Founders' Secondary Sales in Israel: Tax Treatment, Section 102, and Withholding

Secondary sales — where a founder sells some of their stock to an incoming investor mid-financing — have become standard in Israeli late-stage rounds. The tax mechanics, however, are anything but standard.

Rate structure

• 25% — base individual capital gains rate.
• 30% — applies if the founder is a "controlling shareholder" (10%+ direct or indirect holding) at the time of sale.
• +3% surtax — high-income surtax on income above ~NIS 700K/year.
• Bituach Leumi — National Insurance may apply if the ITA recharacterizes part of the gain as service income.

The controlling-shareholder problem

Most founders are above 10% holding through Series B and beyond. The 5-percentage-point surcharge on a $5M secondary is $250K. Pre-secondary planning often involves:

• Diluting through new issuance before the secondary.
• Sequencing multiple founder sales so each transaction crosses the 10% threshold.
• Trust or family-LP structures to reduce direct holding.

Withholding mechanics

If the buyer is Israeli, default withholding is 25–30%. If the buyer is a foreign VC fund, the picture depends on the fund's prior dealings with the ITA and whether a Section 232 withholding ruling exists.

For meaningful secondaries (~$1M+ per founder), we routinely file a pre-ruling that sets the withholding rate, addresses Bituach Leumi exposure, and confirms treatment of rollover equity if any.

Foreign founders selling Israeli company stock

A founder who already relocated abroad may still have Israeli-source capital gains exposure. Treaty relief is available under most of Israel's treaties (US, UK, Canada, France) but requires:

• Treaty residency certificate from the foreign tax authority
• Beneficial ownership of the gain
• No "Israeli real estate company" characterization (rare for tech)

For acquisition-event treatment, see our exit tax guide.