S. Horowitz’s tax update for August 2026 brings four key developments: the Tax Authority published a Professional Position Paper clarifying the options for spreading income arising from capital compensation for employees and service providers; a District Court ruling was recently published analyzing the acquisition of the Israeli cyber company NSO by an American investment fund from San Francisco, sharpening the boundaries of permissible tax planning while curbing the imposition of fines; the Tax Authority clarified in a new letter the ability to claim the tax exemption for new immigrants and returning residents in real time; and the Tax Authority published a Professional Position Paper on real estate taxation, clarifying the “date of sale” in “Net Transactions” contingent on a future condition of plan approval.
Renumeration of employees and consultants by granting shares or options is a very common form of compensatory mechanism in the Israeli landscape. Thus, for example, in the high-tech sector, granting said capital compensation constitutes, in many cases, an integral part of the basic wage conditions of employees or service providers.
At the time of realization of the shares or exercise of the options, it is customary to view the tax event subsequently arising as a specific and immediate event, that has full application during the relevant tax year. However, the deployment mechanisms set forth in the provisions of the Income Tax Ordinance allow, under certain circumstances, that the income deriving from exercise be spread out over a number of years, in a way that could ultimately reduce the effective tax liability.
The Tax Authority recently published Professional Position Paper 08/2026, entitled “Spreading of Income in the form of Capital Compensation for Employees”. At the heart of the Position Paper an important distinction is made between two types of stock and option allocations. With regard to allocations made in accordance with the provisions of Section 102 of the Income Tax Ordinance under the equity track, the Tax Authority clarifies that the deployment principles specified in section 91(e) of the Ordinance can apply to the benefit component under the equity track. Under such scenario, this speaks of a technical deployment, going back to up to four tax years, the impact of which will largely be limited to reducing the relevant tax rates and utilizing credit points, but without it being expanded to include personal exemptions or deductions from previous years.
The picture differs when it comes to options allocated to consultants or controlling shareholders pursuant to section 3(i) of the Ordinance. The Tax Authority emphasizes that under such scenario, the spreading of income may be much broader, encompassing up to six tax years, where the tax will be calculated as if the income was received in equal portions in each of the years of deployment. This not only amounts to technical relief, but is also deemed a substantive spread, based on the specific provision of section 3(i)(2) of the Ordinance. In the appropriate circumstances, this spread may also allow for the consideration of personal exemptions and deductions then available to the taxpayer during the years of deployment.
In a world where capital compensation has long since ceased to be an exotic addition and has become a routine component in many compensation packages, the possibility of spreading the tax liability arising from the exercise constitutes an integral part of the economic value of the benefit, and it is worth examining its implications. Thus, for companies, employees, officers and consultants, the Position Paper serves as a useful reminder of their ability to reduce, sometimes to a considerable extent, the tax liability arising from the exercise.
A ruling was recently rendered by the Central-Lod District Court in the case of Q. Cyber Technologies Ltd. v. Kfar Saba Assessing Officer, which addressed an acquisition structure designed by the foreign investment fund, Francisco Partners, for the purpose of acquiring the Israeli cyber company NSO. As part of the acquisition, OSY, a Luxembourg resident company and whose shares are held by the foreign investment firm, initially agreed with NSO to the purchase of its shares. A day before the transaction was completed, OSY purchased the shares of Q. Cyber, an Israeli shelf company. Upon execution of the transaction OSY purchased NSO’s shares on behalf of, and in trust for Q. Cyber, using its own funds, with Q. Cyber having simultaneously recorded in its books loans that it had received from OSY on account of the acquisition funds. Subsequently, NSO’s shares were transferred to Q. Cyber, which in turn repaid the loans to OSY, from the moneys it had received from NSO as loans and as a tax-exempt dividend (due to it being an Israeli parent company). The assessing officer argued that this structure and the sequence of actions was designed to facilitate the transfer of NSO’s profits abroad under the guise of repayment of the loan, and thereby circumvent the two-stage taxation array that applies in Israel with respect to the distribution of dividends to a foreign company. The court accepted this stance and held that it amounted to an artificial transaction under section 86 of the Income Tax Ordinance.
