Tax Authority Plans to Revise High-Tech Option Taxation

A special team from the Ministry of Finance and the Tax Authority is currently examining significant changes in the taxation of high-tech employees ahead of the 2027 state budget and Arrangements Law. Among the alternatives being examined is increasing the tax on employee options alongside reducing the tax on wages. The staff work is led by the "Team of Three," consisting of Tax Authority Director Shay Aharonovich, Budget Commissioner Mahran Proznafer, and Ministry of Finance Chief Economist Dr. Shmuel Abramzon.

In the background is the need to increase state revenues. Although tax revenues are growing beyond forecasts, security expenditures continue to increase the debt-to-GDP ratio. Despite optimistic announcements and a relatively low deficit in the first half of the year, the Ministry of Finance still hopes to meet the deficit target set in the budget of 4.9% of GDP.

Additional Revenue-Raising Measures

In an attempt to increase state revenues, the Tax Authority and the Ministry of Finance have been examining additional measures. Among other things, reducing pension contributions is being examined, which would lead to a reduction in tax benefits currently provided for pension savings. At the same time, another team is looking at changes to the "Israel Invoice" reform to combat black capital, as well as the "trapped profits" reform to facilitate investments in office real estate.

In addition, as revealed in Globes in May, the Tax Authority is examining a move concerning graduates of technological units in the IDF, primarily 8200, which could impose tax restrictions on companies and ventures they establish in the decade following their release.

"Distorted" Taxation

Experts claim that the current taxation format is "distorted" because it acts as a salary substitute. As of the end of last year, the value of options held by high-tech employees in Israel that were "in the money" was estimated at about 150 billion shekels, according to Bank Hapoalim. Today, if shares are held by a trustee for 24 months, the capital gains tax is 25%, whereas early sale subjects the profit to income tax rates reaching up to 62% when including National Insurance and health tax.

Carrots and Sticks

The Ministry of Finance and the Tax Authority are looking to balance the tax burden:

1. The stick: Increasing the tax on options for high-tech employees.

2. The carrots: Reducing the tax on wages, additional benefits to encourage high-tech investment funds, and maintaining a portion of options under the 25% capital gains tax track.

Another solution being examined is a change in the tax outline, where part of the options would be taxed as work income, while future value increases until leaving the workplace would be subject to a 25% capital gains tax. While these decisions are far from consensus, the Ministry of Finance and the Tax Authority continue to work on a series of significant structural reforms.