Israel weighs U.S.-style tax break for high-tech entrepreneurs
The Finance Ministry is expected to recommend a capital gains exemption modeled on the American QSBS regime, aiming to discourage founders from relocating and companies from incorporating in the United States. The proposal is emerging as officials separately debate raising taxes on employee stock options.
The Finance Ministry is expected to recommend a full capital gains tax exemption for high-tech entrepreneurs, in a move aimed at discouraging high-tech workers from relocating to the United States and reducing the number of Israeli-founded companies that incorporate there.
The proposed benefit would be modeled on a U.S. tax exemption known as QSBS, or Qualified Small Business Stock, which was expanded in July 2025. The exemption allows eligible shareholders in qualifying small businesses to exclude certain capital gains from taxation, subject to specific conditions and limits.
Unlike other tax benefits available to Israeli high-tech entrepreneurs, such as the Angels Law, the American regime is relatively straightforward. Under the expanded rules, shares in a qualifying company whose gross assets were below $75 million when they were issued may be eligible for a capital gains exemption after a qualifying holding period. The maximum exclusion is generally the greater of $15 million or 10 times the shareholder’s adjusted basis in the shares. The dollar limit was raised from $10 million in July 2025.
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Israel Tax Authority Director Shai Aharonovich (right) and Finance Ministry Director General Israel Malachi.
(Photos: Avichai Sochar, Finance Ministry; Yariv Katz)
How the exemption works
Consider an American technology startup founded today with assets worth less than $75 million, as is common among early-stage companies. It issues shares to employees, investors and founders. Five years later, the company is worth $1.5 billion.
An employee who owns 1% of the company sells those shares for approximately $15 million. If the shares originally cost $1,500, the resulting capital gain would fall below the $15 million exclusion limit, assuming all other eligibility requirements are met. The employee could therefore owe no federal capital gains tax on the sale.
An employee holding 2% of the company who sells the shares for $30 million could exclude up to $15 million in capital gains, with the remaining gain potentially subject to tax.
An investor who put $20 million into the company could, under the 10-times-basis limit, potentially exclude up to $200 million in capital gains. If the investor sold the shares for $220 million, the entire gain could fall within that limit, assuming the shares qualified and all other conditions were met.
It is important to note that the benefit applies to qualifying shares, not simply to stock options. The U.S. rules were expanded in July 2025 to introduce partial exclusions for shorter holding periods: a 50% exclusion after three years and a 75% exclusion after four years. A full exclusion requires a five-year holding period under the applicable rules.
The Finance Ministry has not yet determined how a similar benefit would be structured in Israel. Would the exemption be capped at approximately NIS 46 million, the shekel equivalent of $15 million? Would the same eligibility conditions apply? Would other tax benefits be reduced to offset the cost? The ministry is clearly concerned about the possibility of Israeli high-tech companies and entrepreneurs moving abroad.
Israeli entrepreneurs cannot automatically benefit from QSBS simply by incorporating a company in the United States. Israeli tax residents generally remain subject to Israeli tax rules on their capital gains, even if a transaction qualifies for an exemption under U.S. law. Depending on their circumstances, they may therefore still owe Israeli capital gains tax at rates of 25% to 30%.
To avoid Israeli tax on the gains, an entrepreneur may need to establish that they have ceased to be an Israeli tax resident, subject to the applicable rules and timing. The Finance Ministry may be seeking to act before concerns over the next election, continued fighting and tax advantages abroad contribute to a broader wave of relocation.
Expanding high-tech tax benefits
Last week, the Finance Ministry again made headlines over discussions about raising taxes on employee stock options. Section 102 of Israel’s Income Tax Ordinance provides a preferential tax arrangement for employees who receive equity compensation through qualifying plans. Under the capital gains route, eligible gains are generally taxed at 25% if the relevant conditions are met, including a holding period of at least 24 months. This is lower than the top marginal income tax rate, which can reach 50%. The treatment of options and shares in publicly traded companies differs in some respects, but preferential tax treatment is also available in certain cases.
The idea of raising the tax rate is not new. Israel Tax Authority Director Shai Aharonovich discussed it publicly at a conference in July. Finance Minister Bezalel Smotrich responded at the time: “I believe it is a mistake to load taxes onto the high-tech sector.”
Smotrich’s position may have limited bearing on the eventual decision, since the proposals are expected to be considered by the next government, and it is unclear whether he will remain finance minister. But he added an important qualification: “From a check with professional officials at the Finance Ministry, they definitely lean toward this position of mine.”
Smotrich was making a specific point: professional officials at the ministry, he said, shared his view that the high-tech sector should not face an additional tax burden. The ministry recognizes the sector’s strategic importance and understands that its perception of the government’s attitude can influence decisions about where entrepreneurs establish companies.
Against that backdrop, a headline focused exclusively on plans to tax employee options, without considering possible new incentives for founders and investors, could give an incomplete picture of the government’s approach to the sector.
The substance of the proposals remains under discussion. There are disagreements within the Finance Ministry, and no decision has been made on changing the taxation of high-tech employee options. For now, the idea is not to eliminate the benefit entirely. The main proposal Aharonovich discussed in July was to raise the capital gains tax rate on employee options from 25% to 30%. That proposal remains disputed within the ministry and is far from being agreed upon. Other ideas have also been raised, including capping the amount of gains eligible for the reduced 25% rate.
At this stage, the ministry appears closer to reaching agreement on expanding tax benefits for high-tech entrepreneurs through an Israeli version of QSBS, first reported here, than on reducing the preferential tax treatment of employee options.
If both proposals are eventually implemented, the result would be a notable shift in how Israel distributes tax incentives within the high-tech sector. Founders and investors, who may already be relatively wealthy, would gain a new tax advantage, while employees, who generally have less wealth, could see their tax benefit reduced.
From the perspective of encouraging the growth of Israeli high-tech, however, the proposed QSBS-style exemption could have a greater impact than the existing employee-options benefit. The key question is whether it would persuade more founders to build and keep their companies in Israel, rather than incorporating abroad.