The ruling reinforces that even where a leveraged acquisition is an acceptable business move, it may not necessarily suffice. The key question is whether there was a substantive and fundamental commercial reason for executing the transaction on the basis of that particular structure, and not only as a tax advantage? In this case, the court attributed weight to the fact that the appellant did not present adequate evidence in real time, did not present key witnesses on behalf of the foreign fund, nor was it able to establish convincingly the purported business reasons for the holding structure. In the circumstances, it was held that the stance of the assessing officer—that the structure was largely designed to gain a tax saving—was not obscure.
Alongside this, the ruling includes an important determination regarding the imposition of a fine due to the failure to withhold tax at source. Although the court rejected the appeal by holding that it amounts to an artificial transaction, it nonetheless cancelled the fine that was imposed on the appellant. The court clarified that a penal fine of this nature need not be an automatic result of rejection of the taxpayer’s stance, and that in the circumstances it did not amount to fraudulent or false conduct justifying the imposition of a fine.
The ruling has significance on two levels. From a substantive viewpoint, it hones that where a complicated holding and financing structure is chosen, a general vote on commercial logic or acceptable practice will not suffice, but that there should rather be established, already in real time, in a clear and documented manner, the underlying fundamental commercial reason for pursuing it. In this sense, the ruling serves as an important reminder of the need for early meticulous and documented examination of the business considerations accompanying international transactions and complex financing structures. Alongside this, the ruling also conveys an important message to the various tax assessment offices, which sometimes pull the trigger by adding fines to assessments, and clarifies that there is no room to impose fines as a matter of routine in every case where the taxpayer’s stance is rejected, except mainly in cases of fraudulent or false conduct, and not when it entails true and legitimate tax disputes.
As previously updated by us, on 31 March 2026 the provisions of the Law for Encouraging Immigration (Aliyah) to Israel and Return to it (Temporary) Order, 5786-2026 entered into effect. The purpose of this Order is to encourage new immigrants to immigrate, and the return of veteran returning residents, to Israel, by granting a tax exemption on income generated from personal exertion in Israel, beginning from the 2026 tax year and ending in the 2030 tax year (subject to published conditions and ceilings). For further elaboration in this regard, see our December 2025 newsflash.
Generally, eligibility for the said tax benefit will be examined and approved as part of submission of an annual tax return. However, in a new letter recently published for representatives, the Tax Authority clarified that taxpayers will be able to enjoy the tax benefit as determined in the Temporary Order already during the relevant tax year, by submitting a request for tax coordination (salaried workers) or a request for a reduction in advance tax payments (self-employed).
The letter contains a list of documents and annexures that need to be attached to the request in order to facilitate application of the tax benefit in real time. It was also clarified that if the request will not be approved, the request for eligibility can be fully and comprehensively examined within the context of submission of the annual tax return.
The bottom line is clear—the legislator has sought to encourage immigration and the return of veteran residents to Israel, and the Tax Authority is now signalling that it is possible to benefit from this incentive also throughout the year and not necessarily by means of a tax refund. New immigrants and veteran returning residents who satisfy the conditions of the Temporary Order, can thus now examine their eligibility to enjoy the tax benefit granted by virtue of it, in real time.
In complex land transactions, determination of the tax event may be of considerable economic importance. A new Professional Position Paper issued by the Tax Authority provides important clarification with regard to determination of the “date of sale” for tax purposes, with respect to transactions in which the sale of rights in land is contingent upon the fulfilment of a future condition entailing the approval of a plan that increases the possibilities of exploitation of the land, and where the consideration is impacted by the increased exploitation possibilities and is not paid entirely in money.
Section 19(3a) of the Real Estate Taxation Law provides that in transactions of this type “the date of sale” will be deferred, generally, to the date of approval of the plan. Thus, the recently published Position Paper clarifies that also where it concerns transactions in which the consideration is given through the provision of construction services, and it is simultaneously agreed that the purchaser will bear the tax liabilities or other payments imposed on the seller by virtue of the law, such as betterment tax, levies or fees arising from the relevant transaction (Net Transactions), the provisions of section 19(3) of the Real Estate Taxation Law will generally apply, such that the date of sale will be deemed the date of approval of the plan.
Deferral of the date of sale from the date of the agreement until the date of approval of the plan may directly impact the cash flow, the structure of the transaction and the manner of allocation of risk between the parties. This therefore entails a positive stance on the part of the Tax Authority, in that it confers significant security with respect to Net Transactions and emphasizes the importance of examining the transaction structure already at the stage of drafting the agreement.
* The newsflash is intended to provide subscribers with general information only and should not in any way be regarded as firm professional advice and/or a definitive legal opinion.
