Equity is now standard in mid-level and senior hiring across US, UK and European tech companies competing for Israeli talent. A competitive offer in Tel Aviv or Jerusalem includes options, RSUs or both. The tax treatment matters deeply. A stock option issued to an Israeli employee without a Section 102 wrapper costs the employee roughly double the tax compared to the same grant inside the Section 102 framework.

Section 102 exists because Israeli tax law treats employee equity as compensation subject to income tax at marginal rates (up to about 50% combined tax and social security). Section 102 routes qualified option grants instead through a capital-gains track, where the tax is a flat 25% after a two-year holding period. For an Israeli engineer earning 15 million shekels ($4M) in option gains, the difference is roughly 10 million shekels in tax savings.

The catch is structure. Section 102 requires an Israeli trustee to hold the options, specific employment relationships, and coordination between the foreign company and the Israeli trustee before issuance. Contractors, freelancers and certain EOR relationships cannot use it. Many foreign companies discover the requirement too late and reissue grants retroactively, a costly fix.

How Section 102 works — the capital gains track

Section 102 is a tax provision that allows Israeli employees to receive equity compensation (options, RSUs, or restricted stock) through a scheme that qualifies for capital-gains treatment rather than ordinary income treatment. The mechanics look like this.

An Israeli trustee (certified equity plan trustee, typically run by a law or accounting firm) receives the option grant on behalf of the employee. The employee has all beneficial ownership and voting rights, but the trustee holds legal title. The employee exercises or receives the options and holds them for two years. At the two-year mark, the employee can sell or transfer the equity free of ordinary income tax. The only tax due is capital gains tax at 25% on the appreciation (the difference between the strike price and the sale price).

Contrast this with the ordinary income track. Without Section 102, the option or RSU grant is taxed as compensation when it vests or is granted, depending on the structure. The tax is the fair market value of the grant at the time of vesting, taxed at ordinary income rates. For an engineer in Israel earning above roughly 2 million shekels per year, the marginal rate is around 47-50% (income tax plus social security and health). A 1-million-shekel option grant taxed as ordinary income costs the employee roughly 470,000-500,000 shekels immediately. Under Section 102, the same grant defers tax until sale, and when it is sold, the capital gains rate of 25% applies only to the appreciation, not the grant amount.

The requirement is tight. Both the employer and employee must intend to use Section 102 from the start. The grant must be filed with the Israeli Tax Authority (Mas Hachnassa) in advance of the first issuance. The trustee must be a certified Israeli equity plan trustee or trust company. The employee must be a direct employee of the foreign company or, in some cases, an employee of an EOR or subsidiary. Contractors and freelancers do not qualify.

Section 102 capital gains track vs ordinary income track — the numbers

The numbers compound over scale. A company issuing 10 Israeli engineers option packages worth 50 million shekels total saves between 100-150 million shekels in tax exposure by routing grants through Section 102 versus issuing them directly.

Trustee mechanics — the Israeli trustee timeline

The trustee is central to Section 102 compliance. The trustee is a certified Israeli entity (usually a trust company, law firm or accounting firm with specific equity plan certification) that holds legal title to the options on behalf of the employee. The employee retains all beneficial rights: voting, dividends, and the proceeds of sale. The trustee is essentially a nominee.

Here is the timeline:

Trustee fees typically range from 0.5% to 1.5% of the value held, charged annually or at exit. The cost is usually borne by the employee or negotiated as part of the overall package. Some foreign companies pay the trustee fee on behalf of the employee as a recruitment incentive.

Foreign employer requirements — coordinating with the Israeli trustee

A US, UK or European company issuing equity to an Israeli employee must coordinate directly with the trustee. The company cannot bypass the trustee or grant directly to the employee. The process looks like this.

The foreign company and Israeli employee agree on the equity terms: number of options or RSUs, strike price (for options), vesting schedule, and the two-year holding period. The foreign company engages an Israeli trustee (often via a recommendation from the employee, the local legal counsel, or a global EOR vendor). The trustee prepares the option plan or RSU plan documents, files with the Israeli Tax Authority for pre-approval, and confirms compliance with Section 102. Once approved, the company grants to the trustee on behalf of the employee. The trustee sends the company a holding certificate or grant confirmation for the foreign company's records.

