Non-trustee option plans in Israel 

Tax|Employees

Dr. Avi Nov Adv.

October 2009

Section 102 of the Israeli Income Tax Ordinance [New Version] 1961 (the "Ordinance"), deals with trustee option plans (see - The taxation of employees’ option plans in Israel), andnon-trustee option plans, for which the following rules apply:

In principle, the benefit accruing to the employee on the grant of shares and non-traded options issued without a trustee is taxable at granting time as ordinary employment income, and any gain accrued when the options are exercised is taxed as capital gains.

However, when non-traded options are granted, the tax event is postponed until the ultimate sale of the share received on the exercise of the option. In such case, the full amount of the employee's profit on that sale is characterized as employment income subject to regular income tax.

Within 90 days of the grant of options, an employer must report details concerning the option issuances with particulars similar to those required in the case of a trustee structure as listed above. The regulations do not require any notification prior to the grant of options.

The employer must file a report with the Israel Tax Authority by March 31 following the tax year in which the options were granted. The report must reflect particulars similar to those required in the case of a trustee as listed above.

The regulations require employers to secure guarantees from employees upon termination of employment for the payment of tax due upon realization of the shares.

It will accordingly be necessary for plan documentation to include provisions that afford the necessary security for employers where an employee’s employment is terminated prior to the realization of his /her shares.

Please note that this summary does not discuss all the details of the pertinent laws, rules and regulations that may apply in this matter, and it serves to give you an overview of the legal situation.

Dr. Avi Nov Law Offices, Israeli & international tax law 

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*This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion 
 
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