Taxation of Stock Options for Non-Residents Who Became Israeli Residents – Israel Tax Authority Position for 2025

In November 2025, the Israel Tax Authority Published the Income Tax Circular 9/2025. It addresses taxation of options for non-residents who became Israeli residents. Stock options are very common compensation for employees in Israel and abroad. Taxation of Israeli options is regulated in the Income Tax Ordinance (the Ordinance) However, taxation of foreign options that vested when an individual became an Israeli resident was not regulated.

This issue created uncertainty among many taxpayers. The Tax Authority published the circular to clarify its position. The circular addresses issues such as income classification and application of Section 102.

Taxation of Stock Options in Israel

Taxation of equity compensation for employees is anchored in Sections 102 and 3(9) of the Ordinance.

Section 102 regulates share allocation by an employment company. The section provides several alternatives for defining an employment company. These include an Israeli resident company and a non-resident company with a permanent establishment or development center in Israel approved by the Director of the Israeli Tax Authority. The section allows the company to report options through the capital track. In this track, income from exercising options is classified as capital gain and taxed at capital gains tax rates.

Options granted by companies not meeting the employment company conditions are taxed under Section 3(9). Under this section, income from exercising these options is classified as employment income and taxed at marginal rates. Income recognition timing is determined by work location during the vesting period. The income is divided among countries where the employee worked during this period, proportional to workdays in each country.

For further reading on employee stock option taxation, click here.

Key Differences Between Section 102 and Section 3(9) of the Ordinance

*Information in this table is updated for 2025.

Restricted Stock Units (RSUs)

Another equity compensation employees sometimes receive is Restricted Stock Units (RSUs). Under this compensation, the company commits to provide the employee a certain number of shares based on predefined conditions. At vesting, shares are issued, usually without active action by the employee. The tax event date for RSUs is the issuance date.

Treatment of RSUs under Section 102 and Section 3(9) is identical to options. An individual who received RSUs where the restriction period and share issuance began as a non-resident will pay tax in Israel upon actual sale. This income is classified as capital gain under Part E of the Ordinance.

Key Points of Circular 9/2025- Taxation of Income from Exercising Foreign Options

The circular addresses taxation of exercising foreign options by Israeli residents. These are options granted to an individual as a non-resident by an employer that is not an employment company. This exercise is classified as employment income of an Israeli resident taxable in Israel. The circular distinguishes between a returning resident, a veteran returning resident, and a new immigrant.

Returning Resident

A returning resident is someone who stayed outside Israel for between 6 and 10 years. A returning resident can spread the income under Section 3(9)(2) over up to six years. Their income is taxed as if given in equal annual installments during the spreading period. Income spread over a period when the individual was a non-resident is considered income generated outside Israel by a foreign resident and is exempt from Israeli tax. The remaining income is taxable in Israel. Credit can be obtained for foreign tax paid.

Veteran Returning Resident / New Immigrant

The circular distinguishes between situations where vesting ended as a non-resident versus as an Israeli resident. If vesting ended as a non-resident, all income from exercising options is considered foreign income and is exempt from Israeli tax. If vesting ended after becoming an Israeli resident, the income is divided according to workdays in Israel. Part of the gain is taxed in Israel. The rate equals workdays in Israel from return until vesting completion, divided by the total vesting period. The remaining gain is considered income generated abroad and is exempt from Israeli tax.

Application of Section 102 of the Ordinance

Instead of the tax track detailed above, the company can request the Tax Authority to change the tax track to the Section 102 capital track through a trustee. Income from exercising options after the track change is taxed under Section 102. If options were deposited with the trustee within 30 days, the application date is considered the option allocation date. Options not vested at allocation are taxed under Section 102. Cancellation of vested Section 3(9) options and allocation of Section 102 options constitutes a tax event for the company and employees. These options are taxed under Section 102.

Example of Applying the Circular – Returning Resident

An individual left Israel on January 1, 2017, and returned on January 1, 2024. This person is considered a returning resident, having been outside Israel for seven years. The individual received options from a foreign employer (not meeting the employment company definition) on January 1, 2021, which vested on January 1, 2023. The individual exercised the options on December 31, 2024, after returning to Israel. Income from this exercise was one million ₪, on which they paid foreign tax of 200,000₪

The company is not an employment company, so Section 3(9) applies. The option exercise date is the tax event date. The section allows spreading income from the grant date to the exercise date, proportional to workdays in each country. Three quarters of the period the individual was abroad. Therefore, three quarters of the income (750,000₪) is considered income generated outside Israel and is exempt from Israeli tax. The remaining income (250,000₪) is considered income generated in Israel by an Israeli resident and is taxed accordingly.

Foreign tax credit applies only for the period when options are considered Israeli income. Therefore, only one quarter of the tax paid is credited.

In Summary, Circular 9/2025 provides guidance on the taxation of foreign options exercised by Israeli residents. It details income classification, foreign tax credit, and more. The Tax Authority thus provides certainty on this matter for many taxpayers. Publication of this circular joins a recent trend of tax changes for new immigrants and returning residents.

Given all the changes implemented and expected, it is recommended to consult with a tax expert to maximize tax benefits and prevent double taxation. Nimrod Yaron & Co. – Israeli and International Taxation specializes in comprehensive tax advice for individuals making Aliyah or returning to Israel, including stock option matters. To contact a representative from our firm, click here.

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