The foreign company does not need an Israeli subsidiary or entity to use Section 102, but the trustee must exist and must file. If the company hires through an Employer of Record, many EOR vendors have Section 102 partnerships built in and will coordinate with the Israeli trustee on behalf of the company. If the company has its own Israeli subsidiary, it can work with a trustee directly.

One critical requirement: the grant must be filed with the Israeli Tax Authority before the option is issued. Backdating or retroactive Section 102 compliance is not possible and can result in the entire grant being disqualified and taxed as ordinary income. Get the trustee and the plan design in place first, then issue the equity.

RSUs vs options vs restricted stock — which vest under Section 102?

Section 102 applies to all three types of equity compensation: options, RSUs and restricted stock. The mechanics differ slightly.

Options (ISOs and non-qualified). The employee receives the right to purchase shares at a strike price. The option vests according to a schedule. Under Section 102, no tax is due at grant or exercise. The two-year holding period runs from the grant date (or, in some plan designs, from exercise). The employee pays the strike price to exercise and receives shares held by the trustee.

RSUs (Restricted Stock Units). The company promises to deliver shares (or cash equivalent) when a vesting condition is met. Under Section 102, no tax is due at vesting. The trustee receives the shares on the employee's behalf and holds them for the two-year period. RSUs are more common in 2026 for foreign companies because they avoid the need for the employee to fund an exercise price.

Restricted stock. The company issues actual shares that vest over time. Under Section 102, restricted stock is held by the trustee until the vesting condition is satisfied and the two-year holding period has passed. This structure is less common because the shares are illiquid during the holding period.

For US companies, "ISOs" (Incentive Stock Options) have separate US tax treatment that can also interact with Section 102. An Israeli employee receiving an ISO from a US company may have US AMT (Alternative Minimum Tax) liability separate from Israeli Section 102 treatment. The two regimes do not conflict but must be managed together. Coordination with a US tax professional familiar with Israeli remote hires is recommended.

Contractors and freelancers cannot use Section 102

A critical disqualifier: only employees can use Section 102. Contractors (atzmai) and freelancers cannot. If a foreign company wants to grant equity to an Israeli contractor as part of the compensation, the equity is taxed as ordinary income at marginal rates. There is no Section 102 route.

This is why the choice between contractor and EOR (or own entity) matters for equity. A contractor can receive equity, but it is taxed unfavorably. An EOR-employed engineer or an employee of the foreign company's Israeli subsidiary can use Section 102.

Many foreign companies underestimate this when scoping a first Israeli hire. The CTO thinks "we will offer equity to attract the engineer" and engages a contractor, then discovers mid-negotiation that the equity cannot be granted on favorable tax terms. The fix is to switch the contractor to an EOR or to set up an Israeli entity.

Company exit and Section 102 treatment

When the company exits (acquisition, IPO, or other liquidity event), the Section 102 holding period and capital gains treatment are preserved if the conditions have been met. If the employee has held the equity for two years, the sale is still taxed at 25% capital gains rate.

If the exit happens before the two-year holding period is complete, the treatment reverts to ordinary income tax on the grant value, and capital gains tax on the appreciation. This retroactive disqualification is why the two-year hold is enforced. For example, if an engineer receives options and the company is acquired 18 months later, the engineer loses Section 102 treatment and pays ordinary income tax on the grant value plus capital gains on the appreciation.

In an acquisition, the acquirer typically exchanges old options for new ones or accelerates vesting. If new equity is issued, the two-year holding period for Section 102 restarts from the date of the new grant unless specific plan provisions preserve the old holding period (this is sometimes negotiated in M&A and requires trustee and tax authority coordination).

Common mistakes in Section 102 setup

Granting equity before filing with the Israeli Tax Authority. The plan design must be filed and pre-approved before the first option is granted. Grants issued without prior approval are disqualified retroactively. Many foreign companies discover this when the employee consults a local accountant and learns the equity is taxed as ordinary income. Reissuing the grant retroactively and filing for amendment is possible but costly and time-consuming. Solution: engage the trustee and file before day one.

