Quick Answer: Israel taxes stock options and RSUs primarily under Section 102 of the Income Tax Ordinance. If your options or RSUs are held through a licensed Israeli trustee for at least 24 months, gains are taxed at the capital gains rate (25%) rather than as employment income at marginal rates up to 50%. New immigrants and qualifying returning residents may be exempt from Israeli tax on options granted by foreign employers for their first 10 years of Israeli residency. Always verify your specific situation with a qualified Israeli tax attorney, as the rules are complex and depend on when and how your equity was granted.

A software engineer joins an Israeli startup and receives 50,000 options under a Section 102 Capital Gains track plan. Four years later, the company is acquired. The engineer expects to pay 25% Israeli capital gains tax on the spread. What he receives instead is an assessment from the Israeli Tax Authority for ordinary income tax at 47% — because his options were deposited with a trustee 10 days after the grant, not before. Under the Israeli Tax Authority's Section 102 rules, the trustee deposit must occur within the window specified in the ITA's approval letter for the plan — and 10 days is enough to disqualify the entire grant.

Israeli tax law offers a structured and relatively favorable regime for employee equity, centered on Section 102 of the Israeli Income Tax Ordinance (פקודת מס הכנסה). Used correctly, it can convert what would otherwise be taxed as ordinary employment income into capital gains. This guide walks through the key rules, the practical steps involved, and the special provisions that apply to new immigrants and employees with pre-existing foreign grants.

1. The Israeli Tax Framework for Equity Compensation

Two provisions of the Israeli Income Tax Ordinance govern most equity compensation situations:

  • Section 102 — the main track for employers who grant options or shares to employees through a formal plan. It creates two sub-tracks: trustee and non-trustee, with very different tax outcomes.
  • Section 3(i) — a catch-all provision that applies when options are granted outside a Section 102 plan, or by a foreign employer that has not adopted a qualifying Israeli plan. Under Section 3(i), the benefit is taxed as employment income when the option is exercised.

The practical implication is straightforward: if your employer has set up a Section 102 trustee plan, you have a meaningful opportunity to reduce your tax rate on equity gains from marginal income tax (which can reach approximately 50% for high earners when including the 3% surtax on annual income above the threshold) down to the 25% capital gains rate. If no qualifying plan is in place — which is common with foreign employers or early-stage startups that have not done proper Israeli structuring — your options will most likely be taxed as employment income.

Understanding which regime applies to your specific grant requires reviewing the grant agreement, the company's Israeli trustee arrangement (if any), and the date of grant relative to any changes in your tax residency. None of these questions should be answered casually.

2. Section 102: The Capital Gains Route for Employees

Section 102 of the Income Tax Ordinance (סעיף 102 לפקודת מס הכנסה) was designed specifically to encourage Israeli companies to offer equity to employees without creating an immediate, punitive tax burden. It does this by deferring taxation and, under the preferred track, converting the gain into capital gains income.

The Two Tracks

Trustee Capital Gains Track (the preferred option): Under this track, options or shares are deposited with a licensed Israeli trustee on behalf of the employee. The employee cannot access or sell the shares for a mandatory holding period of 24 months from the deposit date. If the holding period is met, the entire gain — from the exercise price to the eventual sale price — is taxed at the capital gains rate of 25% (or 30% if the employee is a "substantial shareholder," meaning they hold 10% or more of the company). There is no income tax component, and the employer cannot claim a corresponding tax deduction for the cost of the award.

Non-Trustee Track: Under this track, there is no trustee and no mandatory holding period. The benefit is taxed as employment income in the tax year of exercise or vesting, at the employee's marginal income tax rate. The employer can claim a deduction. This is generally less favorable for the employee but may be chosen by companies that prefer the deduction or by employees who expect to be in a lower tax bracket.

Key Rules for the Trustee Track

  • The employer must register a Section 102 plan with the Israel Tax Authority before granting options under it.
  • The options or shares must be deposited with the trustee within 90 days of grant; late deposit disqualifies the grant from Section 102 treatment.
  • The 24-month clock starts from the date of deposit with the trustee, not from the date of grant or vesting.
  • Early sale before 24 months causes the gain to be taxed as employment income retroactively, at the employee's marginal rate.
  • The exercise price paid by the employee is deducted from the taxable gain; only the net gain is taxed.
  • If shares are sold more than 24 months after deposit, the entire gain (sale price minus exercise price) is taxed at 25%.

Who the Trustee Track Does Not Apply To

Controlling shareholders (holding more than 10% of the company's shares or voting rights) are ineligible for Section 102 benefits. Their options fall under Section 3(i) and are taxed as income at exercise. Directors who are not employees may also be ineligible depending on their classification under Israeli corporate law.

3. RSUs in Israel: How They Are Taxed

Restricted Stock Units (RSUs) have become the dominant equity vehicle at large public tech companies, and Israeli law treats them similarly to options for most purposes — though with some important distinctions.

An RSU is a promise to deliver shares (or their cash equivalent) once a vesting condition is met. Unlike a stock option, the employee does not pay an exercise price; they receive the shares outright upon vesting. This means the entire fair market value of the shares at vesting constitutes a taxable benefit, not just the spread between a strike price and the market price.

