Quick Answer: Non-residents selling shares in an Israeli company often pay zero Israeli capital gains tax. Section 97(b) of the Income Tax Ordinance [New Version] 1961 exempts foreign residents from Israeli capital gains tax on share sales, provided they held less than 10% of the company's means of control at any point in the 12 months before the sale, the company is not a "real property company" (igud), and they have no permanent establishment in Israel. When the exemption does not apply, Israeli capital gains tax is 25% for minority shareholders and 30% for major shareholders with a 10%-or-more stake. Whatever the outcome, an Israeli buyer is required under Section 68A of the Ordinance to withhold tax at source unless the seller holds a valid Exemption Certificate (Teudat Nikui Mas) from the Israel Tax Authority.

Foreign venture capital funds, angel investors, family offices, and diaspora entrepreneurs frequently end up holding equity in Israeli companies. When a startup gets acquired, a portfolio company lists on a stock exchange, or a shareholder buys out a co-founder, the question of Israeli capital gains tax on the share sale lands squarely on the non-resident seller's desk.

The answer is rarely obvious. The rules sit across multiple sections of the Income Tax Ordinance and depend on four variables: the seller's residency, the seller's ownership percentage, the nature of the company's assets, and whether a double taxation treaty adds another layer. This guide covers all four, with the practical steps you need to close a transaction without unnecessary exposure.

1. The Basic Framework: How Israeli Capital Gains Tax Applies to Share Sales

The starting point is Section 89 of the Income Tax Ordinance [New Version] 1961 (the "Ordinance"). Capital gains arise when a "right" is transferred for consideration above its original cost. Shares in an Israeli company are a "right" for this purpose. The taxable gain is the sale price minus the adjusted cost basis, adjusted for inflation using the Central Bureau of Statistics consumer price index for shares acquired before January 1, 2003.

Under Section 91 of the Ordinance, the tax rates that apply to the gain are:

  • 25% for a shareholder who is not a "major shareholder" during the sale year and was not a major shareholder at any point in the prior 12 months
  • 30% for a "major shareholder" — defined as a person who holds, directly or indirectly, 10% or more of any means of control in the company

Means of control includes shareholding percentage, voting rights, the right to appoint directors, and the right to profits or assets on winding up. All four are aggregated. If you hold 8% of the shares but also have the right to appoint 15% of the board through a separate shareholders' agreement provision, you are likely a major shareholder for Israeli tax purposes.

Non-residents are taxable in Israel only on Israeli-source income. A capital gain on shares in an Israeli company constitutes Israeli-source income under Section 4A of the Ordinance, regardless of where the sale agreement was signed or where payment was received.

In Practice: Israel's 3% surtax on high income (Section 121B of the Ordinance) applies to the sum of all Israeli-source income in the year exceeding NIS 721,560 (the 2026 threshold, updated annually). A non-resident who has no other Israeli income in the year of the share sale benefits from the full NIS 721,560 buffer before the surtax kicks in. On a NIS 5 million gain where the standard 25% rate applies and the seller has no other Israeli income, the first NIS 721,560 of gain falls under the threshold and only the remaining NIS 4,278,440 is subject to the 3% surtax, adding approximately NIS 128,353 to the total tax bill. This calculation matters and is often missed by non-residents who assume the 25% rate is all-inclusive.

2. The Section 97(b) Exemption: When Non-Residents Pay Nothing

Section 97(b) of the Ordinance is the primary route by which most foreign investors in Israeli companies exit without paying Israeli capital gains tax. The provision exempts a foreign resident from Israeli tax on capital gains from the sale of shares in an Israeli company, but three conditions must all be satisfied simultaneously.

Condition 1: The seller is a foreign resident

Israeli tax residency is determined under Section 1 of the Ordinance using a center-of-life test, with a quantitative backstop: spending 183 or more days in Israel in any tax year creates a rebuttable presumption of Israeli residency. A seller who recently left Israel must be able to show that their center of life shifted abroad before the sale. The Israel Tax Authority (ITA, Rashut HaMisim) scrutinizes this question closely in exit transactions where the seller's residency history is ambiguous.

