What Is Israeli Section 102 Equity Tax?

Section 102 of the Israeli Income Tax Ordinance is the framework that governs how employee equity grants are taxed in Israel. When a company sets up its equity plan correctly under Section 102, its Israeli employees can receive meaningfully better tax treatment on the gains from their options or shares. When the setup or the deadlines are missed, those same employees can lose the favorable treatment and pay ordinary income tax instead.

This guide explains what Section 102 is, the tax tracks it offers, the role of the trustee, the holding period, the deadlines that matter, and what happens across the life of a grant. It is general information about how the regime works, not legal or tax advice. Confirm specifics for your company with your tax advisor.

Who Section 102 applies to

Section 102 applies to equity grants made to employees and company officers, including directors, of the granting Israeli company or a related company such as a parent, subsidiary, or sister company. A foreign parent can grant under Section 102 to employees of its Israeli subsidiary when that subsidiary is formally designated and approved by the tax authority as the employing company.

Two groups fall outside Section 102 and are taxed under Section 3(i) instead: service providers without an employee relationship, such as consultants and advisors, and controlling shareholders. A controlling shareholder is broadly defined as anyone who holds, directly or indirectly, 10% or more of the company's share capital, voting rights, profit rights, or the right to appoint a director. Under Section 3(i) the benefit is taxed as ordinary income at progressive marginal rates, usually at vesting or exercise, with no capital-gains track and no trustee.

The two trustee tracks (and the non-trustee track)

Section 102 offers three tax tracks. The company chooses the track when the plan is set up. The employee cannot choose.

Capital-gains track with trustee

This is the most favorable track for employees. Gains are taxed at a flat 25% capital-gains rate. High earners can pay an additional surtax above an annual threshold (the threshold was ILS 721,560 as of 2025), so the effective rate on the capital-gains portion can reach roughly 30% for the highest earners as of 2025. For a private company, the entire gain from sale proceeds minus the exercise price is treated as a capital gain. For a public company the gain is split: the spread between the exercise price and the fair market value at grant is taxed as ordinary income, and the appreciation above that value is taxed at 25%. This track requires a trustee to hold the awards for at least 24 months from the grant date.

Ordinary-income track with trustee

The entire benefit is taxed as employment income at the employee's marginal rate, which can reach about 50% including surtax, plus National Insurance and health tax. A trustee is still required, but the minimum holding period is typically 12 months from the date of grant. The advantage sits with the employer: the benefit amount is generally deductible as a compensation expense.

Non-trustee track

No trustee is involved. The gain is taxed as ordinary employment income at marginal rates, and the employing company withholds tax at exercise or sale.

The practical difference is large. An employee on the capital-gains track who sells shares of a private company at a significant gain pays 25%. The same gain outside a trustee track could attract 47% to 50% income tax plus social contributions. The trade-off for the lower rate is the holding period and the administrative work of running a trustee arrangement.

The trustee and the holding period

A trustee is a mandatory intermediary for any grant made under either trustee track. The trustee holds the granted options and shares on behalf of employees during the lock-up, calculates and remits tax to the tax authority when a taxable event occurs, files the required periodic reports, and manages exercises and sales. The trustee must be an entity or individual approved by the tax authority, and the company selects and appoints it through a trust agreement.

The holding period is the heart of the capital-gains track. Awards must remain with the trustee for at least 24 months measured from the date the award is deposited with the trustee, not from board approval and not from exercise. On the ordinary-income track the minimum is 12 months from the deposit date. Selling or transferring shares out of trust before the required period is complete forfeits the favorable treatment: the entire gain is reclassified as ordinary employment income at marginal rates, plus National Insurance and health tax. This early-sale reclassification is one of the most common and most costly mistakes employees make.

Fair market value at grant

The fair market value of the shares on the grant date is a critical input, especially for public companies and for any grant priced below fair market value. For a public company the value at grant is typically the average closing price over the 30 trading days before the grant date, and it is the point at which the gain splits into an ordinary-income portion and a capital-gains portion. For a private company no market price exists, so the company must keep robust, contemporaneous documentation supporting the value at grant, commonly an independent valuation that the tax authority can review during an audit or at an exit. Setting the exercise price at or above fair market value at grant is standard practice to preserve capital-gains treatment, because any discount below that value becomes an ordinary-income component. If you are determining defensible fair market value for a private company, the same valuation discipline that supports a US 409A valuation is the kind of contemporaneous evidence that supports a Section 102 grant price.

The deadlines that decide eligibility

Section 102 compliance depends on meeting several hard deadlines. Missing any of them can cost employees their preferential treatment.

