Written by Ofir Levy, Ben Sandler, and Elizabeth Krishmarov Chanan
Online Submission of Plans, Detailed Questionnaire and “Red Flags”
The Israel Tax Authority (“ITA”) has issued new regulations and guidelines that affect all companies making equity award to Israeli taxpayers pursuant to equity incentive plans.[1]
According to the regulations, as of January 1, 2025, equity incentive plans intended to qualify under the “capital gains track” pursuant to Section 102 of the Income Tax Ordinance (the “ITO”) may only be submitted online (i.e., physical submissions to the Assessing Officer will no longer be accepted). As part of this process, a detailed questionnaire, will need to be completed regarding the plan and its terms.[2] This process is intended to provide the ITA with the information necessary to evaluate the plan’s compliance with the requirements for qualification under the “capital gains track” in a streamlined manner.
Once submitted via the online system, notifications and alerts regarding the submitted plan will be provided exclusively through the platform. Submissions that are missing required documents, or documents that are incomplete, illegible, or not properly signed, will be rejected. Only after all missing documents and other omissions are corrected will the plan undergo a fresh review and evaluation, carried out via the online system’s chat feature with the designated representative of the filing company.
The new form of submission is intended to flag for the ITA potential issues or “red flags” of non-compliance with the requirements of the “capital gains track” under Section 102. Companies must be proactive in addressing such matters with the Assessing Officer to avoid delays or complications and to ensure that grants under the plan will be qualified under the capital gains track for tax benefits.
New Questionnaire Requirement upon Submission
A new addition to the submission process is the obligation to provide responses to a form questionnaire, including the type of awards being granted, the shares subject to the awards, rights attached to the shares, whether the shares are subject to a put / call option, whether vesting is subject to performance metrics or events, limitations on transfer, and whether the company is publicly traded or privately held.
These new requirements and “red flags” may require the company to obtain tax rulings in advance; for example, if a company has a call option (share repurchase) mechanism in its equity plan, it will be required to obtain the relevant tax ruling from the ITA in order for the plan and grants thereunder to be qualified under Section 102.
If the Assessing Officer does not respond to the submission within 90 days from filing, the plan would be deemed approved, however, under the new regulations the identification by the tax authority of a “red flag” will suspend the 90-day approval period and the 30-day waiting period before initial grants may be issued, which may delay the intended schedule for granting “capital gains track” awards.
The new regulations further clarify what would be considered a “material” amendment of the plan that would require its resubmission via the online system and then waiting 30 days prior to making new awards pursuant to the plan (or even a longer period when a red flag is raised). Generally speaking, any change that would require a change in response to a question in the questionnaire would be deemed a “material” change and require a new submission, while other “technical” matters would not and a notification to the ITA will suffice. The ITA has clarified that the addition of different types of awards to a plan increases in the allocated pool for grants, and replacement of the appointed trustee for Section 102 purposes would all be deemed non-material and would not require a new submission or a 30-day waiting period.
Reporting
Under the new regulations, there is now an obligation to file quarterly and annual reports.[3] The quarterly reports include information on awards made in the past quarter, such as the type of equity instrument, type of shares as well as details with respect to the date of grant, exercise price, etc. and are to be filed within 120 days from the end of the quarter in which the awards were made. The annual reports are intended to cover all outstanding awards subject to Section 102 (both “capital gains track” awards and non-trustee awards) including details of exercises made and dividends distributed (to the extent relevant). Such annual reports are to be filed with the ITA by March 30 of each calendar year for the preceding year. The first annual report should include information of all grants and exercises made through December 31, 2024. These reporting requirements are relevant not only to awards made under the “capital gains track” but also to non-trustee track grants subject to Section 102.[4] In the latter case, and in the absence of a trustee, the company will bear primary responsibility for filing the report. The reporting requirement covers all types of awards made under Section 102 of the Income Tax Ordinance – options, RSUs (restricted stock units), restricted stock, as well as shares issued under an ESPP (employee stock purchase plan) – regardless of whether or not they are subject to a trustee arrangement. Non-inclusion of a relevant award in a required report will result in disqualification of such award from the tax benefits of Section 102.
Needless to say, these changes increase the reporting burden on companies and trustees, requiring detailed reporting of awards on a timely basis. Israeli trustees are making the necessary adaptations in their systems to comply with these new online reporting requirements.
Effective Date
The new regulations have come into effect as of January 1, 2025 and apply to plans filed with the ITA that date onwards. The first annual report, covering grants, exercises and dividends distributed in 2024, is due on March 31, 2025.
[1] On December 9, 2024, the Tax Authority published a professional circular entitled “Income Tax Circular 01/2024 on Submitting Stock Option Plans via Trustee Under Section 102 of the Ordinance” (the “Income Tax Circular”). This follows the publication of the Income Tax Regulations (Tax Relief for Employee Stock Options) (Amendment), 2024 ( “Regulations”) on September 17, 2024.
[2] Appendix D to the Regulations).
[3] Income Tax Form 146 and Form 156, respectively.
[4] These reports do not apply to awards subject to Section 3(i) of the Income Tax Ordinance, the default provision for taxation of options and similar equity awards, which applies to non-employees and “controlling shareholders” ineligible for the benefits under Section 102.
