Israel Tax Authority to double tax on startup share warrants

Eran Yaakov Photo: Rafi Kutz

Warrants that depend on an exit or public offering will be taxed as income from labor, not as capital income.

A new circular published by the Israel Tax Authority, managed by director Eran Yaakov, which "Globes" has obtained, and which changes the policy on warrants distributed to employees, has caused an uproar among technology companies. The circular, entitled, "Capital-based Remuneration with Vesting Contingent on Performance," states that employees can no longer enjoy lower tax rates when selling warrants that can be exercised only in the event of an exit or public offering.

Following the circular, instead of the 25% tax that applied to contingent warrants up until now, income from exercising such warrants will be considered income from labor, and the tax rate on it is therefore liable to rise to 50% in the same circumstances. Tax experts describe this change as an earthquake, an attack, and potential double taxation for employees that severely restricts the judgment of boards of directors in providing incentives for employees.

The new circular was published shortly after "Globes" revealed a new decision by the Tax Authority changing taxation policy on profits of relocated Israelis from the sale of warrants given them during their period of overseas residence. The question now arises of whether the Tax Authority is targeting high-tech workers.

Vesting period of capital remuneration

The new income tax circular changes the previous policy on capital-based remuneration with performance-based vesting. In the circular, the Tax Authority establishes criteria for warrants granted to employees on the capital track (taxed at a reduced 25% rate) with a vesting period (the date on which they can be exercised) that depends on the employee's performance and on the date on which they are granted. The change is significant because the Tax Authority makes an official ruling in the circular that a vesting period that depends on a public offering or an exit by a company will not be allowed on the capital track; it will be considered income from labor, and will be taxed at the employee's marginal tax rate, which is liable to reach 50%.

Published by Globes, Israel business news - en.globes.co.il - on December 18, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

Eran Yaakov Photo: Rafi Kutz
Eran Yaakov Photo: Rafi Kutz
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