You spent several years working abroad - New York, London, Berlin, wherever the job was - and part of your pay came as equity: restricted stock units (RSUs), or stock options under an employee share plan (ESOP), over your employer's shares. Now you are moving to Israel, as a new oleh or as a returning resident, and the shares are still sitting there, some vested, some not, most of them unsold. The question that follows you onto the plane is simple to ask and genuinely hard to answer: how much of this does Israel tax, and when?
If you are holding foreign RSUs or options as the move approaches, you are probably turning over the same handful of questions:
- Should I sell before the move, after it, or wait? What does each do to the actual tax?
- Does it matter where I was working while the equity vested - abroad or in Israel?
- How do I avoid paying twice - once to the foreign tax authority and once to Israel?
For years these questions produced disputes, because the Israeli position was scattered and, in places, aggressive. Circular 9/2025 from the Israel Tax Authority finally sets out a coherent picture - if not an easy one to read - and clear guiding lines for equity held by people arriving in Israel.
In short: three separate dates dictate how much tax you pay - vesting, exercise and sale. Where each of them falls relative to the day you became an Israeli resident is what determines what is taxed as employment income, what is exempt, and what counts as capital gain.
The companion piece to this one, Section 102: Israeli employee equity, covers equity granted by an Israeli company. This article is the mirror image: equity you were granted abroad, before you became an Israeli resident, and how Circular 9/2025 taxes it once you arrive.
What Circular 9/2025 covers - and who it applies to
The circular applies where the granting company is not considered an Israeli "employing company" - typically a foreign company with no related company in Israel. In that case Section 102, with its benefits, does not apply, and the equity is taxed under the Section 3(i) route instead.
Because Section 3(i) applies, there are two separate tax events: the first at realisation (the option converting into a share, or the RSU vesting), when the benefit element is taxed as employment income; the second on the sale of the shares, when the difference between the value at realisation and the sale price is a capital gain (or loss).
Which tax will I pay in Israel - and when am I exempt?
There are really two separate taxes here - tax on employment income, and capital gains tax. The table below is my attempt to simplify the main principles of how equity is taxed under the new guidance.
| Question | Tax on employment income | Capital gains tax |
|---|---|---|
| What is taxed? | The benefit element - the share value at the tax event, less any exercise price | The rise in value from that date until you sell the share |
| When is the tax event? | RSUs - at vesting; options - at exercise (conversion into a share) | On the sale of the share |
| When is it exempt in Israel? | RSUs - if vesting was completed entirely while you were still a foreign resident; options - if the exercise took place while you were still a foreign resident. Otherwise, a proportional exemption for the part attributed to your foreign-residency years | Only if you qualify for new-oleh or returning-resident relief (for example under section 97(b)(2)) |
And the taxable part of the benefit? It is taxed at your marginal rate, as part of your employment income (up to roughly 50%), and it can be spread over up to six years ending in the year of exercise. The size of the foreign tax credit depends on the vesting period - the more of your vesting workdays that were performed abroad, the larger the share of foreign tax recognised as creditable. A veteran returning resident or new oleh enjoys a broader exemption (see below). Each of these is unpacked in turn.
How the exempt part is determined - and how you avoid double tax
The answer is set by spreading the income across the tax years from grant to exercise (up to six years ending in the year of exercise), with each year classified according to your residency status in that year:
- The exempt part: income attributed to years you were a foreign resident is treated as produced outside Israel. For returning residents and new olim that part is exempt from Israeli tax (unless you were physically working in Israel during that time).
- The taxable part: income attributed to years you were already an Israeli resident is treated as produced in Israel, and is taxable.
So the split follows the residency years within the spread period - not where the vesting happened. The more of that period that fell while you were still a foreign resident, the larger the exempt part. This is a meaningful development: Circular 9/2025 formally establishes that a substantial portion of the income can be exempt.
Avoiding double tax (the foreign tax credit): if you paid foreign tax on the full benefit, you can credit it against the Israeli tax. But the credit is limited and proportional: you cannot claim credit for the share of foreign tax that relates to the exempt income. Only the proportional share attributed to the income taxable in Israel is allowed. How much of the foreign tax is recognised as creditable is determined by the number of workdays performed abroad during the vesting period. The final credit is also subject to the limits in sections 200 to 204(a) of the Income Tax Ordinance.
What rate applies to the taxable part, and how does the spread help?
First, manage expectations: where the options (or RSUs) are taxed under the Section 3(i) route, the taxable benefit is employment income at ordinary marginal rates - up to 47%, plus the 3% surtax, so roughly 50%. It does not get the reduced 25% capital-gains rate. This is the point people most often get wrong.
This is where the spread earns its keep. The same apportionment across the years from grant to exercise (Section 3(i2)) that decides what is exempt and what is taxable also spreads the taxable part across several tax years, up to six ending in the year of exercise. If your overall income in some of those years was lower, that spreading can reduce the effective rate on the benefit. It is requested, not automatic - and you can approach the assessing officer for a withholding or tax-coordination certificate that reflects it before tax is over-withheld.
How much tax would I actually pay? A worked example
To make this concrete, follow Michal (figures are illustrative; the method follows the circular):
- 1 Jan 2019 - Michal ceases Israeli residency and moves abroad for work.