RSUs Under Section 102

RSUs can be granted under a Section 102 trustee plan, just like options. When they are:

  • Upon vesting, the shares are deposited with the Israeli trustee rather than delivered to the employee directly.
  • The 24-month clock starts from the date the shares are deposited with the trustee (typically at vesting).
  • If sold after 24 months from deposit, the gain is taxed at 25% capital gains. The taxable amount is the sale price minus the fair market value at the time of deposit.
  • The fair market value at deposit is the cost basis for the capital gains calculation; there is no deduction since the employee paid nothing for the shares.

For a foreign company — for example, a US public company with Israeli employees — RSU grants can be structured to qualify under Section 102 through an Israeli trustee arrangement. However, the company must establish the plan in advance and comply with the 90-day deposit rule. Many foreign employers who have not set up Israeli-specific plans inadvertently leave their Israeli employees in a non-qualifying arrangement, exposing them to income tax rates on the full RSU value at vesting.

RSUs Without a Trustee Arrangement

If RSUs are not deposited with an Israeli trustee under a qualifying Section 102 plan — as is common with foreign employers who manage equity through a US stock plan administrator without Israeli customization — then Section 3(i) applies. The fair market value of the shares at vesting is treated as employment income, subject to income tax and national insurance (ביטוח לאומי, Bituach Leumi) contributions, at the employee's marginal rate. There is no capital gains benefit.

In Practice: The 90-day deposit rule is where foreign employers most commonly disqualify Israeli employees from Section 102 treatment. A US company grants RSUs to a new Israeli hire; the grant is processed through the US stock plan administrator; no one triggers the Israeli trustee deposit within 90 days. The employee is now on the Section 3(i) track — meaning the full RSU value at vesting is ordinary employment income at marginal rates up to 50%. This cannot be corrected retroactively. Israeli employees joining any foreign company should confirm that a Section 102 trustee arrangement is already in place before accepting the grant, not after.

4. New Immigrants and Returning Residents: The 10-Year Exemption

Israel's tax law contains a significant incentive for new immigrants (olim) and long-term returning residents (*toshavim chozrim*): a 10-year exemption from Israeli tax on income and capital gains derived from sources outside Israel. This exemption is governed by Section 14(a) of the Income Tax Ordinance and has a direct impact on equity compensation for anyone who moved to Israel after working abroad.

Who Qualifies

  • New immigrants (olim): Any person who becomes an Israeli resident for the first time.
  • Returning residents (toshav hozer): Israeli citizens or previous residents who lived abroad for at least 10 consecutive years and then returned. The threshold was previously 6 years for some categories; consult an attorney on current rules.

The exemption begins on the date the person first becomes an Israeli resident and lasts for 10 years. During this period, passive income (dividends, interest, capital gains) and active business income derived from foreign sources are generally exempt from Israeli tax. No Israeli tax return reporting of the exempt income is required, though you may elect to report voluntarily.

Impact on Stock Options and RSUs

If you received stock options or RSUs from a foreign employer before becoming an Israeli resident, and you vest or exercise them during your 10-year exemption window, those gains may be fully exempt from Israeli tax — provided the income is considered foreign-sourced.

The sourcing determination is not automatic. Israeli Tax Authority Circular 9/2025, issued in 2025, addressed this directly and established a time-apportionment methodology: if the vesting or restriction period spans both your pre-Israeli-residency period and your Israeli residency period, the gain is split. The portion attributable to work performed before you became a resident is treated as foreign-sourced (potentially exempt), while the portion attributable to work performed as an Israeli resident is treated as Israeli-sourced and taxed normally.

Practically, this means:

  • Options fully vested before you became an Israeli resident: the gain upon exercise may be fully foreign-sourced and exempt (if exercised within the 10-year window).
  • Options with a vesting period that straddles your immigration date: the gain is apportioned based on the ratio of pre-residency service days to total vesting period days.
  • Options granted by a foreign employer after you became an Israeli resident: generally Israeli-sourced and subject to Israeli tax, even if granted by a foreign company.

This area is legally complex and highly fact-specific. Do not rely on a general understanding of the exemption to avoid reporting obligations — an Israeli tax attorney can analyze your specific grant documentation and immigration timeline and give you a precise answer.

An American software engineer who made Aliyah in 2021 came to us in 2023 after his US employer — a NASDAQ-listed company — vested 8,000 RSUs worth $320,000. He assumed the full amount was exempt under the 10-year new immigrant exemption. Using the time-apportionment methodology in ITA Circular 9/2025, however, 61% of the vesting period had been served in the US and 39% in Israel — meaning only $196,800 was foreign-sourced and exempt, while $123,200 was Israeli-sourced and taxable. The US employer had already withheld US federal income tax on the full vesting. An Israeli tax attorney filed Form 1301 for that year, applied the foreign tax credit for the Israeli-sourced portion using the applicable Israel-US tax treaty, and reduced the net Israeli tax liability from approximately NIS 140,000 to NIS 38,000. The lesson: the new immigrant exemption does not automatically cover RSUs that vest after Aliyah — every grant requires a time-apportionment analysis.

