Who is this update for?
Companies that grant employees shares or options through a trustee, high-tech companies, and employees holding shares under equity compensation plans.
What is this about, and why does it matter?
On March 19, 2026, the Supreme Court issued its judgment in the matter of Conduit Ltd. The Court accepted the Israel Tax Authority’s position and held that a dividend distributed to employees in respect of shares held for them by a trustee will be taxed at a 25% rate—even where the dividend is distributed by a company that benefits from reduced dividend tax rates under the Law for the Encouragement of Capital Investments (which would otherwise apply lower tax rates to such distributions).
The judgment reversed the District Court’s ruling, which had previously accepted the company’s appeal against the assessing officer’s decision, and instead upheld the Tax Authority’s appeal.
Key holdings of the Supreme Court
The Supreme Court held that Section 102 of the Income Tax Ordinance constitutes specific and unique legislation governing equity compensation granted to employees. In the Court’s view, the statute requires that all rights attached to the share—including the right to dividends—must be held by the trustee, at least until the end of the statutory minimum holding period (two years under the capital gains track, and one year under the ordinary income track).
According to the Court, the language of Section 102 and the rules promulgated under it makes clear that the dividend is an integral part of the bundle of shares and rights that must be deposited with the trustee, and that transferring it to the employee as part of that bundle constitutes a “realization” subject to the tax rate set under the Ordinance.
The Supreme Court further stated that even if the shareholder is not “enriched” as a result of the dividend distribution (because the share is worth less following the distribution), substantively the transfer of value is equivalent to transferring a portion of the share’s value into the shareholder’s pocket.
With respect to the applicable tax rate, the Supreme Court held that Section 102 is a targeted, employee-specific arrangement that prevails over other legal provisions, including those under the Law for the Encouragement of Capital Investments. The Court reasoned that the purpose of that law is to encourage investments in eligible companies; the employee did not invest their own funds in the company and did not contribute in that manner to the company’s capital raising.
The Court also noted that accepting the taxpayers’ position could have led companies benefiting from the Law for the Encouragement of Capital Investments to prefer distributing dividends (to enjoy the incentive) over selling shares in the future, which would be subject to capital gains tax for which no incentive is provided under that law. We note in this context that the incentive for such companies (and their shareholders) to distribute dividends at reduced rates rather than sell shares exists in any event, regardless of the tax rate applicable to employee dividends—particularly given that employees’ holdings typically do not exceed 10% of the company.
How might this affect you, and what are the practical implications?
- Dividend distributions to employees by a company that benefits from incentives under the Law for the Encouragement of Capital Investments will be taxed in accordance with the rates applicable under the Section 102 tracks (25% under the capital gains track, and marginal tax rates under the ordinary income track).
- In our view, the Supreme Court’s decision implies that where a company elected the ordinary income track for its employees, the company may be able to deduct, as an expense, dividends distributed to employees, since the distribution is treated as a realization event. This may also apply (pro rata) to dividends distributed by a public company that elected the capital gains track, to the extent attributable to the portion taxed as ordinary income.
- In our view, the decision further implies that employees’ income upon realization is not “taxable income from a capital source” (as that term is defined in Section 121B of the Ordinance for purposes of the surtax), contrary to the Israel Tax Authority’s official position.
We would be pleased to assist
We provide analysis and assessment of existing tax exposures in equity compensation plans; support companies in their engagement with the Israel Tax Authority, including submitting applications for tax rulings in complex cases; assist in redesigning compensation structures and share allocations in an optimal manner; provide ongoing advice to companies and employees regarding the implications of the judgment; and handle disputes and clarifications vis-à-vis the tax authorities.
The above content is a summary provided for informational purposes only and does not constitute legal advice. It should not be relied upon without obtaining further professional legal counsel.