Condition 2: The seller (and connected persons) held less than 10%

The seller and all persons "connected" to the seller must not have held 10% or more of any means of control at any point in the 12 months preceding the sale. "Connected persons" for this purpose covers spouses, siblings, parents, children, and entities controlled by any of them. A foreign VC fund that holds 12% of a company through its main vehicle cannot circumvent this by assigning the sale to an affiliated entity; the aggregation rules catch that.

Condition 3: The company is not an igud

The third condition is covered separately in the next section because it warrants detailed treatment. If all three conditions are met, the gain is fully exempt from Israeli tax, the seller has no Israeli filing obligation, and no withholding is required once the seller produces an ITA Exemption Certificate.

In Practice: A US-based venture capital fund holding a 7% stake in an Israeli cybersecurity company sells its stake to a strategic acquirer for USD 14 million. The fund has been a US tax resident throughout the holding period. Neither the fund nor any of its general partners, limited partners acting as connected persons, or affiliated entities held 10% or more at any point in the prior 12 months. The cybersecurity company's assets are primarily intellectual property, software, and cash. No Israeli real property rights appear on its balance sheet. All three conditions for Section 97(b) are satisfied: the gain is exempt from Israeli tax. The fund's home-country tax treatment is a separate question entirely and depends on US partnership tax rules, not Israeli law.

3. Real Property Companies (Igud): The Exception That Catches People Off Guard

A "real property company" (igud) is defined in Section 1 of the Ordinance as a company whose Israeli real property rights exceed 50% of its total assets at the date of the sale or at any point during the two years preceding the sale. If the company qualifies as an igud, Section 97(b) does not apply and the gain is fully taxable in Israel, regardless of the seller's ownership percentage.

"Israeli real property rights" covers:

  • Land in Israel (karka), including leaseholds of 25 years or more
  • Buildings and permanent structures on Israeli land
  • Rights to use Israeli land under long-term arrangements
  • Shares in other igud companies
  • Rights in partnerships whose principal asset is Israeli real property

The 50% test compares the fair market value of all Israeli real property rights to the fair market value of all the company's assets. It uses market value, not book value, which can produce a different result than the company's balance sheet suggests. A company that bought a Tel Aviv office building in 2010 for NIS 8 million that is now worth NIS 35 million, alongside intellectual property and receivables worth NIS 30 million, is closer to the igud threshold than its historical-cost balance sheet indicates.

Two-year lookback: even if the company liquidated most of its Israeli real estate six months before the sale and the remaining properties no longer cross the 50% threshold, the ITA can still characterize the company as an igud if it crossed the threshold at any point in the prior 24 months.

In Practice: A foreign investor sells shares in an Israeli holding company that owns a portfolio of residential units in Tel Aviv and Haifa plus a controlling stake in a non-real-estate subsidiary. Twelve months before the sale, the real estate portfolio was worth NIS 80 million and the subsidiary was worth NIS 60 million, totaling NIS 140 million, with 57% in real property. The company is an igud at that point. Six months later, the subsidiary's valuation rises to NIS 100 million after a successful fundraising round; the ratio drops to 44%. At the time of sale, the company is no longer over 50%. Despite this, because the company crossed the igud threshold during the two-year lookback window, the ITA can characterize the seller's gain as taxable. Foreign investors acquiring stakes in Israeli mixed-asset holding companies should obtain an igud analysis before entry, not just at exit.

4. Section 68A Withholding: Why the Buyer Bears the Risk

Section 68A of the Ordinance places a withholding obligation on the Israeli purchaser of shares from a non-resident seller. Unless the seller presents a valid Exemption Certificate from the ITA, the buyer must withhold 25% of the total purchase price, not just the estimated gain, and remit the withheld amount to the ITA within 30 days of the payment date.

This point often surprises foreign sellers. Withholding at 25% of the entire consideration (including the return of the seller's original investment) creates a cash flow problem even when the seller ultimately owes nothing. The seller then must file an Israeli tax return, prove the exemption applies or compute the actual gain, and wait for the ITA to process a refund. Refunds from the ITA on capital gains transactions typically take three to nine months, sometimes longer if the file is flagged for review.

