By: Eli Doron, Adv; Yaron Tikotzky, Adv, (C.P.A); Dr.Slomo Nass, Adv, (C.P.A)
Options in foreign companies that Israelis receive from the employers are extremely valuable. Those holding an option have the right to purchase or sell the subject of the option for a set price. The advantage is that the risk that the value of the subject of the option will decrease lies on behalf of the one who gives the option.
Regulations of taxing options, and the taxation system at large, have been modified immensely during the recent years. On July 24th, 2002 the 132nd Israeli Income Tax Code amendment was ratified, reforming the tax system from January 1st, 2003. The main reform dealt with alteration from a territorial affinity system to a personal affinity system. That is, a resident shall be taxed for all his income that has derived beginning in the year 2003, regardless of the location from where the income was derived. Therefore, regarding foreign companies’ options, tax remains the same regardless.
According to article 102 of the Israeli Income Tax Code there are two methods of providing options to employees (that do not control the company):
- Providing shares independent from trustees: article 102(c)(1) of the Code maintains that when an employee receives an option from his employer, the income shall be taxed at the time of allotting according to articles 2(1) and 2(2), i.e. fruitful income, and at the time of realization (selling of the option) a capital gain income shall be implemented. However, if the options aren’t open to public trade, all the taxation shall take place at the time of realization.
- Providing shares via a trustee: This alternative has three preamble conditions. First, from the date of allotting all the options must be deposited with the trustee. Secondly, the employing company has informed the assessing officer of the allotting 30 days in advance in order to receive approval. Thirdly, the assessment officer must approve the allotting plan and the identity of the trustee in advance. Article 102(b) of the Code maintains that the income of an employee from allotting options in a company that employs him via a trustee, will not be taxed until realization date (the day in which the trustee gives the employee the options or the day that the trustee sells the options – the early of the two).
An employing company is an Israeli resident company or a foreign resident company having a permanent enterprise or R&D center in Israel and was approved by the assessment officer. Such a company may choose amongst two methods of taxation of options to employees via a trustee:
- (1) Employment income method: article 102(b)(1) of the Israeli Income Tax Code maintains that according to this method, the income of the employee will be seen as fruitful income in accordance to articles 2(1) or 2(2) of the Code, in a sum equal to the value of the benefit (value at realization after deducting the employee’s expenses of purchasing or selling the option).
- Capital income method: according to this method, the trustee must hold the options for a period of time no shorter than 2 years from the date of allotting and depositing with the trustee. The income will be measured as capital revenue equal to the value of the benefit and he will be taxed 25%.
It should be clarified, that these guidelines are simplified and that in practice the taxation system is more complex, and therefore, it will be wise of the employer, who wished to offer his employees options in a foreign company, to consult with a tax expert.