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. If an approved trustee holds the securities 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 the tax is only due when the shares are actually sold. Meeting the conditions of this track 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, which tax RSUs on vest. This 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. For shares not listed on a stock exchange, the entire gain is generally treated as capital gain. For listed shares (in Israel or abroad), the benefit element at grant - the difference between the average share price over the 30 trading days before the grant and the exercise price - is treated as employment income. Only the appreciation after that point is taxed as 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 before Israeli tax residency ends. Meanwhile, the new country of residence will usually seek to tax the full gain as well. Because most tax treaties do not fully resolve this overlap, double taxation is a real risk. Managing the timing of realisation relative to the timing of severance is critical.

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 tax treaty. However, treaties do not resolve every double-taxation scenario - particularly when the two countries recognise the income in different tax years. The two tax systems must be coordinated deliberately, usually by involving advisors on both sides.

Section 102: Israeli Employee Equity Explained

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

Israel Tax Authority Circular 9/2025 sets out a specific framework for taxing equity received from a foreign employer while a foreign resident and exercised after becoming an Israeli resident. For an ordinary returning resident, or someone returning after fewer than six years, the income can be spread over the tax years from grant to exercise (up to six years). The portion allocated to the foreign-residency years is exempt, the remainder is taxable, and a partial foreign tax credit may be available. For a new oleh or a veteran returning resident, only the portion reflecting Israeli workdays during the vesting period is taxable.

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 referring to "Section 102" and a trustee will land on your desk. It has no clean analogue in most tax systems. The instinct to map it onto whatever your jurisdiction calls a qualified plan is exactly where the trouble starts. Here is how it actually works.

If you take away just one thing, let it be this: Israel generally taxes Section 102 equity when the shares are sold, not when they vest. Almost everywhere else taxes RSUs on vest. That means two countries, the same shares, and different tax years - leaving you with a credit that often has nothing to offset.

Why Section 102 surprises foreign advisors

Section 102 of the Israeli Income Tax Ordinance governs equity an employer grants to its employees - options (ESOP), restricted stock units (RSUs), and discounted employee stock purchase plans (ESPP). The instruments themselves are familiar. What makes the regime unusual is that the favourable tax treatment is delivered through a trustee holding the securities, and that qualifying changes both the tax 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 but the timing badly wrong. And the timing is what costs your client money.

The trustee capital-gains track

Under the capital-gains track, the employee's gain is taxed at the capital-gains rate of 25% rather than at marginal rates as employment income. This is subject to conditions. The central requirement is that an approved trustee holds the securities for a lock-up of at least 24 months from the date of grant and deposit. The alternative is the ordinary-income track, which taxes the gain as employment income at the employee's marginal rate.

Meeting these conditions determines the rate. This is not an election your client makes at sale. It is a function of how the plan was structured, which track the company elected, and whether the trustee holding period was actually respected.

Comparison of the Israeli Section 102 tax routes for employee options and shares: capital-gains track, employment-income track and grants without a trustee
	Capital-gains track with trustee	Employment-income track with trustee	No trustee
Tax rate	25% capital gains. For shares listed on a stock exchange, the part up to the 30-trading-day average before grant is employment income	Marginal rate, as employment income	Unlisted option - marginal rate on the whole gain. Share or listed option - marginal rate on its value at grant, later growth as capital gain
When tax is due	When the trustee sells the share or transfers it to the employee, whichever is earlier	When the trustee sells the share or transfers it to the employee, whichever is earlier	Unlisted option - on sale of the share. Share or listed option - at grant, and again on sale
Lock-up (blocking period)	24 months from grant and deposit with the trustee	12 months from grant and deposit with the trustee	None
Sale before the lock-up ends	The whole gain is taxed as employment income	No change - employment income	Not relevant

The company elects the track, which will appear in the grant letter. Note that Section 102 does not apply to a controlling shareholder.

A quick note on rates: 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% - comprising a 25% base rate, a 3% surtax, and a 2% capital-gains levy.

Sale, not vesting: the timing mismatch

This is the heart of the matter. 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, the tax event is deferred past exercise until the sale of the underlying share.

Most tax systems do the exact opposite with RSUs: income is recognised, withheld, and reported on vest. Consider an employee who vests while resident in your jurisdiction and sells three years later while resident in Israel, or vice versa. One country has already taxed the income in year one. The other taxes it in year four. Both countries may be entirely correct under their own domestic rules.

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

Employment income vs capital gain

Assuming the equity was granted under the trustee capital-gains track, the tax event is deferred to realisation for both RSUs and options. From there, the classification depends on whether the shares are listed on a stock exchange:

Shares not listed on a stock exchange - the entire gain at realisation is generally treated as capital gain.
Shares listed on a stock exchange (in Israel or abroad) - the "benefit element" at grant is treated as employment income. This is the difference between the average share price over the 30 trading days before the grant and the exercise price. Only the appreciation from that point to sale is taxed as a capital gain.

For an advisor preparing a foreign return, this split really matters. The employment-income slice and the capital-gains slice may be sourced, timed, and credited quite differently in your jurisdiction.

Client holding Israeli equity?

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Leaving Israel with RSUs or Section 102 options? How I can help »

Leaving Israel: exit tax

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

The timing of realisation relative to the timing of your client's severance is therefore critical. This is a decision that must be made before the move. Afterwards, the planning options narrow sharply.

Coming to Israel: Circular 9/2025

Consider the mirror-image scenario: your client received equity from a foreign employer while working abroad, outside Section 102, and is now moving to Israel as a new oleh or a returning resident. Israel Tax Authority Circular 9/2025 sets out, for the first time, a coherent framework for how that equity is taxed here.

The circular splits the income by residency. For an ordinary returning resident, or someone returning after fewer than six years, the income can be spread over the tax years from grant to exercise (up to six years). The portion allocated to the foreign-residency years is exempt, the rest is taxable, and a partial foreign tax credit may be available. For a new oleh or a veteran returning resident, the exemption is broader: only the portion reflecting Israeli workdays during the vesting period is taxable. If your client's vesting schedule straddles the move, this split is worth real money and depends on records they might 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 I will be direct about the limits: a treaty does not resolve every double-taxation scenario, and the equity timing mismatch is exactly the kind of problem it handles least well.

What actually works is coordinating the two tax systems deliberately. You must decide when to realise the equity, and in which residency year, with clear sight of both sets of rules at once. That normally means advisors on both sides talking before the event, rather than trying to reconcile things after the fact.

There is also a recurring point regarding refunds. A trustee or employer may withhold Israeli tax at the maximum rate upon realisation, even if the actual liability is lower due to part-year employment, an available foreign tax credit, or the apportionment mentioned above. Where this happens, you can file a return to reclaim the excess.

If you take just one action, make it this: before your client exercises, sells, or moves, find out which Section 102 track their plan uses and exactly when the trustee holding period started. Those two facts dictate most of the Israeli tax 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