Section 102 FAQ
Last verified Oct 3, 2026 · Reviewed by Value8 valuation team
Common questions about how Israeli Section 102 equity taxation works. This is general information, not legal or tax advice. Confirm the specifics for your situation with your tax advisor.
What is Section 102?
Section 102 of the Israeli Income Tax Ordinance is the framework that governs how employee equity grants are taxed in Israel, including grants held through a trustee that can qualify for favorable capital-gains treatment.
Who qualifies for Section 102?
Employees and company officers, including directors, of the granting Israeli company or a related company qualify. Service providers such as consultants, and controlling shareholders, do not; they are taxed under Section 3(i) instead.
What are the Section 102 tax tracks?
There are three: the capital-gains track with a trustee, the ordinary-income track with a trustee, and the non-trustee track. The company chooses the track when it sets up the plan, and the employee cannot change it.
What is the capital-gains track?
It is the most favorable track for employees, taxing the gain at a flat 25% capital-gains rate, with a possible surtax that can lift the effective rate to roughly 30% for the highest earners as of 2025. It requires a trustee and a 24-month holding period.
What is the difference between the capital-gains track and the ordinary-income track?
On the capital-gains track the gain is taxed at 25% and the holding period is 24 months. On the ordinary-income track the whole benefit is taxed as employment income at marginal rates with a 12-month holding period, but the employer can generally deduct the benefit as a compensation expense.
Why is a trustee required under Section 102?
The trustee holds the options and shares on behalf of employees during the lock-up, remits tax to the tax authority when a taxable event occurs, files the required periodic reports, and manages exercises and sales. A trustee is mandatory for both the capital-gains and the ordinary-income tracks.
How long is the Section 102 holding period?
Under the capital-gains track the awards must stay with the trustee for at least 24 months. Under the ordinary-income track the minimum is 12 months.
When does the 24-month holding period start?
It starts on the date the award is deposited with the trustee, not on the board-approval date and not on the exercise date.
What happens if shares are sold before the holding period is complete?
The entire gain is reclassified as ordinary employment income at marginal rates, plus National Insurance and health tax, instead of the 25% capital-gains rate. This is one of the most common and most costly Section 102 mistakes.
When is tax due under Section 102?
Under the trustee tracks there is generally no tax at grant or at vesting. Tax is deferred to the earlier of the sale of the shares by the trustee or the transfer of the shares out of trust to the employee.
How is the gain calculated for a private company?
For a private company on the capital-gains track the entire gain, meaning sale proceeds minus the exercise price paid, is treated as a capital gain and taxed at 25% plus any surtax.
How is the gain calculated for a public company?
The gain splits in two: the fair market value at grant minus the exercise price is taxed as ordinary income, and the sale price minus the fair market value at grant is taxed as a capital gain at 25%.
Why does fair market value at grant matter?
It sets the point where a public-company gain splits into ordinary-income and capital-gains portions, and any exercise price set below fair market value at grant creates an ordinary-income component even for a private company. Private companies should keep contemporaneous documentation supporting the value at grant, much like a US 409A valuation.
What are the main Section 102 deadlines?
The plan must be submitted to the tax authority at least 30 days before the first grant; the board resolution must reach the trustee within 45 days of the grant and the signed agreement within 90 days; and periodic reports are filed quarterly and annually.
What is the 30-day plan filing rule?
A Section 102 plan must be submitted through the tax authority online portal at least 30 days before the first grant is made under it. Grants issued inside that window may not qualify.
What does "deemed approval after 90 days" mean?
If the tax authority does not formally respond within 90 days of a plan submission, the plan is treated as approved. This fallback is suspended whenever the authority raises a red flag on the submission.
What triggers a red flag on a Section 102 plan?
Common triggers include put or call options on the shares, vesting tied solely to an uncertain event such as an IPO or acquisition, awards lacking standard share rights, and cash-settlement alternatives without a specific ruling.
What are Form 146 and Form 156?
Form 146 is the quarterly report of allocations made during a quarter, due within the statutory period after the quarter end, and Form 156 is the annual report covering all outstanding awards for the prior tax year, due within the statutory period after the tax-year end. Leaving a grant out of a required report can disqualify it from Section 102 benefits.
Who is a controlling shareholder for Section 102 purposes?
Someone who holds, directly or indirectly, 10% or more of the company's issued capital, voting rights, profit rights, or the right to appoint a director. Controlling shareholders are not eligible for Section 102 and are taxed under Section 3(i) instead.
What is the difference between Section 102 and Section 3(i)?
Section 102 covers employees and officers and offers the trustee capital-gains track. Section 3(i) is the default for service providers and controlling shareholders, taxing the benefit as ordinary income at marginal rates with no capital-gains track and no trustee.
What happens to Section 102 options when an employee leaves?
Unvested options are typically forfeited on termination, and vested options usually carry a limited post-termination exercise window, commonly 90 days, after which they expire. The holding-period clock keeps running from the original deposit date.
Can a US citizen working in Israel use Section 102?
Yes, but with added complexity, because the US taxes worldwide income and the timing of US tax can differ from Israel's deferral to sale. US citizens should get specialist US-Israel cross-border advice before exercising or selling.
What happens to Section 102 awards if an employee relocates out of Israel?
Ceasing Israeli tax residency can trigger an exit-tax provision, and the portion of any gain attributable to the period worked in Israel generally stays taxable in Israel, often apportioned across the vesting period. Specialist advice before moving is essential.
How does Value8 help with Section 102 compliance?
Value8's cap table platform includes a Section 102 compliance module that tracks deadlines, the trustee holding period, plan filings, controlling-shareholder status, and compliance findings, and pre-flights the quarterly and annual report data. See how Value8 does Section 102.
This is general information about how Section 102 works, not legal or tax advice. Confirm the exact rules, rates, and deadlines that apply to you with your tax advisor.