- 1 Jan 2023 - her foreign employer (not an Israeli "employing company") grants her 10,000 options, with a four-year vesting period and an exercise price of ILS 12 per share.
- 1 Jan 2026 - Michal moves to Israel as an ordinary returning resident (Section 14(c)).
- 31 Dec 2026 - vesting ends: she exercises the options into shares and sells them the same day, when the share is worth ILS 92.
In the country where she worked, Michal paid ILS 160,000 of foreign tax on the full option income. The income is spread across four years (2023-2026), from grant to exercise: three of them as a foreign resident, and one as an Israeli resident.
| Step | Calculation | Amount (ILS) |
|---|---|---|
| Value of the shares at exercise | 10,000 × 92 | 920,000 |
| Less the exercise price | 10,000 × 12 | (120,000) |
| Benefit element | 920,000 - 120,000 | 800,000 |
| Benefit not taxed in Israel | 3/4 × 800,000 | 600,000 |
| Benefit taxed in Israel | 1/4 × 800,000 | 200,000 |
| Israeli tax before credit (47% plus 3% surtax) | 50% × 200,000 | 100,000 |
| Credit for the foreign tax | 3/4 × 1/4 × 160,000 | (30,000) |
| Tax payable in Israel | 100,000 - 30,000 | 70,000 |
Look closely at the credit line. Of the ILS 160,000 of foreign tax, only three quarters counts as creditable "foreign taxes" - three of the four vesting years in which Michal worked abroad - and of that, only the share attributed to the income taxable in Israel is allowed. The result is a credit of just ILS 30,000; the remainder of the foreign tax, which relates to the exempt income, cannot be credited at all.
If you are a US citizen or green-card holder, read this carefully. The United States taxes its citizens on worldwide income regardless of where they live, so making aliyah does not switch off the IRS. Israel's exemption relieves the Israeli side; it does nothing about the US side. The two systems have to be coordinated deliberately - see the new olim guide for why the exemption is not the whole story.
Ordinary returning resident, veteran returning resident, or new oleh?
This is the distinction it is most important not to miss. The status you arrive in can reduce your total tax bill very substantially - in Israel and abroad - which is exactly why careful planning is needed before you land.
| Status | Tax on employment income (the benefit element) | Capital gains tax (sale of the shares) |
|---|---|---|
| Ordinary returning resident (Section 14(c)) | No additional relief on the salary element: exempt only on the part attributed to the foreign-residency years, with the balance taxed at full marginal rates. | May qualify for relief under section 97(b)(2), subject to conditions. |
| Veteran returning resident / new oleh (Section 14(a)) | If the vesting period ended while still a foreign resident - the entire benefit is exempt. If it ended after arrival - only the part reflecting Israeli workdays is taxable. | Exempt on gains from assets outside Israel during the benefits period, subject to conditions. |
It is worth being clear about who falls into each category: ordinary returning resident status generally requires at least six years abroad, and veteran returning resident status at least ten. Someone who returns to Israel after fewer than six years abroad falls into neither category, and is not entitled to Section 14 relief at all. For more on the differences between the classifications, see the new olim guide.
Moving to Israel with equity?
I map the Israeli tax on your RSUs and options before you set an arrival date - and coordinate with your advisor abroad. Book a consultation.
Get in touchHow are RSUs taxed if sold after you arrive?
With RSUs the benefit element - the employment income - is the share value at vesting, and how it splits between the exempt and taxable parts is covered above. From that point the second tax event applies: the sale of the share. All the appreciation from vesting to sale is a capital gain, taxable in Israel - though a returning resident may benefit from relief, for example the exemption under section 97(b)(2) for a veteran returning resident.
How are options taxed if sold after you arrive?
With options the benefit element is measured later - the share value at exercise, when the option is converted into a share - and how it splits between exempt and taxable is again covered above. The second tax event is the sale of the share: the appreciation from exercise to sale is a capital gain, taxable in Israel subject to returning-resident relief.
Note: if the option both vested and was exercised while you were still a foreign resident, the entire benefit element is exempt from Israeli tax - which is what the next section deals with.
What if I exercised the options before arriving in Israel?
If you had already converted the options into shares while still a foreign resident, and you are only selling those shares after arriving in Israel, there is no remaining employment-income element for Israel to tax. The whole gain on the sale is a capital gain under Part E of the Ordinance, subject to the relief provisions available to returning residents and new olim (such as section 97). The timing of the exercise - before the move or after it - can therefore change the picture materially.
Why set the arrival date deliberately?
Circular 9/2025 is genuinely good news - it brings order and hands returning residents and olim real reliefs on equity they built up abroad. But open questions, complexities and differing scenarios remain, and they need to be weighed in advance, before you fix the date you become an Israeli resident. Among them: the timing of vesting and exercise; the status you return in (ordinary returning resident, veteran, or new oleh); and the option of applying to move the plan onto the Section 102 capital-gains track - a step that can help but may itself be a tax event on options that have already vested. Nor can an Israeli circular settle the rules of the country you are leaving. A planned move, rather than one dictated by the calendar, is where the meaningful savings live - on both sides.
Related: Section 102 - how Israel taxes equity granted by an Israeli employer »