A secondary transaction is a real opportunity for liquidity
What is a secondary transaction, and why is it so common in Israeli high-tech?
A secondary transaction is a sale of existing shares by a shareholder to a new buyer – unlike a “regular” investment, or primary investment, in which new shares are issued and the money goes directly into the company’s treasury. In a secondary transaction, the money is transferred between shareholders – not to the company.
A simple example: a company raises 120 million USD. 100 million USD is injected into the company for growth, and 20 USD million goes directly into the pockets of employees and founders who sell part of their holdings. For them, this is the first encounter with real money, without losing the majority of their holdings in the company.
Feature | Primary Transaction | Secondary Transaction |
The money goes to… | The company’s treasury | The selling shareholder |
What is created | New shares | Transfer of existing shares |
Impact on the company | Dilution | No dilution |
Tax event | Usually no | Yes – for the seller |
Secondary transactions have become one of the key tools in Israeli high-tech in recent years, and for good reason: start-up companies remain private for an average of around ten years until a liquidity event, while founders and employees often hold significant wealth “on paper” – with no way to realize it. In 2025, many secondary transactions were carried out at discounts of 35%-55% compared with peak valuations, and with the initial public offering window beginning to reopen in 2026, demand for liquidity is only expected to grow. But behind the opportunity lies a complex tax system that many are not familiar with.
Taxation of secondary transactions: capital gain, employment income, or both?
In most cases, the sale of shares in a secondary transaction is considered the sale of a capital asset and is therefore generally subject to capital gains tax at rates of 25% to 35%, including surtax, depending on the circumstances.
But that is not always the full story.
The classification of the income is the most sensitive issue in secondary transactions. In certain circumstances, the Israel Tax Authority may view part of the consideration not as a capital gain, but as employment income, and tax it at the full marginal tax rate, which may reach approximately 50%.
When does this happen? Common circumstances include:
- Conversion of ordinary shares into preferred shares – preferred shares grant superior rights, such as priority in an exit, veto rights, and more, and are therefore worth more. The Israel Tax Authority may view the difference in value as a benefit derived from employment, and tax it as employment income.
- Absence of an external valuation – in Israel, there is no requirement to determine the value of employee shares based on an external professional valuation. In the United States, this issue is regulated under Section 409A of the U.S. Internal Revenue Code. Where no such valuation exists, the Israel Tax Authority may challenge the company’s internal valuation and argue that the benefit granted was higher.
- Connection between the consideration and the terms of the sale – if the sale is conditional on continued employment, a non-compete undertaking, or other benefits related to employment status, part of the consideration may be classified as employment income.
Employee options under Section 102 of the Income Tax Ordinance
If you received shares or options as part of your compensation package, they were most likely granted under Section 102 of the Income Tax Ordinance [New Version] – the legal framework for equity compensation for employees in Israel. This section has two main tracks:
- Capital gains track – tax of only 25% on the gain, plus surtax, provided that the shares were held by a trustee for at least 24 months.
- Ordinary income track – tax at the full marginal rate on the entire gain.
In a secondary transaction, the critical points to review are:
- Has the lock-up period ended? A sale before the end of 24 months may deny the tax benefit and result in full marginal tax.
- Are the shares held by a trustee? The trustee is a material party to the transaction – the trustee is required to approve the sale and withhold tax at source.
Withholding tax and the 30 days you cannot afford to miss
The reporting obligation to the Israel Tax Authority in respect of a secondary transaction is within 30 days from the date of sale. This is a legal obligation, not a recommendation. A delay may be considered a criminal offense, trigger interest and penalties, and harm the tax narrative vis-à-vis the Israel Tax Authority.
In large transactions, it is customary to appoint a paying trustee – a party that collects the consideration and distributes it to the shareholders. In the absence of appropriate approvals, the trustee will withhold tax at source at high rates, even if the seller’s actual tax is lower. The result is a delay in receipts and an unnecessary temporary loss of liquidity.
An application for reduced tax should be submitted before the transaction date, not afterward. It is important to know: the reporting obligation applies personally to the seller, not to the company.
International taxation: when the transaction crosses borders
Secondary transactions in Israeli high-tech are often not limited to Israel alone:
- Foreign residents – often benefit from a full exemption from capital gains tax on shares in Israeli companies, subject to conditions and tax treaties.
- New immigrants and veteran returning residents – are entitled to significant tax benefits that should be reviewed before the transaction.
- An employee who relocated abroad after receiving the options – two countries may claim taxing rights, and real double taxation may arise that is not resolved under tax treaties. Therefore, tax planning on this issue should be carried out before the relocation, and it is important to determine tax residency before carrying out a secondary transaction.
A real-world example: when capital income became ordinary income
A senior employee at a high-tech company held ordinary shares that he had received as part of his compensation package. As part of a financing round, he was offered the opportunity to convert his ordinary shares into preferred shares and sell part of them in a secondary transaction. The employee expected to pay capital gains tax of approximately 30%. In practice, the Israel Tax Authority determined that the difference in value between the ordinary shares and the preferred shares constituted employment income and assessed full marginal tax on that difference.
The lesson: not all consideration in a secondary transaction is capital gain. The classification depends on the details and requires professional review before signing.
In our professional experience, secondary transactions are often executed under tight timelines, and time pressure is one of the main causes of costly mistakes. The common mistakes we encounter again and again include mixing Section 102 shares with “regular” capital shares, failing to meet the 30-day reporting obligation, approaching the trustee without reduced withholding tax approvals, and missing exemptions arising from residency status.
Tax advice should be obtained as early as possible, and certainly not after signing. The earlier you prepare, the better the chances of taxing the transaction correctly and avoiding traps that are not easily forgotten.
Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team is composed of professionals with years of experience at the Israel Tax Authority, alongside experience at leading firms and law firms, bringing together both legal and economic perspectives. Our team of experts specializes in taxation of capital transactions in the high-tech sector, and advises employees, founders, and investors throughout the stages of a secondary transaction, from reviewing the classification of income, through preparing withholding tax approvals, to reporting to the Israel Tax Authority.
FAQ
What is the difference between a secondary transaction and a regular exit from a tax perspective?
In an exit, all shareholders usually sell at the same time to one buyer, and are paid at once. In a secondary transaction, the sale is partial and individualized, which requires a separate review for each seller.
If I am an employee who sold Section 102 shares - when do I pay the tax?
The reporting obligation and payment of the advance tax are due within 30 days from the date of sale. If the shares are held by a trustee, the trustee will withhold the tax at source when transferring the consideration. It is advisable to confirm in advance that the trustee has a reduced withholding tax approval.
I am a foreign resident holding shares in an Israeli company - will I pay tax in Israel?
In many cases, a foreign resident who sells shares in an Israeli company may benefit from an exemption from tax in Israel on the capital gain, subject to the conditions set out in domestic law and the relevant tax treaties. However, this is not an automatic exemption.
What happens if I did not report within 30 days?
A delay in reporting may trigger interest and penalties, and may harm the ability to manage the tax narrative vis-à-vis the Israel Tax Authority. Courts tend to give decisive weight to the initial report. Therefore, a delay, or an incorrect report, may affect not only the amount, but also the authority’s position regarding the classification of the income.
How much tax will I pay on the sale of shares in a secondary transaction?
The answer depends on your specific circumstances. In most cases, the tax is capital gains tax of 25% to 35%, including surtax. However, in certain circumstances, such as a sale before the end of the lock-up period under Section 102 or classification of part of the consideration as employment income, the rate may be much higher.
