Israel to Fully Tax IPO or Exit-Dependent Employee Options, in Some Cases

A new memo published by the Israel Tax authority could see local employees pay as much as 50% tax on any option they exercise as a result of their company being sold or listed on an exchange.

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Companies, especially in the tech sector, often grant their employees the right to buy a certain amount of company stock at a predetermined price, typically requiring them to wait a certain vesting period before the options can be exercised.

According to the new memo, if the options granted to employees are dependent on employee or company stock performance, and thus the employees are acting as shareholders who bear the risk of stock price fluctuations, the options will be taxed as capital gains, at a 25% rate. If employees are granted options following an initial public offering but those options are locked for a period of two years or more, those options will also be taxed as capital gains when exercised.

If, however, employees can only exercise their options in the event of the company performing an IPO or being sold, and the monetary gain is immediate and predetermined—like any other bonus granted to employees—then the options will be taxed as income, which bears a tax rate of up to 50% in Israel.

The memo is not a change of existing policy but simply a clarification, according to three authority executives who spoke to Calcalist on condition of anonymity. The clarification came about following a pre-ruling the authority made in response to a specific taxation inquiry earlier this year, these executives said.  

Perceived as a tax increase on the already high tax load on Israel's highest paid industry, the memo evoked criticism from Israel’s tech sector.

The authority has allowed companies 180 days to change the terms of stock options already granted to employees.