Following our previous memorandum on the comprehensive and favorable reform in Israel’s high-tech taxation regime, we wish to update you regarding the publication of Income Tax Circular 9/2025 – Taxation of Stock Options Granted to Employees Returning to Israel.
The Israeli Tax Authority recently issued Circular 9/2025, which addresses the taxation of exercise of stock options granted by a foreign company that is not considered an “Employing Company,” to employees who were foreign residents at the time of grant but later became Israeli residents following their return to Israel.
The circular does not address the taxation of share sales resulting from the exercise of such options – these are subject to the capital gains tax rules.
The circular distinguishes between two main taxation routes:
- Taxation under Section 3(i) of the Income Tax Ordinance (“the Ordinance”) – This applies when the granting company is not considered an “Employing Company” as defined in Section 102 of the Ordinance. In such cases, the income from exercising the options is classified as employment income and taxed at the employee’s marginal rate. However, Section 3(i)(2) of the Ordinance, allows the taxpayer to spread such income over up to six years – from the grant date to the exercise date – potentially reducing the effective tax rate. In addition, where the vesting period occurred partly abroad and partly in Israel, only the portion of the income relating to options vested during Israeli residency will be taxable in Israel.
- Taxation under Section 102 of the Ordinance – The Israeli employing company of the returning resident may apply to the Tax Authority to convert the taxation route from Section 3(i) to the capital gains route under Section 102, through a trustee and subject to approval. In this case, the lock-up period begins from the entry into the Section 102 regime, and taxation is deferred until the sale of the shares resulting from the exercise of the options. Depending on the vesting schedule and the time elapsed between grant and sale (before and after the return to Israel), part of the benefit may be taxed as employment income rather than as capital gain. The income from exercising the options will be treated as capital gain, provided that the options are deposited with a trustee within 30 days of grant.
The circular also refers to other equity-based instruments such as Restricted Stock Units (RSUs), clarifying that for tax purposes, they are treated as options. If the RSUs’ lock-up period has not yet ended upon the employee’s return to Israel, they will be taxed at the end of the lock-up period under Section 3(i). If the lock-up period ended before the return, the income from their sale will be taxed as capital gain.
Another key issue addressed in the circular is the status of returning residents and new immigrants. Under Section 14 of the Ordinance, an individual returning to Israel after a prolonged stay abroad may enjoy a ten-year exemption on income derived from sources outside Israel. Therefore, if the vesting period of the options was completed while the employee was a foreign resident, the income from exercising them will be considered foreign-sourced and exempt from Israeli tax. Conversely, if the vesting period continued after the return to Israel, the income must be allocated proportionally between the foreign and Israeli residency periods.
The circular also includes provisions regarding foreign tax credits, under Sections 199–200 of the Ordinance, clarifying that foreign taxes paid on income derived outside Israel may be credited against the Israeli tax due on the same income.
Given the complexity of the arrangements set out in the circular, it also includes illustrative computational examples for various scenarios.
In summary, the circular represents an important development for Israeli and multinational companies, as well as for individuals who worked abroad, received options from a foreign employer, and have since returned to Israel. Employees and companies are encouraged to review the implications of the circular on their equity compensation structures and consider seeking professional tax advice or an advance ruling.
As always, and particularly in light of the complexity of these rules, we emphasize that the above does not constitute specific legal advice. Each case should be examined individually, based on its particular facts and circumstances.
Our team is at your disposal for clarifications and further questions.
*The review was written by Adv. Amir Zolty, Partner and Head of Hi-Tech Practice.