Contractor equity wrapped as Section 102. Some foreign companies try to grant equity to a contractor through a trustee, believing the trustee makes it Section 102-eligible. It does not. Only employees qualify. If the relationship is a contractor in substance, the equity is taxed as ordinary income regardless of the trustee. This is why moving the hire from contractor to EOR often triggers a full repackaging of the comp.

Inadequate hold-period monitoring. The two-year holding period is non-negotiable for capital gains treatment. An employee who sells early pays ordinary income tax on the grant value retroactively. Some trustees and companies do not track the hold period rigorously, leading to accidental disqualification. Choose a trustee that actively monitors and reminds the employee of the hold requirement.

Forgetting trustee fees in comp negotiations. Trustee fees (0.5% to 1.5% annually) come out of the employee's proceeds or are paid upfront by the company. If not budgeted into the offer, the employee's net proceeds shrink. Be explicit about who pays trustee fees and when.

Mixing ISOs and non-qualified options without US tax coordination. If the foreign company is US-based and grants ISOs to an Israeli employee, the ISO treatment (no tax at exercise, capital gains on sale) can interact with Israeli Section 102 in ways that trigger US AMT. The two regimes do not conflict, but they must be understood together. Engage both a US and Israeli tax advisor for ISO grants to Israeli residents.

Changing the plan design mid-stream. Once the plan is filed with the Israeli Tax Authority, changing the vesting schedule, strike price mechanism or hold period requires a plan amendment and reapproval. Making informal changes (e.g., "we will extend the holding period in this case") can disqualify the grant. Keep the plan design consistent and document any exceptions with the trustee in writing.

Checklist for a foreign company issuing Section 102 equity to Israeli hires

Before the hire starts: Engage an Israeli equity plan trustee certified for Section 102. Confirm whether the hire is an employee or contractor; only employees qualify. Have the trustee prepare and file the plan design with the Israeli Tax Authority. Clarify who pays trustee fees and include in the offer letter.

At grant: Have the trustee issue the grant certificate. Ensure the grant is dated on or after the Israeli Tax Authority approval date. Send the employee a clear summary of the vesting schedule, strike price (if options), two-year holding period, and tax implications.

Throughout vesting: The trustee should monitor vesting milestones and send periodic statements to the employee confirming shares held. If the employee transfers to a different entity (e.g., company acquisition), coordinate with the trustee on how Section 102 treatment is preserved.

At exit: If the employee sells, confirm the holding period has been met and the trustee calculates tax correctly (25% on appreciation). If the exit happens before two years, be clear with the employee that tax treatment reverts to ordinary income on the grant.

Not required but recommended: Retain a local Israeli tax advisor to review the plan design and grant documents. Coordinate with a US tax professional if the company is US-based and the equity includes ISOs.

Why this matters for your competitive hiring

Section 102 is not optional boilerplate. For a competitive equity offer to an Israeli engineer, Section 102 treatment can easily double the net value the employee retains. An engineer comparing two offers of equal size will choose the one with cleaner Section 102 compliance because the tax burden is lower. Foreign companies that move fast to establish Section 102 structures signal to Israeli talent that they understand local compensation nuances and are serious about building an Israeli team.

Global recruitment also puts pressure on speed. A global company hiring 50 engineers across the US, UK, Germany and Israel is often trying to complete the hires in parallel. Israeli hires get delayed because the Section 102 trustee and tax filing take two to four weeks. Build this into the hiring timeline from the start. And if you hire through an EOR, confirm upfront that they have Section 102 partnerships and can facilitate the trustee setup within your timeline.

Disclaimer: This article is informational only and does not constitute tax or legal advice. Section 102 rules are complex and interact with employment law, immigration status and international tax treaties. Consult a licensed Israeli tax professional or attorney before implementing a Section 102 equity plan. Digital Hunters does not provide tax or legal services; we facilitate introductions to advisors and structure the hiring process.