The Right Option for you
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.
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 –
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:
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: