi has been a certified public accountant since 2000 and an attorney since 2008. He served for nearly a decade as a national supervisor in the professional division of VAT at the Israel Tax Authority, and was a senior partner at a tax law firm for 18 years before establishing his own firm in 2024. In a stock option case, the legal classification and the calculation of each tranche are interdependent, and both are handled by him.