Recent clarifications on the taxation of exercised employee stock options in Israel apply to only a small number of tech employees in the country.
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Published following a tax inquiry submitted to the authority earlier this year, a recent memo by the Israeli tax authority outlined the situations in which employees exercising their options will pay an income tax on their gains—up to 50% in Israel—instead of a capital gains tax of 25%. However, the instances in which this high rate of tax will be applied are very limited, as the stock option plan terms they refer to are extended to very few employees in the local market.
It makes clear that in the case of options granted following an exit or IPO where employees bear none of the risk shouldered by shareholders—when the options aren't locked and at risk of their value devolving over time but are instead exercised immediately—the resulting sum will be taxed as income. A vesting period of two years or more will ensure any gains are considered capital gains.
The number of companies that choose option plans that fall into the authority's newly defined income tax bracket seems to be low.
Out of 500 employee option plans reviewed across around 90 private companies, only three employees had plans that could, perhaps, fall under the purview of the new memo, according to Oren Barzilai, co-founder and CEO of EquityBee. EquityBee offers a marketplace where startup employees who lack the necessary funds to exercise their stock options can find investors. Of the plans reviewed by his company, "99.4% had a vesting period spread over four years," he said in a Tuesday interview with Calcalist.
In November, the Israeli tax authority announced that employees who exercise options while out of Israel on relocation will still be taxed in Israel, to prevent a situation where they would, in reality, not pay tax in either country. Following criticism, the authority clarified that people will receive a refund if they had indeed paid taxes on the options in their country of relocation.