For the buyer, the consequences of failing to withhold are severe. Under Section 190A of the Ordinance, the buyer becomes personally liable for the tax that should have been withheld, plus CPI-linked interest from the payment date, plus late-payment surcharges of up to 0.5% per month. In an acquisition where the buyer is a large corporation, this exposure creates significant audit risk and negotiating leverage for the ITA.

In Practice: Israeli share purchase agreements involving a non-resident seller almost always contain an Exemption Certificate condition: the closing is conditioned on the seller delivering a valid ITA Exemption Certificate by a specified deadline, typically 30 to 60 days before the scheduled closing date. If the seller fails to deliver the certificate in time, the buyer has the right to withhold from the purchase price at closing, place the withheld amount in an escrow managed by an Israeli attorney, and release it to the seller only after the ITA confirms the exemption or issues a refund. The escrow structure protects both sides: the buyer satisfies its withholding obligation and the seller avoids waiting for a direct ITA refund while the transaction funds sit frozen. Israeli M&A counsel for both buyer and seller should agree on the escrow mechanics at the term sheet stage, not after signing.
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5. Obtaining an ITA Exemption Certificate Before Closing

The Exemption Certificate (Teudat Nikui Mas) is issued by the Israel Tax Authority's International Taxation Division (Machleket HaMisuy HaBeinleumi), located at 125 Menachem Begin Road, Tel Aviv. It is the formal document confirming that withholding under Section 68A is not required because the gain is exempt or the tax has been otherwise addressed.

How to apply

The application must be submitted in Hebrew, either through the ITA's Shaam Online portal or by post. Applications submitted in English are accepted but slow the process. A licensed Israeli tax attorney or CPA holding a power of attorney (yipuy koah) can submit and manage the application on the seller's behalf.

The application file must include:

  • A copy of the executed sale agreement or a near-final draft
  • The seller's Certificate of Tax Residency from their home-country tax authority (IRS Form 6166 for US residents; equivalent documents for UK, EU, and other jurisdictions)
  • The shareholding history of the seller in the target company, showing percentage held at each point during the prior 12-month period
  • The company's audited financial statements for the two most recent fiscal years, to allow the ITA to assess whether the company is an igud
  • The company's register of shareholders and a certified copy of the articles of association
  • A formal legal opinion or accountant's letter confirming that the Section 97(b) conditions are satisfied (not mandatory in all cases, but strongly recommended for complex structures)

Processing times

Routine applications for sellers who clearly qualify for Section 97(b) take 30 to 60 days. Applications involving complex corporate structures, uncertain igud status, ambiguous residency histories, or large transaction amounts are escalated for senior review and can take three to six months. The ITA does not commit to specific processing timelines; the Shaam Online portal provides a status tracker that updates sporadically.

In urgent transactions, a lawyer can submit an expedite request (bakashat dahar) to the relevant ITA case manager, supported by evidence of the closing date and commercial urgency. Expedited review cuts the processing time to 15 to 30 days in straightforward cases but is granted at the ITA's discretion.

In Practice: The International Taxation Division handles all non-resident exemption certificate applications. Do not submit the application to a standard regional ITA office such as the Tel Aviv 1, Tel Aviv 3, or Haifa offices. Regional offices lack jurisdiction over Section 68A certificates and will forward the file to the International Division anyway, adding two to four weeks of delay. The Division's dedicated fax line and mailing address differ from the regional offices. Most experienced Israeli tax attorneys submit digitally through Shaam Online with a concurrent follow-up call to the assigned case manager. The Division has English-speaking staff, but all formal correspondence is in Hebrew. If you are managing this without Israeli counsel, use the Shaam Online system and track the application number it assigns.

6. Double Tax Treaty Benefits for Non-Resident Share Sellers

Israel has double taxation treaties with more than 60 countries. Most treaties include a capital gains article that determines which country has the primary right to tax a gain on shares in an Israeli company.

Under the majority of Israel's treaties, Israel retains full taxing rights over capital gains on shares in Israeli companies regardless of the seller's residency. The capital gains article in most Israeli treaties follows the OECD Model Convention approach: gains on shares in a company that is a resident of Israel may be taxed in Israel. This means the treaty does not grant exemption from Israeli capital gains tax on private company shares.

