Foreign Investor Capital Gains Exemption in Israel

A venture investor in Singapore put money into a Tel Aviv software company in 2018, watched it grow, and is now selling his stake in an acquisition for a gain of several million dollars. His first assumption is that Israel will take a quarter of it at source. His second, after a quick read of a forum thread, is that a tax treaty might help. Both assumptions miss the point. Israel may tax none of it, and the reason has nothing to do with a treaty.

Israel made a deliberate policy choice years ago: to attract foreign capital into Israeli companies, it largely exempts non-residents from capital gains tax on the shares they hold. The exemption is generous, but it is conditional, and it is not self-executing. Plenty of investors who qualify still watch 25% or 30% disappear at closing because they did not take one administrative step in time. This guide explains the exemption, the conditions that switch it off, and the certificate that turns a statutory right into actual cash in your account.

If your interest is in the company-level incentives rather than the investor exit, the Preferred Technological Enterprise benefits cover the operating-company side.

The Core Rule: Section 97(b3)

The exemption lives in Section 97(b3) of the Income Tax Ordinance 1961. In plain terms, a non-resident, whether an individual or a foreign company, is exempt from Israeli capital gains tax on the sale of securities in an Israeli company that were acquired on or after 1 January 2009.

That date is the hinge. The provision was designed to draw post-2008 investment into Israeli equity, so shares bought before 2009 do not enjoy this particular exemption and may fall under older, narrower rules. For most current investors the cut-off is irrelevant because their holdings are well inside the window.

What makes Section 97(b3) powerful is that it is a domestic exemption. It applies whether or not your country has a tax treaty with Israel, and whether or not that treaty would have given Israel taxing rights. A great deal of confused advice circulates because investors reach for the treaty first. In most share sales, the treaty analysis never has to begin, because Israeli law has already given up the tax.

In Practice: Under Section 97(b3) of the Income Tax Ordinance 1961, a qualifying non-resident pays no Israeli capital gains tax on the sale of eligible Israeli company shares. On a NIS 10 million gain, that is NIS 2.5 million of tax avoided at the standard 25% individual rate. But the Israel Tax Authority does not waive withholding on trust: you need a withholding exemption certificate, which the relevant assessing office issues in roughly 4 to 8 weeks once the file is complete.

The Conditions That Switch the Exemption Off

The exemption is not a blanket pass for any sale by any foreigner. Four conditions decide whether you keep it.

It must be a non-real-estate company. The exemption does not apply where the company's value comes mainly from Israeli real estate. The test looks at the purchase date and the two years before it: if the principal value of the company's assets was, directly or indirectly, Israeli real property, a right to use real property, natural resources, or agricultural produce in Israel, the exemption is denied. Property holding structures dressed up as operating companies are caught here, and the carve-out tracks the logic of the Real Estate Taxation Law 1963, under which real-estate gains have their own regime.

The gain must not belong to an Israeli permanent establishment. If you, the seller, conduct business in Israel through a permanent establishment and the shares are connected to it, the gain is Israeli business profit, not an exempt foreign investor's capital gain.

The shares must not have come from a relative or a tax-free reorganization. Buying the stake from a related party, or receiving it through one of the tax-free reorganization mechanisms in the Ordinance, disqualifies it. The provision is aimed at genuine outside investment, not at shuffling shares within a family or group.

It must be a capital gain, not trading income. A person whose business is dealing in securities is taxed on business income, and Section 97(b3) does not shelter that.

Common Mistake: Investing through, or selling, a company that is real-estate-heavy and assuming the foreign-investor exemption still applies. A non-resident who sold shares in what looked like a tech holding company, but whose underlying value was Israeli property, found the exemption denied and faced Israeli capital gains tax at 25% on the full gain, plus interest and linkage from the sale date. The real-estate character is tested at acquisition and for the two preceding years, so it has to be checked before you buy, not after you sell.

Listed Shares Are a Separate Track

If the company is traded on the Tel Aviv Stock Exchange at the time of sale, you are not in Section 97(b3) at all. A different provision, Section 97(b2), governs non-resident gains on TASE-listed securities, with its own conditions. The practical takeaway is simple: the exemption you rely on depends on whether the shares are private or publicly listed when you sell, and the two should never be conflated. Investors who hold through an IPO need to know which regime applies on the day of disposal, because the answer can change at listing.

Why the Certificate Matters More Than the Statute

Here is the gap that costs investors money. The exemption is in the law. The withholding obligation is also in the law, and it does not pause to ask whether you qualify.

Under the Ordinance's withholding mechanism, the payer in a share transaction, typically the buyer or the company, must deduct tax at source unless the seller produces a withholding exemption certificate from the Israel Tax Authority. The default deduction for a non-resident individual is 25%, rising to 30% for a substantial shareholder of 10% or more, and the corporate rate applies to corporate sellers. So a fully exempt investor who shows up at closing without the certificate watches the buyer hold back a quarter of the proceeds, perfectly lawfully, and then spends months reclaiming it through a refund filing.

The fix is to apply to the assessing office before completion. The application sets out why Section 97(b3) applies and asks the Authority to confirm zero withholding. For larger or structurally complex deals, a pre-ruling gives certainty in advance. Either way, the work happens on the Israeli timeline while you are abroad, which is exactly why it should start well before the closing date is fixed.

In Practice: Under Section 91(d) of the Income Tax Ordinance 1961, a capital gain is reportable to the Israel Tax Authority within 30 days of the sale, with any tax due paid as an advance. A non-resident relying on the Section 97 exemption still files, but reports the gain as exempt. Where no exemption certificate was obtained and 25% to 30% was withheld at source, recovering the over-withheld amount through a refund claim commonly takes 4 to 9 months from filing.

The Home-Country Side Most Investors Forget

An Israeli exemption is not a worldwide exemption. If you are tax-resident somewhere that taxes worldwide capital gains, and most developed countries do, your home authority will want its share. Normally a foreign tax credit softens double taxation, but a credit only works against tax you actually paid. When Israel charges nothing, there is nothing to credit, and you bear the full home-country tax.

This is not a flaw in the exemption. It simply means the exemption benefits investors whose home-country rate is low or who have other shelter, more than it benefits those facing a high domestic rate regardless. For US investors in particular, the interaction with US federal capital gains tax is the real number to model, and it is covered in more depth in the guide on capital gains tax on Israeli investments for US residents. Whatever your country, the Israeli exemption should be planned together with your home filing, never in isolation.

Practical Checklist

• Confirm the shares were acquired on or after 1 January 2009
• Verify the company is not real-estate-heavy, tested at purchase and the two prior years
• Check the shares were not bought from a relative or via a tax-free reorganization
• Confirm you have no Israeli permanent establishment the gain attaches to
• Apply to the Israel Tax Authority for a withholding exemption certificate before closing
• For large or complex sales, consider a pre-ruling for advance certainty
• File the Israeli capital gains report within 30 days of sale, reporting the exempt gain
• Model your home-country capital gains tax, since the Israeli exemption gives you nothing to credit

Speak With an Israeli Attorney

The foreign-investor exemption is one of Israel's most valuable but most procedurally unforgiving tax benefits. The difference between keeping the whole gain and waiting months for a refund usually comes down to one certificate obtained at the right time. We advise non-resident investors and their advisers on qualification, secure withholding exemption certificates and pre-rulings from the Israel Tax Authority, and coordinate the timing with your home-country tax position before a sale closes.

Contact us for a confidential initial consultation.