Many Israeli employees and especially in the High-tech market, receive a decent amount of options to exercise after 3-4 years of vesting period under section 102 rules of the IL tax ordinance. This a very common but unique encouragement tool given by the employers to recruit the employee for the company’s goals.

Then, some of those employees are offered to do a relocation and work for a subsidiary or parent company in a foreign country. However, the options these employees received when they were hired and still IL residents, keep on vesting during the time post relocation abroad and/or being sold when they are already non-IL residents (assuming their center of life was actually shifted abroad). Those options though, are kept with their original employer (via an Israeli trustee) and the taxes are withheld once the employee decides to sell them.

In these cases, the employee exercises the options, sell the stocks, and the original employer withholds the taxes on behalf of the employer according to the law.

However, according to section 100A of the IL tax ordinance, the part of gain that was rendered when the employee is no longer an IL resident, should be exempt from tax in IL.

These options that turned into stocks and were sold when the employee was living abroad were treated as if they should be fully taxed in IL although the law says they shouldn’t be.

Since this is the mechanism of exercising options in IL , a lot of employees are overpaying income taxes, for the part they were holding the options/stocks when they were no longer IL residents (and therefore this part of gain is exempt).

This common situation of overpaying tax should be treated accordingly by an IL tax expert that would file a tax return request accordingly and bring back high amounts of money back to the employee.