Under Section 102 of the Income Tax Ordinance, it is possible to reduce Israeli Tax on Shares and Option Plans, and likewise defer the tax until cash is realized if various conditions are met. There are two routes of Israeli Tax on Shares and Option Plans, the salary and the capital gains routes. The following is a summary of some recent tax rulings on Israeli Tax on Shares and Option Plans.
The capital gains route is practical for employees with less than 10% ownership of the company, which is usually the case. Under this route, the gain from options or shares is taxed at a fixed rate of 25%, and both the employer and employee are exempt from National Insurance Institute payments. However, the employer is not entitled to any expense deduction for tax purposes regarding the options.
Israeli Tax rules on Shares and Option Plans requires an approved Israeli trustee who holds the options or shares for at least 24 months. The Israeli Tax on Shares and Option Plans is deferred until the employee sells the options or shares or withdraws them from the trustee. Section 102 plans must be in an approved format and notified to the Israel Tax Authority at least 30 days before the plan is first implemented.
Tax Ruling - extension of deadline
In a tax ruling by the Israel Tax Authority on the options related to stock of a US publicly traded corporation, the employer did not realize it had 45 days to elect a dollar basis when calculating the taxable gain employees faced. The ruling allowed an extension of this deadline provided it was applied consistently to all the share-option plans of that employer.
Tax Ruling - preference shares
In another tax ruling by the Israel Tax Authority, investors received preference shares with priority in any exit transaction. Employees held options to ordinary shares with no such rights, making them out of the money and worthless. In order to give the employees an incentive, it was proposed to lock up onto the existing share-option plan an additional plan relating to preferred shares with exit rights at a pre-agreed percentage of the investors’ rights in both cash and share deals. The ruling allows the Section 102 capital approach to be applied provided various conditions are met
Tax Ruling - Form 923
In the case of private companies, the Israel Tax Authority is concerned that options or shares would be issued to favored employees at an undervalue price. Consequently, the Israel Tax Authority issued a tax ruling and a green path procedure for implementing it. This is by Form 923. The Israel Tax Authority Form 923 applies the net exercise approach. The employee exercises options and converts them to shares of the company without payment. But the number of shares depends on the gain upon such conversion.
Dr. Avi Nov Law Offices, Israeli & international tax law
*This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion