Employer of Record Israel
Hire and pay staff in Israel without opening a local entity · NETO is the legal employer under license 1565.
Read more
Guide for foreign employers
Section 102 Stock Options Israel: A Foreign Employer's Guide
How US and EU companies grant equity to Israeli employees on the 25% capital-gains track under Section 102(b) · instead of the ordinary-income default.
Licensed manpower contractor 1565 · verify
Coordinated with an ITA-approved Israeli trustee
✦ AI summary
Section 102 of the Israeli Income Tax Ordinance lets Israeli employees pay a flat 25% capital-gains tax on stock-option or RSU proceeds, instead of the ordinary marginal rate of up to 50% plus Bituach Leumi (National Insurance), which together can reach roughly 62%.
To qualify, the grant must run through an ITA-approved Israeli trustee on the Section 102(b) capital-gains track, the shares must be held by the trustee for at least 24 months from the grant date, and the plan must be filed with the Israel Tax Authority (ITA) at least 30 days before any grant. Foreign parents whose US ISO or RSU plans were never adapted to Israeli law usually default to the ordinary track and lose the benefit. NETO coordinates Section 102 grants together with an Israeli trustee under manpower license 1565.
Equity for Israeli employees, done the right way
If you are a US or EU company hiring engineers in Israel, your equity plan needs an Israeli overlay. This guide walks through why the US plan does not port over, the three tracks available, the trustee and the 24-month rule, ITA filing, vesting, and how NETO coordinates it all.
Contents
Reading time: 8 minutes · Focus: Section 102 Israel · Updated 2026
The problem
Why your US ISO/RSU plan won't work as-is in Israel
If you're a US or EU company hiring engineers in Israel, your existing equity plan was almost certainly drafted under US tax code · Sections 422 (ISO), 409A (deferred comp), and 83(b) elections. None of those map onto Israeli tax law.
Here's what happens if you just hand an Israeli employee the same US grant agreement your American hires get:
- The employee is taxed at ordinary income rates on exercise · currently up to 50% marginal income tax, plus Bituach Leumi (National Insurance) and health-insurance contributions. Combined, that lands near 62% for a senior engineer.
- The employer owes Israeli social contributions on the same value, because it's classified as compensation income, not capital gain.
- You lose the entire reason equity is supposed to be tax-efficient in the first place.
Section 102 of the Israeli Income Tax Ordinance exists specifically to solve this. It carves out a separate regime for employee equity and · when used correctly · drops the employee's tax to a flat 25% capital-gains rate. But you have to opt in through paperwork filed with the Israel Tax Authority before the grant. Retroactive fixes are not possible.
The three tracks
Section 3(i) vs Section 102(a) vs 102(b) capital-gains track
Israeli tax law gives a foreign employer three realistic tracks for granting equity to an Israeli employee. The choice determines the tax rate the employee pays · and the employer's obligations.
| Track | Who it's for | Employee tax | Trustee? | Holding period |
|---|---|---|---|---|
| Section 3(i) | Contractors, consultants, anyone who is not an employee | Ordinary income, up to 50% plus Bituach Leumi | No | None |
| Section 102(a) · ordinary track | Employees, when the employer wants to deduct the cost | Ordinary income at exercise | Yes | 12 months |
| Section 102(b) · capital-gains track | Employees, optimized for the employee | 25% flat capital gains | Yes (mandatory) | 24 months from grant |
For most foreign companies hiring Israeli employees, the Section 102(b) capital-gains track is the right answer. The employer gives up the ability to deduct the option expense for Israeli corporate tax purposes · irrelevant if you don't have an Israeli entity anyway · and the employee pays a flat 25%. Section 102(a) is mostly used by Israeli-incorporated companies that want the expense deduction.
Section 3(i) is the default that applies automatically if you ignore Section 102. It's also the only track available for contractors. If you're working with someone classified as a contractor in Israel · see our employee vs contractor test · equity grants will land in Section 3(i) and get taxed as ordinary income.
Non-negotiable
The trustee requirement
Section 102 makes the trustee non-negotiable. Without an Israeli trustee, the grant does not qualify · full stop. This is the single most common reason foreign companies miss out on the capital-gains rate: they assume their US transfer agent or a cap-table tool counts as a trustee. It does not.
