Israeli Tax Authority Plans Higher Tax on Tech Stock Options, Lower Income Tax
A special team from Israel's Ministry of Finance and Tax Authority is currently examining significant changes to the taxation of high-tech employees ahead of the 2027 state budget and economic arrangements law. The proposals under consideration include increasing taxes on employee stock options while reducing income tax on salaries. This initiative is led by the "Team of Three," comprising Tax Authority Director Shai Aharonovitch, Budget Director Hanan Frozenfar, and Chief Economist Dr. Shmuel Abramzon.
The backdrop to these changes is the need to boost state revenues amid rising security expenditures that continue to increase the debt-to-GDP ratio, despite optimistic budget deficit figures in the first half of the year. The Finance Ministry aims to ease the tax burden on workers while identifying new tax sources. Besides the high-tech sector, other measures being explored include reducing pension contributions, modifying the "Israeli Invoice" reform to combat black market activity, and easing restrictions on real estate investments.
The high-tech sector, responsible for about 18% of Israel's GDP and 60% of exports, currently contributes roughly 24% of direct income tax revenues. However, the existing tax system on stock options is viewed as "distorted" by officials, as options are often taxed as capital gains at 25%, but if sold prematurely, they are taxed as regular income at rates up to 50%, plus social security and health taxes, resulting in an effective rate of up to 62%. This complexity leads to delayed option exercises, reducing immediate tax revenues.
The proposed reforms aim to encourage earlier exercise of options by adjusting tax rates and possibly splitting taxation between income tax on part of the options and capital gains tax on future appreciation. The plan also includes incentives such as lowering marginal tax rates for high earners and promoting investment funds in the tech sector. These changes are still in the discussion phase and require approval from the incoming government ministers.
Additional reforms under consideration include changes to the taxation of former elite IDF technology unit veterans, such as those from Unit 8200, potentially imposing tax limits on companies and ventures they establish within ten years of discharge. The Finance Ministry is also advancing structural reforms in education, human capital, social security, and Israel Railways, all of which will face political challenges regarding prioritization and implementation.
