A special team from the Ministry of Finance and Israel Tax Authority is currently considering major changes to taxation on tech employees to be included in the 2027 budget and economic arrangements bill. The changes include raising taxes on employee share options, while reducing income tax. The team is being led by Tax Authority director Shay Aharonovich, budget commissioner Maharan Frozenfar and Ministry of Finance chief economist Dr. Shmuel Abramzon.
The proposed changes are to meet the need to increase state revenues. Although tax revenues are growing beyond forecasts, defense spending continues to increase the debt-to-GDP ratio. Despite the optimistic announcements and the relatively low fiscal deficit in the first half of 2026, the Ministry of Finance still hopes to meet the fiscal deficit target set in the budget – 4.9% of GDP. This is because the first quarter of the year was conducted under a restricted continuous budget from 2025, because the 2026 budget was passed late, so that in the second half of the year, government spending will increase significantly.
On the other hand, measures imposed on the public in recent years and since the outbreak of the war have been severe including freezing income tax brackets and raising national insurance contributions. The middle path that the Ministry of Finance is now aiming for is to try to ease taxes on workers while searching for new sources of tax collection.
The team claims: Existing taxation is “distorted”
A sub-team dealing with the tech sector is examining these issues, which are becoming more acute in the sector for a number of reasons: High-tech is the engine of the economy, and a disproportionate burden on it and its employees could harm the GDP, in an era in which Israel serves mainly as a source of development, while production and sales are mostly performed abroad. This occurs alongside the development of AI and waves of layoffs in the sector. On the other hand, the tech sector is responsible for about 18% of GDP, about 60% of exports, and about a third of GDP growth in Israel since 2017, while income tax payments are 24% of all direct tax payments in Israel.
Tax chief Aharonovich has said that the Tax Authority plans to examine increasing the tax on stock options that tech employees receive as additional payment on top of their salaries. How significant this compensation component is can be seen from the estimate that the value of the options held by tech employees in Israel, which are “in the money,” was estimated at about NIS 150 billion at the end of last year, according to Modi Shafrir, chief financial markets strategist at Bank Hapoalim (not including options from private companies). Market sources say the amount has continued to grow since then.
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Today, stock options can generally be exercised about 90 days after the end of employment. Experts explained to “Globes” that according to the Income Tax Ordinance, to enjoy the tax benefit, shares must be held by a trustee for 24 months from the date of allocation. Early sale removes the options from the benefit track, and all profits become income from work that is taxable at up to 50%, and with the addition of National Insurance and health tax, the effective tax rate is up to 62%. This is compared to a capital gains tax of 25%. The result: the implementation is postponed – and thus the state coffers are also harmed.
This is the main reason why the Ministry of Finance and the Tax Authority are now considering changing the rules and incentivizing early exercise. As with the trapped profits reform, the very intention to raise the tax on options in the future could lead to a wave of exercising that will also result in a major increase in taxes for the state coffers.
Sources who spoke to Globes pointed out that taxation in its current form is “distorted,” because they claim that it is in fact a substitute for wages that should be taxed as wages. The team estimates that as of today, there are billions of shekels “locked up” and their value continues to rise, but they are not exercised. In the current situation, at the time of exercise, the taxation is not graduated like the marginal tax and has no ceiling. “It could be a situation where an employee earns NIS 100 million and pays a tax of 25%,” one of them told “Globes.”
Carrots in exchange for sticks
In any case, even if the move is implemented, it is a stick that will also be accompanied by carrots. That is, creating a complete legislative package on the subject of the tech industry, which will include, according to estimates, legislation to encourage tech investment funds and lowering the marginal tax (as of 2026, tax brackets reach up to 50% for very high-income earners), since tech workers quickly reach the maximum tax bracket.
Another solution being considered is a change in the tax framework, so that some of the options will be paid as a marginal tax as work income, while the future increase in value until leaving the workplace will be subject to a 25% capital gains tax. Additional alternatives include bringing forward the tax payment date or creating a mechanism that will not postpone tax liability until the date of exercise.
Published by Globes, Israel business news – en.globes.co.il – on August 6, 2026.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2026.
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