Section 102
Israel's Income Tax Ordinance provision governing employee equity: a 25% capital gains rate (Section 102(b)(2)/(3), 24-month trustee holding) versus ordinary income rates up to 50% (Section 102(b)(1), 12-month holding, or Section 102(c), no trustee). Companies must file a binding track Election with the ITA 30+ days before their first grant. A 2025 ITA circular added a "Green Route" letting foreign options convert into Section 102 for returning residents.
Section 102 of Israel's Income Tax Ordinance is the legal provision governing employee equity compensation in Israel, letting employees pay a 25% capital gains rate on option or share gains instead of marginal income tax rates of up to 50%, provided the equity is held by an approved trustee for a set period. It is the single most-referenced provision in Israeli startup compensation, and in 2025 the Israel Tax Authority added a new mechanism letting companies convert foreign stock options into the Section 102 track for returning residents.
What Are the Three Tracks Under Section 102?
Section 102(b)(1) establishes the Ordinary Income Track, under which a trustee holds the equity for a shorter 12-month period but gains are still taxed as employment income at the employee's marginal rate. Section 102(b)(2) and (3) establish the Capital Gains Track, which requires a 24-month holding period from grant but taxes the growth in value at a flat 25% rate, the option most Israeli companies choose for employee grants. Section 102(c) covers Non-Trustee Awards, which involve no trustee at all and are taxed immediately upon exercise with no preferential rate, typically used for controlling shareholders and others who do not qualify for trustee tracks.
How Does a Company Elect Its Track?
An employing company must file its Election of track, capital gains or ordinary income, with the Israel Tax Authority at least 30 days before its first grant date. That election binds the company to the chosen track for all qualifying grants until the end of the tax year following the year the company first granted options under Section 102, meaning a company cannot switch tracks grant by grant; changing tracks requires a new election that only applies going forward.
What Changed Under ITA Circular 9/2025?
A 2025 Israel Tax Authority circular introduced a mechanism, sometimes called the "Green Route," that lets an Israeli employing company apply to convert an employee's existing foreign stock options, originally taxed under Section 3(i) as ordinary employment income at marginal rates up to 50%, into the favorable Section 102 capital gains track through a trustee, subject to approval and compliance with Section 102's holding-period requirements. The circular also introduced a proportional income-allocation mechanism for returning residents and olim whose options vested partly while they were foreign residents and partly after becoming Israeli tax residents, apportioning the Israel-source and foreign-source income components of a single equity grant rather than treating the whole gain as one or the other.
Why Does Section 102 Matter Beyond the Tax Rate Itself?
Nearly every Israeli startup term sheet, employee option pool and exit process runs through Section 102, including at companies built out of Unit 8200 and other elite technical units. Founders and CFOs structure grant timing around its election deadlines and holding periods, and acquirers diligence Section 102 compliance closely in M&A, since a company that has not properly filed its Election or maintained trustee compliance can expose both the company and its employees to retroactive ordinary-income tax treatment.