Significant Changes to Filing and Reporting Requirements Relating to Equity Plans and Grants in Israel

Dear Clients and Friends,

On September 19, 2024, the Israeli Tax Authority (the “ITA“) enacted the Income Tax Rules (Tax Relief in Allocating Shares to Employees) (Amendment), 2024 (the “New Rules“) which amend the rules which were published in 2003 named: Income Tax Rules (Tax Relief in Allocating Shares to Employees), 2003 (the “Original Rules“). The New Rules come into effect on January 1, 2025. To read the Hebrew version of the New Rules please click here. The ITA are expected to publish a Tax Circular which will provide more details regarding the implementation of the New Rules, including information on the various filing and reporting requirements and certain tax positions of the ITA regarding equity plans and compliance with Section 102 of the Israeli Income Tax Ordinance [New Version] 1961 (the “Ordinance“).

The New Rules introduce a new and more complex process for filing equity plans for approval under the trustee routes pursuant to Section 102 of the Ordinance. The documents required for the purpose of filing plans for approval have been amended to include a detailed questionnaire which the company will need to complete regarding the equity plan. In addition, it is expected that starting from January 1, 2025 the ITA will activate two electronic filing systems – one for the purpose of filing equity plans for approval under trustee routes and another for the purpose of filing annual and quarterly reports regarding the awards granted under the plan.

The below is a summary of the main provisions of the New Rules, however there are additional amendments which are not summarized below. In addition, since the electronic system has not yet been opened to the public, and the ITA circular which is expected to be published as well, we expect additional updates to be provided prior to the effective date of the New Rules.

Filing Equity Plans For Approval Under Trustee Routes

The New Rules add a questionnaire companies will be required to complete as part of the filing process (Exhibit D). Previously companies were required to file only three forms called: Request to approve the plan, a trust deed and a request to approve the trustee. The questionnaire incudes various representations regarding the plan such as the following[1]:

• Any shares issued in connection with awards granted under the plan will be “ordinary shares” or “common stock” and in addition will be newly issued shares.
• Each award granted to an employee is not regarded as “compensatory” for accounting purposes and there is no alternative under the plan and Israeli appendix to settle the award using cash.
• According to the incorporation documents of the company or shareholder agreements the rights attached to the shares issued under the plan include inter alia the following rights: voting right, dividend right, right to sell the share and right to assets in case of liquidation.
• The vesting conditions of the awards are subject to set, measurable and pre-defined goals and are not subject to the occurrence of an external event such as: sale of rights in the company, an investor entering into the company or the listing of the company’s shares for trade on a stock exchange.
• The issuing company, reporting company, employing company or any affiliate thereof do not have the ability to force employees to sell their shares or rights granted under the plan to them. If such right exists the company can state that it will be seeking a ruling with respect to such mechanism.
• The issuing company, reporting company, employing company or any affiliate thereof are not obligated to purchase shares issued under the plan to the employees.

Annual and Quarterly Reporting Requirements

The annual and quarterly reporting requirements which were included in the Original Rules and which were suspended due to the inability of the ITA to set up an online reporting system, are scheduled to be re-instated through a new online reporting system the ITA will be introducing. The reports will be required for both trustee and non trustee plans and grants. The annual report will need to be filed electronically by April 30 of each year. Quarterly reports will be required within 120 days of the end of the quarter during which an award was granted.

Annual reports will include the following information:

• Employees names, ID numbers and addresses.
• Award status at the beginning of the year including the type of equity award and class of shares.
• The activity performed with respect to the awards during the year including transfer to heirs or sale.
• Rights which were issued in connection with the shares including bonus shares.
• The end of year status of each employee as of the last day of the previous tax year
• Dividends distributed with respect to the awards and shares.
• Employees who ceased employment with the employer
• Employees who ceased being Israeli tax residents
• The tax which was calculated upon the “exercise” of shares which were subject to tax under section 102(b) of the Ordinance, including the date of grant, the sale price, the employee expenses and the timing of the sale, the exercise price or value upon exercise, the tax amount which was transferred by the trustee or if an approval of tax payment was provided to the trustee.
• If the company became publicly traded – the date of listing and the details of the exchange on which the shares are traded.

It is not clear if companies will be required to file an annual report by April 30, 2025 or only on April 30, 2026. Please note that Trustee and Non-Trustee Grants are subject to the same requirements.

Quarterly reports will include the following information:

• Date of grant.
• Employees names, ID numbers and addresses.
• Amount of awards and class of shares including type of award.
• Exercise price or any amount paid for the award or shares, and if the employee paid for the awards or shares, the amount paid and the date of payment.
• The expiration date of the awards including the time frame to exercise the awards upon termination of employment relations.
• If the issuing company is publicly traded – the date of listing or the date of expected listing.
• The date of deposit of the award with the trustee.
• The vesting conditions.

All companies will be required to file their first quarterly report for the first quarter of 2025 by July 29, 2025! Trustee and Non-Trustee Grants are subject to the same requirements.

We will be issuing additional updates as new information is provided by the ITA including when the Tax Circular is published. Please do not hesitate to reach out to us with any question you may have.

Sincerely,

Herzog Fox & Neeman

[1] The list details only part of the representations.