What is Section 102 of the Israeli Income Tax Ordinance?

Section 102 governs how equity granted by an employer to its employees is taxed in Israel. Its central feature is the trustee capital-gains track: where the securities are held by an approved trustee for a lock-up period of at least 24 months, the employee's gain is taxed at the 25% capital-gains rate rather than at marginal rates as employment income, and only when the shares are actually sold. Meeting the track's conditions is what determines the rate.

When does the Israeli tax event occur on options and RSUs?

Under the Section 102 trustee track the tax event is generally deferred until the shares are sold or released from the trustee - not at vesting. This differs from most jurisdictions, where RSUs are taxed on vest. The timing mismatch is the single most common source of double taxation for employees who hold Israeli equity while resident, or formerly resident, elsewhere.

What is taxed as employment income and what as capital gain?

For equity granted under the Israeli Section 102 trustee capital-gains track, the tax event is deferred to realisation. In a private company the entire gain is generally treated as capital gain. In a public company, the benefit element at grant - the difference between the share value based on the 30-trading-day average and the exercise price - is treated as employment income, and only the appreciation after that point is capital gain.

What happens to Israeli equity when the employee leaves Israel?

Israel's exit tax under section 100A deems assets - including options and RSUs - to have been sold on the day Israeli tax residency ends. The new country of residence will usually seek to tax the full gain as well, and because most treaties do not fully resolve this, double taxation is a real risk. The timing of realisation relative to the timing of severance is critical.

How is foreign equity taxed for someone returning to Israel (Circular 9/2025)?

Israel Tax Authority Circular 9/2025 sets out, for the first time, a coherent framework for taxing equity accrued while working abroad. Income is apportioned over the vesting period: the more of the vesting that occurred abroad, the larger the portion exempt from Israeli tax, and a foreign tax credit may be available against the taxable balance.

Does a treaty prevent double taxation on employee equity?

Not reliably. A foreign tax credit may be available in Israel for foreign tax paid on the same income, subject to the credit rules and the applicable treaty. But treaties do not resolve every double-taxation scenario - particularly where the two countries recognise the income in different tax years - so the two systems have to be coordinated deliberately, usually with advisors on both sides.

Section 102: Israeli Employee Equity Explained for Foreign Advisors

If you advise someone who works for an Israeli company, or for the Israeli subsidiary of a company you look after, sooner or later a grant letter lands on your desk that refers to "Section 102" and a trustee. It has no clean analogue in most systems, and the instinct to map it onto whatever your own jurisdiction calls a qualified plan is where the trouble starts. This is what it actually does.

The one thing to take away: Israel generally taxes Section 102 equity when the shares are sold, not when they vest. Almost everywhere else taxes RSUs on vest. Two countries, same shares, different years - and a credit that often has nothing to line up against.

Why Section 102 surprises foreign advisors

Section 102 of the Israeli Income Tax Ordinance governs equity an employer grants its employees - options (ESOP), restricted stock units (RSUs), and discounted purchase plans (ESPP). What makes it unusual is not the instruments, which are familiar. It is that the favourable treatment is delivered through a trustee holding the securities, and that qualifying changes both the rate and the timing of the charge.

Advisors who read the grant letter as "an Israeli version of an incentive stock option" tend to get the rate roughly right and the timing badly wrong. The timing is the part that costs money.

The trustee capital-gains track

Under the capital-gains track, and subject to conditions - the central one being that the securities are held by an approved trustee for a lock-up of at least 24 months - the employee's gain is taxed at the capital-gains rate of 25%, rather than at marginal rates as employment income. The alternative, the ordinary-income track, taxes the gain as employment income at the employee's marginal rate.

Whether the conditions are met is what determines the rate. This is not an election the employee makes at sale; it is a function of how the plan was set up, which track the company elected, and whether the trustee holding period was actually respected.

Rate detail: where an employee's total income (salary plus equity proceeds) exceeds the statutory threshold, the effective rate on the shares in 2026 can reach roughly 30% - 25% base, plus a 3% surtax, plus a 2% capital-gains levy.

Sale, not vesting: the timing mismatch

This is the heart of it. Under the Section 102 trustee track, the Israeli tax event is generally deferred until the shares are sold, or released from the trustee - not when they vest. For options, it is deferred past exercise to the sale of the underlying share.

Most systems do the opposite with RSUs: income is recognised on vest, withheld on vest, and reported that year. So consider an employee who vests while resident in your jurisdiction and sells three years later while resident in Israel, or the reverse. One country has already taxed the income in year one. The other taxes it in year four. Each may be entirely correct under its own rules.

A foreign tax credit is designed to relieve double taxation on the same income in the same period. When the two countries do not agree on when the income arose, there can be nothing to credit against in either year. That is not an edge case - it is the ordinary result of a cross-border move with unsold equity.

Employment income vs capital gain

Assuming the equity was granted under the Israeli trustee capital-gains track, the tax event is deferred to realisation, for both RSUs and options. From there the split depends on whether the company is private or public:

Private company - the entire gain at realisation is generally treated as capital gain.
Public company - the "benefit element" at grant, being the difference between the share value calculated on a 30-trading-day average and the exercise price, is treated as employment income. Only the appreciation from that point to sale is capital gain.

For an advisor running a foreign return, that split matters: the employment-income slice and the capital slice may be sourced, timed and credited differently on your side.

Client holding Israeli equity?

I act as Israeli counsel alongside advisors abroad - you keep the client, I take the Israeli part of the file.

For foreign advisors

Leaving Israel: exit tax

When an employee ceases to be an Israeli tax resident, section 100A applies an exit tax: assets - including unexercised options and unvested RSUs - are deemed to have been sold on the day residency ends. Meanwhile the new country of residence will usually want to tax the full gain when it is actually realised. Most treaties do not fully resolve the overlap.

The timing of realisation relative to the timing of severance is therefore critical, and it is a decision that has to be made before the move. Afterwards, the planning options narrow sharply.

Coming to Israel: Circular 9/2025

The mirror-image case: your client accrued equity working abroad and is now moving to Israel, whether as a new oleh or a returning resident. Israel Tax Authority Circular 9/2025 set out, for the first time, a coherent framework for how that equity is taxed here.

The income is apportioned across the vesting period. The greater the proportion of vesting that occurred while working abroad, the larger the portion that falls outside the Israeli charge; a foreign tax credit may then be available against the taxable balance. For a client with a long vesting schedule that straddles the move, the apportionment is worth real money and depends on records they may not think to keep.

Where the foreign tax credit breaks

A credit may be available in Israel for foreign tax paid on the same income, subject to the credit rules and the applicable treaty. But it is worth being direct about the limits: a treaty does not resolve every double-taxation scenario, and the equity timing mismatch is precisely the kind it handles least well.

What actually works is coordinating the two systems deliberately - deciding when to realise, in which residency year, with sight of both sets of rules at once. That normally means advisors on both sides talking before the event rather than reconciling after it.

There is also a recurring refund point: a trustee or employer may withhold Israeli tax at the maximum rate on realisation while the actual liability is lower - because of part-year employment, an available foreign tax credit, or the apportionment above. Where that has happened, a return can be filed and the excess reclaimed.

If you take one action: before your client exercises, sells, or moves, find out which Section 102 track their plan is on and when the trustee holding period started. Those two facts determine most of the Israeli answer.

*The above is a general overview only. It does not constitute legal or tax advice, and should not be relied upon without individual advice tailored to your own circumstances.

Section 102: Israeli employee equity, explained