Former Applied Materials Israel CFO Must Pay Up to 50% Tax on Stock Sale Profits

Henry Saul Schwartzbaum, former CFO of Opal Technologies (later Applied Materials Israel), will face income tax rates up to 50% on profits from selling company shares received through an employee stock option plan. The Central District Court in Lod rejected Schwartzbaum's claim that the gains should be taxed at a reduced 25% capital gains rate. Schwartzbaum held stock options granted between 1994 and 1996 for shares of the parent company, Opal Inc., later converted to Applied Materials Inc. options. These were managed under a tax deferral arrangement known as "Section 102," allowing employees to defer taxation until sale.

Schwartzbaum exercised the options in 2003 and sold shares intermittently through 2018, reporting these sales annually. The tax dispute centered on whether the shares qualified for a preferential 25% tax rate under Section 6(b) of the Income Tax Regulations, which applies to shares listed on a stock exchange if the employee notifies the tax authority. Schwartzbaum argued for the 25% rate, while the Rehovot Tax Authority contended the income should be taxed at the employee's marginal rate.

The court sided with the tax authority, noting the options were granted before 2003 and the tax deferral arrangement did not convert the income into capital gains eligible for the lower rate. Judge Shaul Bornstein ruled that the statutory relief in Section 6(b) did not apply as Schwartzbaum sought to extend it beyond its clear wording. The court emphasized Schwartzbaum had benefited from the tax deferral and was now attempting to repudiate the agreed terms, which he had helped formulate as CFO. The ruling also criticized Schwartzbaum for trying to revive a previously abandoned legal appeal on the same matter.

This decision confirms that profits from stock options granted before 2003 under the old Section 102 are subject to the employee's marginal tax rate upon sale, not the reduced capital gains rate. Schwartzbaum and other employees had the option to defer tax but must pay the higher rate when selling shares. The ruling clarifies tax treatment for similar employee stock option cases in Israel.