An Israeli Section 102 trustee is a regulated role. The trustee must be approved by the Israel Tax Authority and is usually one of a small number of Israeli law firms or trust companies that specialize in employee equity. Their job:
- Hold the granted options and underlying shares in trust for the required holding period (24 months on the capital-gains track).
- Track the grant date, vesting schedule, exercise events and sale events for each individual Israeli employee.
- Withhold and remit the 25% capital-gains tax to the ITA when the employee sells.
- File annual reports with the ITA for the plan as a whole.
The trustee fee is typically a setup charge per plan plus a small per-employee annual fee · trivial compared to the tax delta on a single liquidity event.
The clock
The 24-month holding rule
Here's the rule that catches the most companies by surprise: to get the 25% capital-gains rate, the trustee must hold the underlying shares for at least 24 months from the date of the grant · not from the date of exercise, and not from the date of vesting.
That distinction matters. In the US, the ISO clock for long-term capital gains starts at exercise. In Israel, the Section 102(b) clock starts at grant. So an Israeli employee granted options on Jan 1, 2026, who vests them on Jan 1, 2030, and exercises and sells on Jan 1, 2031, comfortably clears the 24 months and qualifies for 25%.
But an employee granted options on Jan 1, 2026, who exercises and sells within the same 24-month window · say in a quick acquisition in late 2026 · does not qualify. The proceeds get taxed as ordinary income under Section 102(a), even though the plan was filed on the capital-gains track. The 24-month rule is hard. The ITA does not bend it.
This is why founders who anticipate an acquisition need to file the Section 102 plan as early as possible · ideally at the company's first Israeli hire, even before there are real shares to grant. The clock can only start once the plan is filed.
Paperwork
Filing the plan with the ITA
Filing a Section 102 plan with the Israel Tax Authority is paperwork, not a discretionary review. There's no approval to wait for · the ITA accepts the filing and the plan becomes effective on a defined date. But the filing must happen at least 30 days before any grant is made under the plan. If you grant options first and try to file the plan afterward, those specific grants fall back to Section 3(i) or 102(a) by default.
The filing package typically includes:
- The equity plan document itself, often the same US plan with an Israeli appendix attached.
- The trust agreement with the Israeli trustee.
- An election form specifying the chosen track · usually 102(b) capital gains.
- A board resolution adopting the Israeli appendix.
- Form 904 and supporting documents identifying the trustee and the issuing company.
Timeline from kickoff to a filed plan is realistically 4-6 weeks: 1-2 weeks for the Israeli trustee and Israeli employment counsel to draft the appendix, 1 week for board approval, plus the mandatory 30-day waiting period before the first grant. Plan accordingly if you've already promised options to a new hire.
Vesting
Vesting, acceleration, double-trigger
Standard Silicon Valley vesting terms · 4 years with a 1-year cliff, monthly vesting after that · are fully compatible with Section 102(b). Israeli tax law doesn't care about vesting schedules; it cares about the grant date and the 24-month holding period at the trustee level.
Acceleration provisions also work, with one nuance worth flagging:
- Single-trigger acceleration on change of control · fully compatible. The shares accelerate, the trustee transfers them, and if the 24-month period from grant is met, the gain is taxed at 25%.
- Double-trigger (acceleration on involuntary termination within X months after change of control) · fully compatible. Same outcome.
- Acceleration within the 24-month window · the gain still happens, but it falls into Section 102(a) ordinary income at the employee level. Not a 102(b) problem per se, but a sequencing reality.
For exit planning, the practical advice is to grant the Israeli team as early as possible so that by the time a real liquidity event happens, the 24-month clock has long since cleared.
NETO's role
How NETO handles Section 102 grants
NETO operates as the Employer of Record (EOR) for foreign companies hiring in Israel · we hold license 1565 from the Israeli Ministry of Labor and run payroll for the Israeli employee under our entity, so the foreign parent doesn't need to incorporate in Israel.
Section 102 sits adjacent to payroll, not inside it: equity is granted by the foreign parent (the issuer of the shares), not by NETO. But the two pieces have to be coordinated · the trustee needs to know what's happening at payroll, and payroll needs to report option-exercise events correctly to Bituach Leumi and the ITA.
