Secondary sale transactions have become a central tool in Israeli hi-tech over the past two years, letting founders, employees and early investors realize part of their holdings before an exit. Alongside this trend came two regulatory developments in quick succession: on July 26, 2026, the Tax Authority Director issued guidance aiming for uniform tax treatment of secondary sales, and days later, on July 30, 2026, the Tax Authority published a position paper expanding income spreading for gains on options and shares granted to employees, consultants and controlling shareholders. The firm’s Partners Adv. Miriam Zaltsman and Adv. Ophir Kaplan review the implications in the full update.
Over the past two years, we have once again seen an increase in the volume of secondary sale transactions in high-tech companies. These transactions are sometimes carried out as part of an equity financing round and, in other cases, as “stand-alone” rounds. In all cases, however, they require the company’s approval and cooperation. Secondary transactions enable founders, employees, and early investors to benefit from the company’s growth process and monetize their investment. From the company’s perspective, secondary transactions may also serve as a lower-cost alternative to improving the compensation terms of employees and founders. In other cases, secondary transactions allow investors to increase their stake in the company without diluting the company’s other shareholders. Unlike a standard investment transaction, in which the funds are paid into the company’s account in exchange for the issuance of new shares to the new investors, in a secondary transaction the investors purchase existing shares from existing shareholders.
Secondary transactions raise a variety of legal and commercial issues. For example, while in ordinary investment transactions investors will typically receive preferred shares that rank senior to the company’s other shares, in a secondary transaction the default rule is that investors acquire the class of shares already held by the selling shareholders. If the sellers are founders or employees, these will usually be ordinary shares, and if the sellers are early investors, they may hold a more junior class of preferred shares. Accordingly, investors sometimes require that these shares be converted into a more senior class of preferred shares as part of the secondary transaction, or that the difference in share class be reflected in the price per share. Another legal issue that sometimes arises in secondary transactions concerns the investors’ ability to receive representations and warranties and indemnities regarding the company’s condition in connection with a transaction to which the company is not a direct party. The form of investment also has tax implications, since the issuance of new shares in the context of a financing round is generally not a taxable event, whereas the sale of shares by existing shareholders is generally a taxable event. In addition, there are differences in the tax treatment of the various types of secondary transactions, depending on the identity of the seller – for example, an existing investor as opposed to an employee selling shares granted under an employee option plan pursuant to Section 102 of the Income Tax Ordinance – and on additional circumstances, including whether the shares are converted and how the price per share is determined. Secondary transactions may also give rise to questions regarding the classification of income as ordinary income versus capital gain, eligibility for exemptions, and withholding tax obligations.
On July 26, 2026, a directive issued by the Director of the Israel Tax Authority was published and circulated to the various assessing officers under the title: “Regulating the Treatment of, and Establishing a Uniform Policy for, Secondary Transactions.” The directive states that the Professional Division of the Israel Tax Authority is expected to publish, in the coming months, a circular addressing the tax aspects of secondary transactions, with the aim of establishing a uniform policy and providing certainty and transparency regarding the Tax Authority’s position on the matter, while encouraging the high-tech sector.
Until such circular is issued, assessing officers have been instructed to consult with the Senior Deputy Director for Professional Affairs before approving any assessment they prepare in connection with a secondary transaction, in addition to the ongoing consultation with the legal adviser of the relevant tax office.
We recommend monitoring the publication of the circular and taking it into account when planning future secondary transactions – from the company’s perspective, from the purchasers’ perspective, and from the sellers’ perspective.
Under most employee option/share plans, which are common primarily – though not exclusively – in high-tech companies, employers customarily elect the tax track that is most favorable to employees, namely the capital gains track under Sections 102(b)(2)-(3) of the Income Tax Ordinance. This track allows an employee who receives such an award to pay tax at a lower rate on the gain derived from the options/shares (25%, before surtax, in private companies, or a combination of capital gains tax rates and ordinary income tax rates in public companies, where the ordinary income component depends on the average share value during a certain period proximate to the grant, in accordance with the law, and on the exercise price). This tax track also entails various restrictions, such as the requirement to deposit the granted options/shares with an external trustee for at least two years before the shares may be sold.
It should be noted that, although the default rule is that income arising from the grant of options/shares to employees is generally classified as employment income, since it is paid by virtue of the employment relationship between the parties, Section 102 allows that same income (or part of it), subject to certain conditions and under the capital gains track, to be taxed at capital gains tax rates, with the aim of encouraging employees to share in the company’s growth.
In this context, on July 30, 2026, the Israel Tax Authority published a professional position paper on the subject of “Income Spreading in Employee Equity Compensation.” Under that circular, the rules applicable to the spreading of ordinary capital gains under Section 91(e) of the Income Tax Ordinance are also applied to the benefit component classified as “capital gain” in the context of grants of options/shares to employees under Section 102. In other words, there is a possibility of a technical spreading of that portion of the income taxed as a “capital gain” under Sections 102(b)(2)-(3) of the Ordinance over a period of up to four prior years (or the holding period of the options/shares, whichever is shorter), for purposes of calculating the tax based on the taxpayer’s tax brackets and tax credit points. It should be emphasized that, in all events, the tax will be paid upon the sale of the shares, and that the spreading mechanism does not reduce surtax liability. The spreading mechanism is not relevant to the portion of the benefit classified as employment income, if any.
In addition, the circular addresses the spreading of income for people who are not employees – such as consultants, service providers, and controlling shareholders – arising from options/shares, namely income classified under Section 3(i) of the Ordinance. In this case, the income spread is substantive rather than technical, and allows the income to be spread over up to six prior years (the income is deemed to have been received in equal portions in each of the spreading years). Among other things, such spreading may allow the utilization of personal exemptions or set offs, as well as savings in surtax, which is not possible in the case of income spreading under Section 102.
We remain at your disposal for any questions on this topic. Our firm offers comprehensive legal advice and support to corporations and individuals in connection with every aspect of equity financing, secondary transactions, grants of options/shares and other employee benefits, and the like.