5. Options Granted Abroad Before You Moved to Israel

A scenario that has become increasingly common: a tech professional works for a US, European, or other foreign company for several years, accumulates unvested stock options or RSUs, and then makes Aliyah or returns to Israel as a toshav hozer. What happens to those pre-existing grants?

Circular 9/2025 from the Israeli Tax Authority provides the current official position. The key principles are:

  • Fully vested options: If all conditions for exercise were met before you became an Israeli resident, and you still hold them upon arrival, the gain (sale price minus exercise price) is generally treated as foreign-sourced capital gain. If you are within your 10-year exemption window, the gain may be exempt.
  • Unvested options with lock-up periods: If the restriction period had not yet ended when you arrived in Israel, the options continue their life cycle in Israel. Under Section 3(i), tax is assessed when the restriction lifts (or upon exercise), but only the Israeli-sourced portion (determined by time apportionment) is taxable in Israel.
  • RSUs with multi-year vesting: Each tranche is analyzed separately. RSUs that vest after your Israeli residency begins are partially Israeli-sourced based on how much of the vesting period was spent in Israel.

One practical complication: foreign employers typically have no Israeli trustee arrangement, so even if you want to benefit from the Section 102 capital gains track going forward, your pre-existing foreign grants will not qualify for that track. They will be analyzed under Section 3(i) or under the new immigrant exemption, depending on your residency status.

For any person in this situation, it is worth obtaining a pre-ruling (*hachlatat mashov*) from the Israeli Tax Authority before exercising large option positions. A pre-ruling provides certainty about the tax treatment and avoids disputes later.

6. Reporting Obligations and Practical Steps

Even if you believe your equity compensation is fully exempt from Israeli tax (for example, because you are within the 10-year new immigrant window), there are still administrative obligations to understand.

For Employees Under a Section 102 Trustee Plan

  • The Israeli trustee handles withholding tax at the time of sale and remits it to the Tax Authority.
  • The employee does not need to separately report the trust income on their annual return if the trustee has withheld tax at the correct rate — though they may be required to include it in their return depending on their overall income level.
  • The employer must report option grants to the Israel Tax Authority within 90 days of grant.
  • If you exit the trustee arrangement early (before 24 months), the trustee is required to withhold at the income tax rate.

For Employees with Foreign-Employer Grants (No Israeli Trustee)

  • You are personally responsible for reporting any taxable income from options or RSUs on your Israeli annual tax return (Form 1301, *Doach Shnati*).
  • Tax is due in the year the income arises — typically the year of exercise (for options) or the year of vesting (for RSUs under Section 3(i)).
  • If your employer withheld tax in another country (for example, the US withheld US income tax on your RSU vesting), you may be able to claim a foreign tax credit in Israel. The interaction between Israeli and US withholding is a common source of complexity for dual-resident employees.
  • Employees who have not been reporting foreign equity income to the Israeli Tax Authority — which is a common situation for new residents who were unaware of their obligations — may be able to use Israel's voluntary disclosure program to come into compliance with reduced penalties. See our guide to voluntary disclosure in Israel.

US Citizens with Israeli Equity Compensation

US citizens are taxed by the United States on their worldwide income regardless of where they live. This creates a dual-reporting reality for US citizens living in Israel and holding equity compensation:

  • The US taxes the option or RSU benefit at the time of exercise or vesting (unless the options qualify as Incentive Stock Options under US law).
  • Israel taxes the benefit under its own rules (Section 102 or Section 3(i)).
  • The US-Israel double taxation treaty provides some relief, but the interaction between the two systems — different definitions of income, different timing rules, different rates — requires careful planning.
  • US citizens must also comply with FBAR and FATCA reporting if equity is held in foreign financial accounts. See our guide to FATCA and FBAR for Israelis and US persons.

Practical Steps Before Exercising Options or Selling RSU Shares

  1. Confirm whether your employer has a registered Section 102 trustee plan in Israel.
  2. Obtain a copy of the plan document and your specific grant agreement, noting the grant date, vesting schedule, and exercise price.
  3. Identify your Israeli tax residency start date and whether you qualify for the 10-year new immigrant exemption.
  4. Calculate the time-apportionment ratio for any grants that straddle your Israeli residency date.
  5. Consider requesting a pre-ruling from the Israeli Tax Authority for large positions.
  6. Consult a qualified Israeli tax attorney or CPA before exercising options worth more than a modest amount — the tax savings from proper structuring routinely exceed the cost of advice many times over.
In Practice: For US citizens in Israel, the interaction between Israeli Section 102 treatment and US Incentive Stock Option (ISO) rules creates a structural conflict. ISOs require the employee to hold shares for at least two years from grant and one year from exercise to get favorable US capital gains treatment. Section 102 requires a 24-month trustee hold from deposit. The clocks start at different times, the holding conditions differ, and the IRS does not recognize the Israeli trustee arrangement in the same way. US citizens in Israeli Section 102 plans frequently end up in a situation where the US treats income as ordinary or subject to Alternative Minimum Tax, while Israel treats it as capital gains — with limited treaty relief available to align them. Cross-border advice before exercise is essential, not optional.