Israel's Finance Ministry Proposes Higher Tax on Tech Employee Stock Options

Israel's Ministry of Finance and Tax Authority are preparing recommendations to alter the taxation of high-tech workers, according to Globes. The proposed changes, intended for inclusion in the 2027 state budget and regulation law, aim to encourage employees to sell company stock options more quickly. Under the current system, employees benefit from a preferential 25% tax rate on vested options. However, the new proposal suggests that if employees do not exercise their options by the end of the vesting period and sell the shares later, they will face a 30% tax rate instead of the current 25% preferential rate.

To mitigate the impact, individuals whose vesting period has already concluded may be allowed a limited time to exercise their options at the 25% rate. Concurrently, the ministry plans to expand the tax bracket for employees earning over 30,000-35,000 shekels per month, who currently pay income tax at a 35% rate. This adjustment is expected to increase their net monthly salary by approximately 1,000 shekels. The Finance Ministry views these two measures as linked, anticipating that the tax bracket expansion will benefit some employees affected by the increased option tax.

Officials in the Finance Ministry and Tax Authority believe the current tax break on stock options is being abused. They note that many employees hold onto shares for years, even after leaving their companies, rather than selling them. The existing benefit allows taxation at 25% on option income, significantly lower than the top income tax rate of 47-50%, with no restrictions on holding periods. The ministry estimates the proposed reform could generate about 2 billion shekels annually for the state treasury.