New Israeli Tax Circular
Affecting Taxation of Section 102 Options
Action Required by July
28, 2010
The Israeli Tax Authority
("ITA") recently issued a circular which may be helpful for employees
who receive options under a trustee plan implemented under Section 102
of the Israeli Income Tax Ordinance ("Section 102 Options"). However,
companies operating an existing trustee plan under which they grant
Section 102 Options will have to file an election by July 28, 2010
to adopt the rules under the circular.
The circular deals with the
calculation of the "ordinary income portion" for Section 102 Options.
This income is subject to a higher tax rate and is calculated as
the difference (or discount) between the exercise price and the 30-day
average share price at grant. Under the current rules, even if
companies set the exercise price at the higher of the value of the
shares on the grant date and the 30-day average price (to avoid a
discount), a taxable ordinary income portion may still exist as a result
of the timing of conversion of the exercise price into Israeli currency
and adjustment of the exercise price in accordance with the Israeli
Consumer Price Index. The tax itself is not due until the shares are
sold.
Under the circular, the
ordinary income portion may be calculated using only the exchange rate
as of the grant date. This amount will then be adjusted "forward" to
the date of exercise so that the amount paid to the ITA upon sale of the
shares reflects the ordinary income portion adjusted to reflect the
exchange rate at exercise. Further, under the circular, it will not be
necessary to adjust the exercise price in accordance with the Israeli
Consumer Price Index (which typically increases 2 - 4% each year
resulting almost certainly in an increase of the ordinary income
portion).
As mentioned, for
existing trustee plans, companies have to file an election by July
28, 2010. The election will apply to sales of shares from
July 1, 2010 forward. In addition, companies are able to elect to
apply the rules of the circular for any new trustee plans filed with the
ITA. Please note foreign currency elections are not reversible and
must apply to all exercises/sales.
For assistance with filing
an election or more information regarding the impact of the new
circular, please contact your GES attorney.
Hi Everyone,
My name is Shai Hadar and I work as at one of Israel's leading trustee / stock administration service providers, Meitav Benefits. This clarification from the ITA was done partially due to our addressing the issue with the ITA.
I would be happy to provide any advice or assistance if there are questions due to the new circular. There are some additional issues that have not been addressed here, for example, calculating tax in Shekels (as is done today) means that a dollar amount has to be exchanged and thus the employee is subject to the differnce between the representative rate and the exchange rate (which is usually lower). Using the Dollar calculation, the amount of dollars due is exchanged and transferred to the ITA.
Feel free to contact m with any Q's at shaih@meitav.co.il
Regards
Shai