What Capital Gains Tax Do Foreign Shareholders Pay When Selling Israeli Company Shares?

Selling shares in an Israeli company is a taxable event in Israel for a non-resident shareholder, and the Israeli tax framework creates both a liability on the seller and a withholding obligation on the buyer. Under Section 91(c) of the Income Tax Ordinance (Pkadat Mas Hakhnasa), a non-resident individual's capital gain from shares in an Israeli company is taxable at 25% of the net gain — the difference between the sale price and the adjusted cost base of the shares, indexed to Israeli CPI since acquisition. Under Section 170 of the same Ordinance, the buyer of Israeli company shares from a non-resident must withhold 25% of the total purchase price and remit it to the Israel Tax Authority unless the seller has obtained a reduced or zero withholding certificate from the ITA before closing. The withholding obligation falls on the buyer — failure to withhold makes the buyer directly liable to the ITA for the unpaid amount, regardless of what the seller does with the proceeds.

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Detailed Answer

The withholding mechanism exists because the ITA cannot easily enforce a tax liability against a non-resident after the proceeds have been transferred abroad. By placing the withholding obligation on the buyer — who is typically an Israeli company or individual with assets in Israel — the ITA secures collection at the transaction rather than relying on voluntary post-closing compliance from the non-resident. For buyers, this creates a practical compliance risk that is addressed in Israeli company share purchase agreements by requiring the seller to produce either an ITA withholding certificate or treaty-exemption documentation as a condition of closing. A seller who cannot produce that documentation will typically see the full 25% withheld from their proceeds, with a subsequent ITA refund process if their actual gain justifies a lower tax.

The pre-closing process for a withholding certificate begins with the Israeli attorney filing an application to the ITA's Assessment Unit (Pikanut) with jurisdiction over the company's registered address. The application includes the share purchase agreement, the seller's acquisition cost documentation, the capital gain calculation, and — where the seller is claiming a treaty exemption — the relevant treaty provision and proof of the seller's tax residency in the treaty country. Processing time from a complete application is typically 4–8 weeks. The transaction timeline must account for this: a deal expected to close in 6 weeks requires the withholding certificate application to be filed on or before the day the purchase agreement is executed. A last-minute application either delays closing or forces a 25% holdback pending the ITA's review.

In Practice: Section 91(c) of the Income Tax Ordinance (Pkadat Mas Hakhnasa) sets the 25% rate for non-resident individuals on share gains accrued after January 1, 2012; shares acquired before that date may have a different blended rate calculation. The buyer's withholding obligation under Section 170 of the Ordinance applies to the total purchase price, not to the estimated gain — the seller must apply to the ITA for a certificate based on the actual gain if a lower withholding rate is justified. Applications for reduced withholding certificates are filed with the ITA Assessment Unit (Pikanut) covering the company's address. Processing time is 4–8 weeks from a complete submission (2026). Capital gain reports for non-residents must be filed with the ITA within 30 days of the closing date. The gain and any Israeli tax paid must also be reported to the seller's home tax authority; most Israeli DTA treaties require this even when the credit fully offsets home-country liability.

The treaty analysis determines whether Israel has taxing rights over the specific gain. Most Israeli DTAs follow the OECD model treaty's Article 13: gains from shares deriving their value principally from immovable property are taxable in Israel, while gains from other company shares are taxable only in the seller's country of residence. An Israeli operating company — a technology business, a professional services firm, a manufacturing company — whose value is principally in intellectual property, human capital, or equipment is generally not a property-rich company, and the seller's country of residence holds exclusive taxing rights under the applicable treaty. An Israeli holding company whose primary asset is Israeli real estate or land rights would, by contrast, be treated as property-rich, and the share sale gain would be taxable in Israel even for a seller covered by a treaty. The classification must be assessed against the company's actual asset composition at the time of sale, not at the time of incorporation. For guidance on the broader considerations involved in foreign shareholders setting up or exiting Israeli companies, see our guide on registering a company in Israel as a foreigner.

When to Consult a Lawyer

• The sale is expected to close within 8 weeks and no withholding certificate application has yet been filed — buyers routinely require the certificate as a closing condition, and a last-minute application forces either a closing delay or a 25% holdback from the proceeds that requires a subsequent ITA refund process lasting several months
• The company's asset base is mixed — some Israeli real estate, some operating assets — and it is unclear whether the property-rich test is met under the applicable treaty at the time of sale — the classification determines whether Israel has taxing rights at all, and the answer affects both the seller's net proceeds and the structure of the withholding certificate application
• The shares being sold include a combination of Section 102 employee share plan shares held through an IDF-approved trustee and directly-held founder shares — Section 102 shares have their own tax regime with specific trustee involvement requirements, and the trustee must be engaged in the transaction mechanics alongside the attorney handling the sale agreement

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Speak With an Israeli Attorney

A non-resident's capital gains tax position on an Israeli share sale is determined before the purchase agreement is signed. Establishing the correct cost base, reviewing the applicable treaty, and filing the withholding certificate application on a timeline consistent with closing are all tasks that require coordinated Israeli legal and tax advice specific to the transaction.

Contact us for a confidential initial consultation.