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Tapestry Alert: Israel – ESPP ‘fast track’
ruling and guidance on performance conditions
March 2016
Dear Client,
Background
The taxation of equity incentive plans in Israel is addressed in
Section 102 of the Income Tax Ordinance. Essentially, this provides
two alternative tax routes, an approved plan which must be issued
through a trustee under Section 102(b) or a ‘direct issue’ which does
not use a trustee. The Section 102(b) route provides certain
tax advantages and there are two tax treatments, the Work Income
route (generally seen to be more advantageous to the employer) and
the Capital Gains route (which is more favourable to the employee).
If the non-trustee route is followed, for certain types of plan, the
shares will be subject to income tax, and withholding by the
employer, on sale.
Ruling from ITA
A ruling from the Israeli Tax Authority (the ITA) is required for a company
to include Israeli employees as participants in a Section 102(b)
incentive plan. For certain plans, including an employee
stock purchase plan (ESPP), where the non-trustee route is followed,
the employer can apply to the ITA for a ruling that the benefit under
the plan be taxed as income at purchase and that any gain on the sale
of the shares be taxed as capital gain. This means that the
employer will not be responsible for withholding tax when the shares
are sold.
‘Green track’
procedure
The ITA allows certain types of share plans to be subject to a fast
track, or ‘green track’, approval process. It has recently said
that it will add two ‘green track’ rulings in relation to ESPPs to
the list of fast track rulings. Whether the ‘green track’ process is
available for other types of plan will depend on the particular terms
of the plan.
The ITA has released two draft ‘green track’ templates which remove
the need for a formal ruling from the ITA for an ESPP which is issued
under the trustee capital gains route or under the non-trustee route
where the employer wants the benefit to be taxed on purchase, as
outlined above. The new templates, which set out all of the details
and conditions for the operation of the ESPP, should reduce the
processing time for approval. The ITA has also removed the need to
meet with the taxpayer as part of the approval process for plans
under the ‘green track’ procedure.
Performance
Conditions
Separately, the ITA has said that it will no longer require a ruling
for grants which vest based on predetermined performance conditions.
Other rules apply, but in general, such plans will automatically
qualify for tax treatment under the section 102(b) capital gains
route.
Tapestry
comment:
These reforms
will be welcomed by companies looking at offering ESPPs to employees
in Israel as it reduces the time taken to get approval from the ITA
for an ESPP and removes the requirement to obtain a tax ruling
for awards subject to performance conditions. In view of the
meaningful tax savings for both employer and employees, many US
companies put in place a tax qualified share plan in Israel and
anything which makes the process simpler and faster is helpful.
If you would like to discuss this alert, or would like any advice on
offering a share plan to employees in Israel, please let us
know. We would be very happy to help.
Bob, Jordan and Sharon
  
Bob Grayson Jordan Levy
Sharon
Thwaites
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