The Right Option for you

The following steps are required:

Stage one – preparing an equity award plan that is appropriate to the company goals.

Stage two - Selecting a tax track (including foreign taxation if relevant) and choosing a trustee for the equity award plan.

Stage three - approving the equity award plan by company's Board of Directors.

Stage four - submitting the equity award plan to the ITA (Israel Tax Authority) approval.Stage five – granting the awards to the employees, including approval of the grants by the board of directors or committee designated by the board, and signing the award grant agreement. If a trustee track was chosen, the grant should take place only after the lapse of 30 days from the date of submitting the designated plan to the ITA.

Section 102 allows the company to choose between the following tax routes when granting equity awards to Israeli employees and office holders.

  • Ordinary Income Track with a Trustee –the employee's income will be classified as "Ordinary Income" at the date of sale, and will be taxed at marginal tax rate plus social security and health care. At sale, the company will be entitled to recognize an expense for tax purposes (Subject to
    additional conditions in Section 102 of the Ordinance).

  • Capital Gain Track with a Trustee – Part or all of the gain will be classified as capital gain and will be taxed at the rate of 25% (without social security) at the date of sale. The company will not be entitled to recognize an expense for tax purposes.

  • Grant of Shares at Non Trustee Track - the employee's income will be classified at the date of grant, as ordinary income subject to marginal tax rate, social security and health care. The company will be entitled to deduct expense for tax purposes.

  • Granting Options/RSU at non-trustee track –the employee's income will be classified at the date of sale as ordinary income subject to marginal tax rates, social security and health care. The company will not be entitled to deduct expense for tax purposes.

Section 102 to The Israeli Tax Ordinance applies to employees and officer holders (including directors) of an Israeli company only.

Controlling shareholders, consultants (including Advisory board) and service providers cannot be included under section 102 to the Israeli Tax Ordinance.

The most common tax route is the Capital Gain Track with a Trustee that provides significant tax benefit to the employees.

Below are the main provisions of the Capital Gain Track:

Tax event – Upon the sale of the shares or their release from the trustee to the employee.

The holding period – In order to enjoy the lower tax rate, the employee should not sell or release the shares during a holding period of 24 months from the grant date (regardless to the vesting period). Sales before the end of the holding period will be taxes as ordinary income.

Tax rate – sale after the lapse holding period –

  • Private company - the gain from the sell will be taxed at 25% (Surtax will be added if relevant).
  • Public company (including grants made 90 days prior to listing for trading)- the gain will be divided into 2 components:

Ordinary Income- the difference between the value of the share at the grant date (average of 30 trading days before grant) and the exercise price.

Capital gain – the increase of the value of the share from the date of grant until the date of sale.

The provisions of section 3(i) of the tax ordinance will apply for the above grants. The income of the awardee will be classified as an ordinary income on the date of exercising the rights into shares (even if the shares are not being sold). On the exercise date, the company  is obligated to withhold tax at source.

The grant date is the date of the board resolution (or by other authorized by the board) approving a specific grant which is unconditional, and includes all the terms of the grant (including vesting dates and exercise price). It should be noted that there are cases in which the grant date may be deferred since the grant is subject to additional conditions (for example if the grant is subject to an approval at shareholder meeting) or one of its material terms (for example, setting an exercise price at a later date).

In a trustee track, the following documents should be deposited with the trustee:
1. A copy of the Board resolution, including the list of the grants, within 45 days from the grant date.
2. A copy of signed grant agreements - within 90 days from the grant date.
Delay in depositing will result by classifying the grants as non-trustee track.

In general, the authorized person appointed in the equity award plan can approve changes of the grant terms based on the authorization set in equity award incentive plan.

However, please note that some of the changes may have tax implications, and can even affect the tax benefit as set in section 102. Therefore, it is recommended to consult with the company's tax advisors and the trustee before making any change. In some cases a tax ruling

There are several equity based awards that are used by companies:

  • RSU (Restricted Stock Unit) - at the grant date, the employee receives a right to receive in the future share of the company without any cost (this is similar to option with an exercise price of zero). Upon vesting date, the share will be automatically issued to the employee in case the vesting terms are fulfilled.
  • RS (Restricted Share) - at the date of grant, the employee receives shares of the company which are restricted for sale. The restriction will be removed after the fulfilment of the vesting terms. The RS are entitled for dividend unless determined otherwise in the equity award plan.
  • ESPP (Employees Stock Purchase Plan) - a plan to purchase shares at discount. This is common in global companies whose shares are traded in the stock exchange.
  • Performance based award - granting rights that their vesting terms are subject to achieving commercial goals (for example sales target or profitability). It is recommended before to consult with the tax advisor and trustee before granting such awards since some performance goals may result in classifying the grant as non trustee grant.

There are some cases in which sale of the shares before the lapse of two years holding period will not be considered as violation of the holding period, such as:

  • Inheritance
  • Sale as part of involuntary liquidation
  • Sale as part of insolvency procedure
  • Sale of all the employee's holdings as part of a sale transaction of at least 80% of the company's shares to a third party (subject to receiving a ruling from ITA).
  • Sale under a voluntary liquidation which is performed contiguously to a sale of the company's operation and assets (subject to receiving a ruling from ITA )