ITA Circular 9/2025: New Equity Tax Rules for Returning Residents

The ITA released Circular 9/2025 to clarify cross-border equity tax for employees becoming Israeli residents. It introduces proportional income allocation. This resolution incentivizes the return of high-tech talent by clarifying the tax treatment of foreign-sourced equity compensation.

TLDR: Key Takeaways 

• The Core Change: Income from equity units (Stock Options & RSUs) is now proportionally allocated based on the work location during vesting. The portion tied to the foreign residency period is explicitly classified as foreign-sourced income.
  
• Who It Impacts: Israeli residents who worked abroad, including returning residents and new immigrants. It specifically covers options granted by a foreign company that is not an "Employing Company."
  
• The Benefit: Returnees can now utilize “income spreading” to ensure the income portion from their pre-return service remains exempt from Israeli tax.
• ‍Strategic Shift: Israeli employing companies can apply to the Tax Authority to convert existing foreign options from the Section 3(i) employment track to the favorable Section 102 capital gains track (via a Trustee).

Executive Summary: ITA Guidance on High-Tech Taxation Reform

On November 11, 2025, the Israel Tax Authority (ITA) published guidance as part of a "Comprehensive Reform in High-Tech Taxation." Its primary goal is to increase tax certainty, remove investment barriers, and incentivize the return of high-tech talent to Israel.

Key Clarifications (ITA Circular No. 9/2025)

• Target Audience: Relevant for Israeli and multinational companies and employees who were foreign residents at the time of grant but subsequently became Israeli residents. It specifically covers foreign options not granted by an "Employing Company" (under the Section 3(i) track).
  
• The Core Change: The circular establishes definitive guidelines for proportionally allocating equity income (Stock Options and RSUs) based on the work location during the vesting period.
  
• The Benefit: The portion of income generated during the foreign residency period is explicitly classified as foreign-sourced income and, with the implementation of “income spreading”, is exempt from Israeli tax.
• ‍The Mechanisms (Income Spreading): Taxpayers may elect to spread the income from the grant date to the exercise date (over up to six years) to potentially reduce the effective tax rate.

Real-World Scenario: Individual Returns to Israel

Scenario Inputs (ITA Circular No. 9/2025)

• Event: Employee returns to Israel during the vesting period.
• Total Capital Gain: 1,000,000 ₪.
• Total Foreign Tax Paid: 200,000 ₪.
• Vesting Timeline: 4 Years Total (3 Years as Foreign Resident, 1 Year as Israeli Resident).

Step 1: Determine Israel-Source Income

• Rule: Income is apportioned based on the period worked as an Israeli resident relative to the total vesting period.
• Calculation: 1,000,000 ₪ (Total Gain) × 0.25 (Israel Period) = 250,000 ₪.
• Result: 250,000 ₪ is taxable in Israel.

Step 2: Calculate Israeli Tax Before Credits

• Rule: The Israel-source portion is taxed at the combined effective rate (47% Marginal + 3% Surtax).
• Calculation: 250,000 ₪ × 50% (Combined Rate) = 125,000 ₪.
• Result: 125,000 ₪ (Tax before credits).

Step 3: Calculate Allowable Foreign Tax Credit 

• Rule: Foreign tax paid is creditable only in proportion to the foreign-source portion (75%) applied to the Israel-taxable portion.
• Calculation: 200,000 ₪ (Foreign Tax) × 0.75 (Foreign Portion) × 0.25 (Israel Portion).
• Result: 37,500 ₪ Allowable Credit.

Final Tax Determination 

• Calculation: 125,000 ₪ (Liability) - 37,500 ₪ (Credit).
• Final Payable to Israel: 87,500 ₪.

Strategic Opportunity: Switching to Section 102

Income Tax Circular 9/2025 provides a strategic opportunity where the Israeli employing company may apply to the Tax Authority for a conversion of the tax track for existing foreign options. This conversion is executed via an application for a tax ruling in a designated "Green Route."

The mechanism enables equity income to be reclassified into a more favorable tax category.

The Conversion Mechanism: Tax Rate Comparison

• Mechanism (The Switch): The Israeli employing company may apply to convert existing foreign options from the Section 3(i) employment income track (taxed at the marginal rate) to the favorable Section 102 capital gains track (via a Trustee, subject to approval and compliance with the holding periods required under the Section 102 tax regime).
  
• The Outcome: If approved, income from exercising these options is classified as Capital Gain, allowing the equity benefit to avoid taxation as ordinary employment income. 

The Logic (Old vs. New)

Yarin Yom-Tov

Product Tax Manager

Yarin Yom-Tov is a Product Tax Manager at Slice, where he integrates global tax laws into the company’s platform by transforming complex international regulations into proactive compliance insights and tax calculations. Prior to joining Slice, he practiced tax law at a leading law firm and a top-tier boutique, focusing on international taxation and strategic tax planning for both corporations and individuals. Yarin holds an LLB in Law and a BA in Economics from The Hebrew University of Jerusalem.

Global Equity Made Safe

CONTACT US