17 February 2021
At the end of January, the Israeli Tax Authority (ITA) issued two new “green track” tax ruling application forms. These apply to particular tax qualified employee share plans in Israel and provide helpful concessions for companies looking to operate these plans.
Green track tax ruling application forms
Companies are able to apply to the ITA for tax rulings on issues relating to the operation of tax qualified employee share plans under section 102(b) of the Income Tax Ordinance (‘s.102 plans’).
To simplify and speed up the application process, where rulings are regularly sought on particular issues, the ITA may publish a standard application form specifically dealing with that issue – a procedure called a "green track" ruling.
New green track rulings
The two new green track rulings deal with:
- Corporate transactions: a key feature of a s.102 plan is that the shares issued under the plan must be held by a trustee for a specific holding period for the employee to benefit from the beneficial tax treatment. The new green track form addresses a situation where a transaction affects the issuing company (e.g. a sale of the company), such that the shares delivered under the s.102 plan have to be sold earlier than permitted by s.102. The company can apply for tax rulings to ensure that the shares are still eligible for the beneficial tax treatment – the new green track form sets out the procedure for making the initial application and the subsequent tax arrangements.
- Non-Israeli employer: this green track ruling application form can be used where a non-Israeli employer wants to grant shares under a s.102 plan to employees in Israel. Normally, awards under a s.102 plan can only be offered to employees of an Israeli company or an affiliate of an Israeli company. A foreign issuer has to register a company in Israel to act as the employer for the purposes of s.102. The ITA may grant approval for a company to offer the s.102 plan though a registered branch in Israel and the green track form details the application process - this is discussed in more detail below.
Approval of non-Israeli company as employer under a section 102 plan
As mentioned above, to offer shares to employees under a s.102 plan, the issuing company must be either an Israeli company or an affiliate of an Israeli company. However, where the foreign issuing company has a permanent establishment or an R&D centre in Israel, the ITA may give special approval for the company to offer shares to employees in Israel under a s.102 plan. The green track application form is a standard form document which is used if applying to the ITA for this approval. The prerequisites include:
- the issuing company must operate its business through an Israeli branch which is registered with the Israeli companies registrar;
- the branch must have a tax withholding file number and report to an assessing officer; and
- the company must pay tax in Israel on its Israeli income.
Under the terms of the green track application process, approval of a non-Israeli company to operate as an ‘employer’ for the purposes of s.102 of the Income Tax Ordinance will include the following conditions:
- if the branch ceases to report to the assessing officer, the share plan will cease to be treated as a qualifying plan and income under the plan will be subject to tax under the non-trustee route (i.e., it will not receive the beneficial tax treatment);
- any award income will be deemed to be Israeli income and the employees will be deemed to be Israeli residents until the exercise date;
- deductions and exemptions under other sections of the Income Tax Ordinance will not be available;
- all aspects of the share plan will be subject to s.102.
This is a brief overview and the tax ruling application will be subject to additional terms and conditions.
The green track tax rulings were published on 31 January 2021 and the green track forms are available to download from the ITA website.
In view of the meaningful tax savings for both employer and employees, tax qualified share plans are popular in Israel, which is one of the key countries where we see companies operating tax-beneficial arrangements. Although the new green track forms relate to relatively niche issues, anything which makes the process simpler and faster is helpful.
It should be added that even with the green track forms, an application for a tax ruling is a complex procedure and will require local advice, but if you have a substantial population in Israel and aren’t already making use of the tax qualified arrangements – now might be a good time to revisit this.
We would like to thank our partner firm in Israel, Herzog Fox & Neeman, for alerting us to this update.
Sharon Thwaites and Tom Parker