Before the first grant. The equity plan must be submitted to the tax authority online portal at least 30 days before the first grant is issued under it, and an approved trustee must be in place before trustee-track grants are made. Historically, if the tax authority did not respond within 90 days, the plan was deemed approved. That fallback still exists but is suspended if the authority raises a red flag, in which case the plan stays unapproved until the issue is resolved.

Per grant. A copy of the board resolution approving the grant must reach the trustee within 45 days of the grant date, and the signed grant agreement must be deposited with the trustee within 90 days of the grant date. The binding deposit cutoff is whichever of those two clocks expires first. Missing the deposit window can disqualify the grant from the capital-gains track.

Ongoing reporting. Under the regime in force as of 2025, a quarterly report (Form 146) is due within the statutory period after the end of each quarter in which grants were made, and an annual report (Form 156) covering the prior tax year is due within the statutory period after the tax-year end. Leaving a grant out of a required report can disqualify that grant from Section 102 benefits.

Plan filing, approval, and red flags

Before any grant can be made under a capital-gains-track plan, the plan must be submitted to and approved by the tax authority. Since the start of 2025 submission is online only: the company files the full equity incentive plan document, including any Israeli annex for a global plan, together with a detailed questionnaire covering the plan's structure, award types, share rights, vesting conditions, and company status.

The questionnaire is designed to surface non-compliant features. Common red flags include put or call options that let employees sell shares back or let the company repurchase them, vesting tied solely to an uncertain future event such as an IPO or acquisition rather than time or performance, awards that lack standard share rights, and cash-settlement alternatives without a specific ruling. A red flag suspends both the 30-day waiting period and the 90-day deemed-approval clock.

After approval, any change that would alter an answer in the questionnaire is a material change that requires resubmission and a fresh 30-day wait. Some changes are explicitly non-material and need only notification, including adding new award types, increasing the share pool, and replacing the trustee.

When tax is due and how the gain is calculated

Under the trustee tracks there is generally no tax at grant or at vesting. Tax is deferred to the earlier of the sale of the shares by the trustee or the transfer of the shares out of trust to the employee, both of which typically happen after the holding period is satisfied.

For a private company on the capital-gains track, the gain is the sale proceeds minus the exercise price paid, taxed at 25% plus any surtax. For a public company the gain splits: the value at grant minus the exercise price is ordinary income at marginal rates, and the sale price minus the value at grant is a capital gain at 25%. If shares are sold before the holding period is complete, the entire gain is reclassified as ordinary employment income. The trustee withholds tax at source from the proceeds and remits it to the tax authority, and the employee receives the net amount. Because trustees sometimes withhold at a conservative flat rate, an employee who believes they overpaid may need to file an annual Israeli tax return to claim a refund.

The grant lifecycle: leavers, acceleration, and relocation

Leavers. Unvested options are typically forfeited and cancelled on the termination date. Vested options usually carry a limited post-termination exercise period, commonly 90 days but sometimes 30 days or another window set by the plan, after which they expire. The holding-period clock runs from the original deposit date and keeps running after the employee leaves, so shares sold before the required period is complete are still taxed as ordinary income regardless of the reason for leaving. The grant letter and the equity plan, not Section 102 alone, govern most of this.

Acceleration. When a plan accelerates vesting solely because of a standard termination that is not linked to an exit or IPO, the tax authority's stated position is that the accelerated portion is ordinary employment income at marginal rates.

Relocation. Leaving Israel while holding Section 102 awards is one of the most complex scenarios in Israeli equity taxation. Ceasing Israeli tax residency can trigger an exit-tax provision that deems assets sold on the day before departure, and the portion of any gain attributable to the period worked in Israel generally stays taxable in Israel, often apportioned by the share of the vesting period spent in Israel. The new country of residence taxes gains attributable to the post-relocation period under its own rules, with double-taxation treaties sometimes providing relief. US citizens face additional complexity because the US taxes worldwide income and its timing of taxation can differ from the Israeli deferral, so specialist cross-border advice is essential before moving or selling.

How Value8 supports Section 102 compliance

Value8's cap table platform includes a Section 102 compliance module for Israel-eligible companies. It gives the company one place to see how ready it is for its next filing, which clocks are running, which grants carry findings that need attention, and which stakeholders may be controlling shareholders. It tracks the trustee holding period from the attested deposit date, classifies each grant by its tax track, and pre-flights the quarterly and annual report data so problems surface before a filing rather than after. The capability page walks through how Value8 does Section 102 view by view, and the Section 102 FAQ answers the most common questions in one place.

To see the module against your own cap table, explore pricing or get in touch.

This is general information about how Section 102 works, not legal or tax advice. Confirm the exact rules, rates, and deadlines that apply to your company with your tax advisor.