I worked for an Israeli company, left for the US, and still hold options through their trustee. How will Israel tax them?

An ex-employee in Palo Alto with a trustee account in Tel Aviv is in a better position than they usually think, provided nobody has touched the structure. Section 102 of the Income Tax Ordinance gives employees and office holders who are not controlling shareholders a preferential route, and its capital gains track defers tax until sale and then charges 25% rather than employment rates. The trustee is not an administrative nicety. It is the condition.

---

Detailed Answer

The capital gains track requires the company to grant the securities through a trustee approved by the Israel Tax Authority, for the trustee to hold them for a minimum period of 24 months from the end of the tax year in which they were deposited, for the trustee to continue holding the exercised shares until sale, and for the company to meet the section's filing and reporting requirements. Break any of those and the benefit is lost: an early release from the trustee turns the entire gain, not merely the excess, into ordinary employment income taxed at marginal rates that reach 47%, plus the high-income surtax where applicable. There is a second, less favourable route. Section 3(i) applies where options are granted outside the Section 102 trustee arrangement, and it taxes the benefit as work income on exercise rather than as a capital gain on sale, which is what applies to most grants made by a foreign parent directly. The Israel Tax Authority has also published guidance for the mirror case, an employee who received foreign options as a non-resident and later became Israeli resident, offering either Section 3(i) treatment with spreading or conversion into the Section 102 regime under a ruling.

Relocation is where the arithmetic gets careful. Israel treats the benefit as accruing over the vesting period and taxes the slice attributable to the days you worked in Israel, so an option granted in Haifa and sold four years after you moved to California is typically split by workdays between the two countries. The Israeli slice is withheld and remitted by the trustee at source, and you should not expect to receive the gross proceeds. On the American side the same event is compensation income for US purposes under US rules that do not follow the Israeli characterisation, the foreign tax credit has to be claimed against the right basket and the right year, and the timing mismatch between Israeli withholding on sale and US recognition on exercise is the single most common source of double taxation in these files. Practically, tell the trustee your current tax residence and address before you sell rather than after, obtain the Israeli withholding certificate at the time of the sale, and keep the grant documents: Israeli trustees have been known to apply the default withholding rate where a foreign address raises a question. Where the holding also includes ordinary founder or investor shares, the sale mechanics differ and our answer on capital gains tax when a foreign shareholder sells Israeli company shares covers that side.

In Practice: Section 102 of the Income Tax Ordinance [New Version] 5721-1961 taxes the capital gains track at 25%, conditional on grant through an Israel Tax Authority approved trustee and a holding period of at least 24 months from the end of the tax year of deposit. Breach shifts the whole benefit to employment rates reaching 47% plus surtax; Section 3(i) governs non-trustee grants. Israel taxes the portion attributable to Israeli workdays, withheld at source by the trustee, and on a gain of NIS 800,000 apportioned two thirds to Israeli service the Israeli tax at 25% is roughly NIS 133,000. A withholding certificate is normally issued within 30 days of the sale.

When to Consult a Lawyer

• The company or the trustee is proposing to release the shares to you before the 24-month period ends. That single step converts a 25% capital gain into employment income at up to 47%, and it is not reversible after the release.
• You are a US person and the Israeli withholding will land in a different tax year from your US recognition event. The credit has to be planned around the mismatch, and a claim filed after the fact often cannot be matched at all.
• Your grant came from a foreign parent rather than the Israeli subsidiary. Those grants frequently sit under Section 3(i) rather than Section 102, and assuming the 25% rate applies leads to a large and avoidable assessment.

---

Speak With an Israeli Attorney

We read the plan and the trustee arrangement to confirm which track your grant actually sits on, calculate the Israeli apportionment before you sell, and obtain the withholding documentation your home country will need for the credit.

Contact us for a confidential initial consultation.