Dear Clients,
We wish to inform you that on March 11, 2025, and following our client circular published in March 2023 (for the client circular – please click here) the Israeli Tax Authorities (the “ITA“) published a new position paper number 01/2025 regarding the tax implications pursuant to double trigger acceleration upon an exit or IPO (for the New position paper – please click here) (hereinafter: “New position paper“).
Section 102 of the Income Tax Ordinance [New Version], 1961 (hereinafter: “Section 102” and “The Ordinance” respectively) and the rules thereunder, determine how employees’ shares are taxed and reported upon exercise.
However, the Ordinance does not define the conditions and periods under which the options will vest, and therefore there is flexibility for companies to determine the conditions of the option grant. Under the Income Tax Rules (Tax benefits in share allocations to employees) (Amendment), 2024 and the Income Tax Circular 18/2018 regarding Performance-Based Equity Compensation (for the circular – please click here) (“the Circular“), the ITA has determined that vesting targets must be predefined, clear, and measurable. In addition, the ITA stated when the vesting of rights is upon an exit or IPO, the equity compensation risk does not exist. Therefore, vesting contingent upon an exit event or IPO shall not be considered equity-based compensation, and be classified as work income.
In the New position paper, the ITA distinguishes between two acceleration mechanisms as detailed below:
- “Single Trigger” – the acceleration of the vesting of options that have not yet reached their vesting date, upon the occurrence of an exit or IPO, will not be regarded as a violation of Section 102 of the Ordinance, and the tax on the sale of the shares will be calculated in accordance with Section 102, i.e., under the capital gains route.
- “Double Trigger” – an acceleration event occurring upon the fulfillment of two conditions: (1) the occurrence of an exit event; (2) the termination of employment due to the exit. In this case, there will be no violation of the provisions of Section 102 of the Ordinance, however, the tax on the options that have vested as a result of the double trigger will be calculated on the compensation given to the employee, as follows:
Cash compensation
- If at the time of receiving the cash compensation, the price of the acquiring company’s share is higher or equal to the price of its share at the time of the Closing of the transaction, then the employee will be taxed according to Section 102(b) of the Ordinance, meaning capital gains route.
- If at the time of receiving the cash compensation, the price of the acquiring company’s share is lower than the price of the acquiring company’s share at the time of the Closing, then the employee’s income will be divided into two parts as follows:
- The cash compensation part, multiplied by the ratio obtained from dividing the difference between the price of the acquiring company’s share at the time of the Closing and the price of the acquiring company’s share at the time of the actual receipt of the compensation, by the price of the acquiring company’s share at the time of the Closing – will be classified at the time of the actual payment of the compensation as ordinary income and would be taxed at marginal tax rate.
- The remaining compensation will be taxed according to the provisions of Section 102(b) of the Ordinance, i.e., capital gains route.
Equity Compensation (Shares) of the Acquiring Company
Equity compensation of the acquiring company, that will be allocated to the employee upon his unvested options at the Closing date, and that will be subject to vesting conditions and termination of employment upon exit, will be subject to tax in accordance with Section 102(b) of the Ordinance, i.e., capital gains route.
It should be noted that upon termination of employment, income resulting from the vesting of options not related to an exit or initial public offering will be taxable as work income and taxed according to Section 121 and Section 121b of the Ordinance.
Our office assists companies with tax-related matters, particularly regarding employee options, as well as ongoing discussions with the ITA. We are at your disposal and will keep you updated with any further developments.
This memorandum contains only general information and does not constitute legal advice or a substitute for legal advice. This memorandum is provided as a service to our clients, with the clarification that in any specific case, a separate discussion on the matter should be conducted.
