Selling Your Israeli Company as a Non-Resident Founder

A founder in Toronto who built an Israeli software company from a spare bedroom gets the call every entrepreneur waits for: a strategic buyer wants to acquire the business for tens of millions of shekels. Her first worry is the Israeli tax bill on the sale. Her Israeli lawyer gives her the good news and the catch in the same breath. The gain is very likely exempt from Israeli capital gains tax under a provision written specifically for foreign shareholders. But unless she secures a certificate from the Israel Tax Authority before closing, the buyer is legally required to withhold roughly a quarter of the entire price and send it to the tax authority anyway, leaving her to spend the following year clawing it back.

That gap, between owing no tax and actually receiving the full price, is where non-resident founders lose time and sometimes money on an Israeli exit. The law is generous to foreign shareholders. The machinery around it is not automatic, and it does not wait for you. If you are earlier in the journey, the mechanics of ownership are covered in the guide to registering a company in Israel as a foreigner; this guide picks up at the other end, when you sell.

Is the Gain Even Taxable in Israel?

Start with the default, then find the exemption. A capital gain on selling shares is, in principle, taxable in Israel under Section 91 of the Income Tax Ordinance 1961. For an individual the rate is 25%, rising to 30% for a substantial shareholder, meaning someone who holds 10% or more, which most founders do. Those are the numbers that apply if no relief is available.

For a non-resident, relief usually is available, and it is broad. The question is whether you fit inside it, because the conditions are specific and a few common fact patterns fall outside.

The Section 97(b3) Exemption and Its Limits

Section 97(b3) of the Income Tax Ordinance 1961 exempts a foreign resident from Israeli capital gains tax on the sale of shares in an Israeli company, provided the shares were acquired on or after 1 January 2009. It was designed to make Israel attractive to foreign investors and founders, and for a clean startup exit it very often applies in full. A separate provision, Section 97(b2), can cover shares acquired before 2009 in defined cases.

The limits are where advice earns its fee. The exemption does not apply in three situations that recur in real deals:

• The company is essentially a property company, meaning most of its value derives from rights in Israeli real estate. Israel keeps the right to tax gains connected to its land.
• The gain is attributable to a permanent establishment the seller maintains in Israel, so the shares are effectively business assets of an Israeli operation.
• The selling shareholder is itself a foreign entity that Israeli residents control to the tune of 25% or more, which stops the exemption being used as a wrapper.

Where the domestic exemption does not reach, a tax treaty between Israel and your country of residence often does, typically assigning the gain to the residence state and leaving Israel with no tax, again subject to a real-estate-company carve-out. The interaction of Section 97(b3) and the treaties is set out further in the note on capital gains tax when a foreign shareholder sells Israeli company shares.

In Practice: Under Section 97(b3) of the Income Tax Ordinance 1961, a non-resident selling shares in a private Israeli operating company acquired after 1 January 2009 is generally exempt from Israeli capital gains tax, which would otherwise run at 25% to 30%. On a NIS 30,000,000 gain that exemption is worth NIS 7,500,000 to NIS 9,000,000. It is claimed through the Israel Tax Authority (Rashut HaMisim), and even when the gain is exempt the sale is still a reportable event: a non-resident must file a capital gains report within 30 days of the sale under Section 91(d). The exemption does not switch off the buyer's separate duty to withhold, which is a different problem solved by a different document.

Why the Buyer Withholds a Quarter of the Price Anyway

This is the point founders find counterintuitive. You can be fully exempt and still watch a large slice of the price disappear into the tax authority at closing.

The reason is Section 164 of the Income Tax Ordinance 1961 and the withholding regime built on it. A person paying consideration for shares must deduct tax at source unless the payee presents a certificate from the Israel Tax Authority that permits a lower rate or none. The buyer is not being difficult and cannot simply take your word, or even your lawyer's opinion, that Section 97(b3) applies. Absent an official certificate, the buyer's own exposure forces it to withhold, and standard practice is to hold back on the order of 25% to 30% of the consideration.

So the exemption and the withholding are two separate gates. The exemption decides what you ultimately owe. The certificate decides what actually reaches your bank on closing day. Clear the first and forget the second, and you can be entitled to keep everything while receiving three-quarters of it, then wait months for the rest.

The Tax Ruling That Unlocks the Proceeds

The instrument that closes the gap is a ruling from the Israel Tax Authority, applied for before the deal completes. Buyer and seller usually file it jointly. It lays out the facts, claims the Section 97(b3) exemption or the treaty relief, and asks the authority to confirm either that no withholding is required or that a specified reduced rate applies. When granted, the ruling produces the withholding certificate the buyer needs, and the proceeds flow without the holdback.