Most commonly, the seller pays Israeli capital gains tax and then claims that amount as a credit against their home-country tax on the same gain. The US-Israel Tax Treaty (1975, as amended) works this way under Article 22, and most other Israeli treaties follow the same mechanism. A smaller number of treaties contain explicit capital gains exemptions for non-residents: the Netherlands-Israel Treaty, for example, historically provided broader protection for Dutch residents selling shares in Israeli companies. Check the specific treaty text before relying on any exemption claim.

In practice, for most non-resident sellers who hold less than 10% of an Israeli company that is not an igud, the Section 97(b) domestic exemption applies and the treaty analysis is secondary. Where the Section 97(b) exemption does not apply and Israeli tax is owed, the treaty credit mechanism typically means the seller pays Israeli tax and reduces their home-country tax by that amount, resulting in a combined effective rate roughly equal to the higher of the two countries' rates.

In Practice: A UK investor selling a 15% stake in an Israeli private company cannot rely on Section 97(b) because the 10% threshold is crossed. The UK-Israel Double Taxation Agreement (DTA) allows Israel to tax the gain under Article 13. The investor pays 30% Israeli capital gains tax on the gain (major shareholder rate). Back in the UK, the same gain is subject to Capital Gains Tax at up to 24% (2026 rate). Under the UK-Israel DTA, the investor claims the Israeli tax paid as a credit against UK CGT under Article 22. Since the Israeli rate (30%) exceeds the UK rate (24%), no additional UK CGT is owed on that gain. The investor's combined rate equals the Israeli 30%. Without this credit mechanism, double taxation at both 30% Israeli and 24% UK rates would apply to the same economic gain.

7. ESOP and Option Exits: Special Considerations for Non-Resident Employees

Foreign nationals who worked in Israel, received Israeli company shares or options under an employee share plan, then left Israel and became non-residents, face a layered analysis when those shares are eventually sold.

Section 102 options: the trustee route

Most Israeli employee share plans are structured under Section 102 of the Ordinance, which allows favorable tax treatment for options granted through an approved trustee. Two tracks exist: the capital gains track (where all option income, from exercise through sale, is taxed at the 25% capital gains rate if held for at least 24 months) and the employment income track (where income from exercise is taxed at marginal rates of up to 50% including the surtax).

When an employee who received Section 102 options later becomes a non-resident and eventually sells the shares, both Israeli and home-country tax rules apply to different portions of the gain:

The employment income component covers the value of options at the exercise date (or the spread from grant to vest, depending on the arrangement). This portion is characterized as Israeli employment income because it was earned while the employee worked in Israel. The ITA takes the position that Israeli tax rights over this portion are not extinguished by the employee's subsequent departure. The capital appreciation component covers any additional increase in share value from the exercise date to the eventual sale. That portion is analyzed under the standard non-resident capital gains rules, including Section 97(b) and the trustee arrangement termination rules.

Timing of trustee releases

Under Section 102, shares must remain in the trustee's custody for a minimum of 24 months from the grant date to qualify for the capital gains track. Early release before the 24-month minimum period converts all the gain to employment income taxable at marginal rates. Non-resident employees who are offered accelerated vesting or a quick exit in connection with an acquisition need to confirm the 24-month clock has run on each tranche before accepting any early release from the trustee (naamanot).

In Practice: A French software engineer received 10,000 Section 102 options in an Israeli startup in January 2023, vesting over four years, held by an ITA-approved trustee (typically a firm such as Computershare Israel or an Israeli bank subsidiary acting as naamanot). The engineer relocated to France in March 2025 and became a French tax resident. The startup is acquired in July 2026, triggering a liquidity event at USD 50 per share. Options were granted at a strike of USD 5. The 24-month trustee holding period from the last grant anniversary was satisfied. The employment income component (USD 5 grant-to-vest spread multiplied by vested shares) remains taxable in Israel as Israeli-source employment income. The capital gains component (USD 50 sale price minus the per-share value at vest date, multiplied by shares sold) is analyzed under Section 97(b). If the engineer's total shareholding stays below 10% and the company is not an igud, the capital gains component is exempt. A tax attorney familiar with both French and Israeli law should review the position at term sheet stage to avoid surprises at closing.