Israel
ITA Circular 9/2025: New Equity Tax Rules for Returning Residents
A technical guide to ITA Circular 9/2025 regarding cross-border equity (Options & RSUs). Covers Section 14 exemptions, Section 102 conversions, and proportional income allocation 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)
In today's competitive tech landscape, attracting and retaining top talent across borders is crucial for startup success. For companies with a growing presence in Sweden, navigating the complexities of equity compensation can be a significant hurdle. This is where Qualified Employee Stock Options (QESOs) become critical. Although implementing QESOs involves navigating numerous requirements, the substantial tax advantages make them a highly rewarding solution for both companies and employees.
What are QESOs?
Qualified Employee Stock Options (QESOs) are a type of stock option specifically designed for companies with a Swedish presence to incentivize employees with equity in the company. The beauty of QESOs lies in their favorable tax treatment for both the company and the employee:
- Employee Benefits: Employees enjoy tax-free grants and are only taxed on capital gains at upon sale, typically at a rate of 25%.
- Company Benefits: Companies benefit from reduced social security contributions compared to traditional non-qualified stock options.
Difference Between QESOs and Non-Qualified Stock Options in Sweden
When considering stock options, it's essential to understand the differences between QESOs and non-qualified stock options in Sweden:
- Tax Event: For non-qualified stock options, there is a tax event upon exercise. Employees are taxed at progresive tax rate ranging between 30%-55% on the difference between the market price and the exercise price at the time of exercise.
- Withholding Obligation: Employers have a withholding obligation for non-qualified stock options. Employers must withhold the appropriate tax amount through salary in the month following the exercise.
- Social Security Contributions: Non-qualified stock options include a social security contribution obligation at a rate of 31.42%.
Key Requirements for QESOs
To benefit from the generous tax rules associated with QESOs, several strict requirements must be met. Here are the ten essential criteria for companies, stock options, and option holders:
Qualifying Conditions for Companies
- Fewer than 150 employees.
- No more than SEK 280 million in net Sales or balance sheet total.
- The company’s operations must not be older than 10 years.
- The company must not primarily engage in asset management, banking, financing, insurance, coal or steel production, real estate trading, long-term rental, or services related to legal advice, accounting, or auditing (“excluded activities”) for 3 consecutive years before the grant.
- Company must not be traded on a public stock market.
- Company cannot be direcly or indirectly controlled by a governmental body.
- The company must not be in financial difficulties.
- Company cannot be purely a holding company, and must undertake trade operations
Qualifying Conditions for Employees
- Be an employee or board member of the granting company or any subsidiary.
- Work a minimum of 75% of their working hours for the granting company or any subsidiary.
- Must earn a minimum salary of 13 “income base amounts” during the vesting period of 3 years after the grant date. The income base amount in 2024 is SEK 76,200.
- Employee, together with closely related affiliates, cannot own more than 5% of the voting rights or share capital of the granting company.
Beyond QESOs: Comparative Analysis
If you're familiar with the UK's Enterprise Management Incentive (EMI) scheme, you'll find striking similarities between QESOs and EMIs. Both programs have similar conditions and are designed to optimize tax benefits and encourage employee ownership, making them highly attractive for startups and growing companies looking to incentivize their workforce.
However, there are key distinctions that set QESOs apart, providing unique advantages:
- No Limit on Exercise Price: One of the most notable advantages of QESOs over EMIs is the absence of a cap on the exercise price. This means that employees can potentially benefit more from their options, as there are no restrictions on the price at which options can be exercised. This flexibility allows for greater potential for value creation, particularly in rapidly growing companies where share prices can increase significantly over time.
- Enhanced Flexibility and Applicability: The absence of exercise price restrictions allows for more customized compensation packages, appealing to a broader range of businesses and making QESOs a more versatile option across various sectors and stages of development.
Slice's Approach to QESO Management
At Slice, we offer a comprehensive solution for managing QESOs for Swedish employees, ensuring a streamlined and efficient process from creation through sale. Here's how we can assist:
- Value Alerts: We provide real-time alerts on the value of options upon grant, both for the company and the option holder. This ensures the company does not exceed the option value limitations.
- Exercise Period Management: Our platform tracks and manages exercise periods, ensuring timely notifications and helping option holders maximize their benefits within the allowed timeframe.
- Scope of Work Conditions: We monitor and enforce the scope of work conditions, ensuring compliance with employment and work hour requirements for QESO This helps maintain eligibility for tax benefits and other advantages.
- Relationship Management: Whether the option holder is an employee, board member, or has another type of relationship with the company, we ensure all relevant criteria and conditions are met and tracked accurately.
With Slice, managing QESOs becomes a seamless experience, allowing both companies and option holders to focus on growth and success.
Conclusion – Investing the Time to Grant QESOs in Sweden is Worth It!
Although granting QESOs in Sweden requires understanding the tax rules, company requirements, and employee conditions, the tax advantages it offers are significant. Investing time in implementing and managing QESOs is a worthwhile endeavor, enhancing employee compensation and driving growth.
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.
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