Timing is the whole game. A clean application commonly takes six to twelve weeks, sometimes longer where the facts are complex or the file is queried. Deals that leave the ruling until closing week end one of two ways: the closing slips while everyone waits for the authority, or the parties close with the full withholding taken and the founder reclaims it afterward through a tax return, tying up seven figures for the better part of a year. Neither is necessary if the application starts when the term sheet is signed.

In Practice: Under Section 164 of the Income Tax Ordinance 1961, a buyer must withhold tax at source on the share consideration unless the seller holds a valid Israel Tax Authority certificate. A pre-ruling confirming the Section 97(b3) exemption typically takes 6 to 12 weeks from a complete filing. On a NIS 30,000,000 sale, the difference is receiving the full amount at closing or watching roughly NIS 7,500,000 held back and reclaimed over the following year. File the ruling when the term sheet is signed, not at closing.

Getting Paid Abroad and What Your Home Country Takes

Winning the Israeli exemption is not the end of the tax story, only of its Israeli chapter. Two things still stand between you and clean proceeds in your home account.

The first is moving the money. Israeli banks apply the Bank of Israel's Directive 411 source-of-funds and anti-money-laundering checks to large outbound transfers, and a sale-of-company wire will draw scrutiny. Expect to document the transaction, the ruling, and the corporate approvals before the bank releases the funds. The practicalities of large outbound transfers are covered in the guide to international transfers from Israel for non-residents.

The second is your own country's tax. Residence-country tax does not go away because Israel waived its charge. If anything the exemption sharpens the home-country bill, because with no Israeli tax paid there is no foreign tax credit to offset it, so you bear the full domestic capital gains rate. A US founder faces federal and possibly state capital gains tax, and should check whether qualified small business stock relief is even available for foreign corporation shares. A UK founder faces capital gains tax, with business asset disposal relief far from guaranteed on an overseas company. Model the home-country outcome in parallel with the Israeli one, because the exempt-in-Israel headline can hide a very ordinary bill at home.

Selling Without Traveling to Israel

None of this requires you to be in Israel, which matters when the buyer's timetable is tight and you are on the other side of the world.

The share purchase agreement can be signed abroad and delivered electronically. Your Israeli lawyer can file the tax ruling, negotiate the withholding certificate, update the company's share register under the Companies Law 1999, and instruct the escrow agent, all under a specific power of attorney you sign before a notary and have apostilled. Where several founders or investors sell together, aligning their positions in advance avoids one holder's tax problem stalling everyone's closing, which is one more reason a well-drafted shareholders agreement for an Israeli company with foreign partners pays for itself at exit. The one thing you cannot delegate is the decision-making timeline: the ruling and the bank clearance run on Israeli calendars and Israeli office hours, and building in the weeks they need is the single most useful thing a non-resident seller can do.

What Often Goes Wrong

Common Mistake: Signing and closing without an Israel Tax Authority withholding certificate in hand, on the strength of an opinion that Section 97(b3) applies. The buyer, protecting itself under Section 164 of the Income Tax Ordinance 1961, withholds 25% to 30% of the price and remits it. On a NIS 30,000,000 sale that is up to NIS 9,000,000 locked with the tax authority, recoverable only by filing an Israeli return and waiting, often 8 to 14 months, for the refund. The exemption was real; the failure was procedural, and it cost a year of access to the money.

The other frequent error is assuming Section 97(b3) applies without testing the carve-outs. Founders of companies whose main asset turned out to be Israeli real estate, or who kept a taxable presence in Israel, have discovered at diligence that the exemption they counted on does not apply, and that the deal now carries a 25% to 30% Israeli tax nobody priced into the sale.

Practical Checklist

• Confirm early whether Section 97(b3) or a treaty covers your gain, and test the real-estate and permanent-establishment carve-outs
• Treat the exemption and the withholding as two separate problems needing two separate steps
• File the Israel Tax Authority ruling when the term sheet is signed, allowing six to twelve weeks
• Insist the withholding certificate is a closing condition, so the proceeds are not held back
• Model your home-country capital gains tax in parallel, remembering there may be no Israeli tax to credit
• Prepare Directive 411 documentation in advance so the bank can release the outbound wire without delay
• Grant your Israeli lawyer a notarized, apostilled power of attorney to run the ruling, the share transfer, and escrow
• Coordinate co-sellers early so one shareholder's tax position does not stall the whole closing

Speak With an Israeli Attorney

An Israeli exit rewards founders who separate the tax they owe from the paperwork that releases their money, and who start the tax ruling weeks before closing rather than during it. Before you sign a term sheet, have an Israeli attorney confirm your exemption, open the ruling file with the tax authority, and set the withholding certificate as a condition of closing so the full price reaches you.

Contact us for a confidential initial consultation.