Are non-residents exempt from Israeli capital gains tax on Tel Aviv Stock Exchange shares?

A non-resident investor buys into the Tel Aviv Stock Exchange, the position does well, and the natural fear is that selling will trigger Israeli capital gains tax on the way out. For most foreign investors in listed Israeli securities, it does not. Israel deliberately exempts non-residents from capital gains tax on traded shares to keep its market open to foreign money. The exemption is generous, but it has a hard edge where Israeli real estate is hiding inside the company, and it never reaches across to switch off tax at home.

---

Detailed Explanation

The core relief sits in Section 97(b2) of the Income Tax Ordinance 1961. A non-resident who sells securities traded on the Tel Aviv Stock Exchange is, as a rule, exempt from Israeli capital gains tax on the gain, provided the gain is not attributable to a permanent establishment the investor maintains in Israel. The point of the provision is to put foreign portfolio investors in roughly the position they would be in trading on any other open market, so the gain is left to be taxed, if at all, where the investor lives. This is the same policy that underlies the broader capital gains exemption for foreign investors in Israeli shares.

Section 97(b3) widens the door further. It exempts a non-resident who is resident in a country with which Israel has a tax treaty from capital gains tax on the sale of shares in an Israeli company, including unlisted shares, where the shares were acquired from 2009 onward and the conditions are met. So the exemption is not confined to the trading screen; it can reach a direct stake in an Israeli company. The exemption is what makes an Israeli investment or brokerage account attractive to a non-resident in the first place, because the exit is usually clean on the Israeli side.

The exception is the part investors miss. Where the company's value derives mainly from Israeli real estate, or from a right to use Israeli land or natural resources, the exemption does not apply. The gain is then treated as a real-estate gain and taxed in Israel, broadly as betterment tax (mas shevach) is on property. So a holding that looks like a share but is really a wrapper around Israeli property does not escape Israeli tax. Two further points matter in practice. First, the Israeli exemption applies to capital gains, not to dividends, which are withheld separately, or to interest. Second, the exemption is an Israeli relief only; if you are resident in a country that taxes worldwide income, the gain is reportable and taxable there, and there will be no Israeli tax to credit against it precisely because Israel exempted it.

In Practice: Under Section 97(b2) of the Income Tax Ordinance 1961, a non-resident is exempt from Israeli capital gains tax on securities traded on the Tel Aviv Stock Exchange, and Section 97(b3) extends a comparable exemption to shares in an Israeli company acquired from 2009 by a resident of a treaty country, provided in each case the gain is not attributable to a permanent establishment in Israel. The exemption does not apply where the company's value comes mainly from Israeli real estate, which is taxed as a real-estate gain (mas shevach) instead; without the exemption the gain would face 25%, or 30% for a material shareholder. Where a broker withholds in error, the Israel Tax Authority (Rashut HaMisim) refunds it, a claim that commonly takes several months.

Key Considerations

• Non-residents are generally exempt from Israeli capital gains tax on Tel Aviv Stock Exchange securities under Section 97(b2).
• Section 97(b3) can extend the exemption to shares in an Israeli company, including unlisted shares, for treaty-country residents.
• The exemption fails where the company's value derives mainly from Israeli real estate; that gain is taxed in Israel.
• The relief covers capital gains only, not dividends, which are withheld at source, or interest.
• The Israeli exemption does not remove home-country tax on the gain, and there is no Israeli tax to credit because none was charged.

When to Consult a Lawyer

This question typically requires professional legal advice when:

• The Israeli company's assets are real-estate heavy and the exemption may not apply.
• A broker withheld Israeli tax on a sale you believe was exempt and you need a refund.
• You hold a material stake or unlisted shares and need to confirm the Section 97(b3) conditions and the treaty position.

A qualified Israeli attorney or tax adviser should confirm the exemption applies to your specific holding before you rely on a tax-free exit.

---

Speak With an Israeli Attorney

We advise non-resident investors on whether the Section 97 exemptions cover their Israeli securities or shareholding, recover tax withheld in error, and coordinate the Israeli position with the home-country tax treatment of the gain.

Contact us for a confidential initial consultation.