1
File the planThe foreign parent files the Section 102 plan with the ITA through our trustee partner, an ITA-approved Israeli trustee. Usual timeline: 4-6 weeks.
2
Record the grantThe grant is recorded with the trustee and the 24-month clock starts.
3
Flag in payrollNETO's payroll engine flags the employee as having a Section 102 grant, so any exercise event triggers the right reporting and not double withholding.
4
Sell and settleWhen the employee sells, the trustee withholds 25% and remits it to the ITA. The payslip shows nothing · the gain is outside payroll.
For a foreign company hiring its first 1-12 Israeli employees, this is usually the cleanest path: NETO under license 1565 handles the employment relationship and payroll compliance, the trustee handles Section 102, and the founder only signs documents.
Related reading: how to hire Israeli employees · mandatory benefits in Israel · Israel payroll for foreign companies.
General information only · not legal or tax advice. Section 102 outcomes depend on the specific plan, timing and the employee's circumstances. The binding rules are those of the Israeli Income Tax Ordinance and the Israel Tax Authority. Consult a qualified Israeli tax adviser and an ITA-approved trustee before granting.
FAQ
Frequently asked questions
Does Section 102 apply to RSUs as well as stock options?
Yes. The Section 102(b) capital-gains track applies to RSUs, restricted stock and stock options, as long as they're granted to an Israeli employee through a filed plan held by an Israeli trustee.
Can a US company grant Section 102 options without an Israeli subsidiary?
Yes. The issuing company can be foreign. What's required is an Israeli trustee and the plan filing with the ITA. NETO clients regularly grant Section 102(b) equity in their US parent stock with no Israeli entity at all.
What happens if we sell the company before the 24 months are up?
The gain still goes through the trustee, but the rate drops back to ordinary income (Section 102(a) treatment) rather than the 25% capital-gains rate. The plan does not break · only the rate changes for that specific event.
Can a contractor receive Section 102 options?
No. Section 102 is for employees only. Contractors fall under Section 3(i) and are taxed at ordinary income rates. If equity is important, reclassifying the contractor as an employee · typically through an EOR · is the practical fix. See our employee vs contractor test.
How long does it take to set up a Section 102 plan from scratch?
Realistically 4-6 weeks: 1-2 weeks to draft the Israeli appendix and trust agreement with the Israeli trustee, 1 week for board adoption, and the mandatory 30-day waiting period between filing the plan and the first qualifying grant.
Does the employee pay tax when the options vest or exercise?
On the Section 102(b) capital-gains track the taxable event is generally the sale of the shares by the trustee, not vesting or exercise. At that point the trustee withholds the 25% capital-gains tax, provided the 24-month holding period from grant has been met.
Does NETO grant the equity, or does the parent company?
The foreign parent grants the equity, because it issues the shares. NETO acts as Employer of Record under license 1565, runs compliant payroll for the Israeli employee, and coordinates with the ITA-approved trustee so the grant and payroll reporting line up.
Learn more
Related guides
How NETO supports foreign employers hiring in Israel.
Hire Israeli employees
The practical path for a foreign company to onboard its first Israeli hires, compliantly.
Read moreHire Israeli software developers
Where to find engineers, how equity fits in, and how to employ them without a subsidiary.
Read moreMandatory benefits in Israel
Pension, severance, recreation pay and the statutory benefits every Israeli employee receives.
Read moreIsrael payroll
Compliant monthly payroll · payslips, National Insurance and pension calculated correctly.
Read moreEmployer cost in Israel
What it really costs to employ someone in Israel, from gross salary to statutory add-ons.
Read more In summary
Lock in the 25% track from day one
Section 102(b) turns a potential 62% tax bill into a flat 25% for your Israeli team · but only if the plan is filed with the ITA, a regulated Israeli trustee holds the shares, and the 24-month clock has run from the grant date. Get the paperwork in early, and the tax efficiency is there when a liquidity event arrives. NETO coordinates the employment, payroll and trustee side so the founder only signs documents.
Granting equity to Israeli engineers?
NETO coordinates Section 102 filings with our trustee partner, so the 25% capital-gains track is locked in from day one · not retrofitted after the exit.
