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Companies Required to Amend Option Plans

On December 5, 2018, the Israel Tax Authority published a circular that determines the terms for granting options to employees when the vesting of such options is contingent upon performance milestones or the occurrence of an IPO or exit event.


The new circular, entitled “Equity-Based Remuneration Contingent on Performance Based Vesting,” will affect every company that intends to grant its employees options. It also specifies instructions on how to handle options granted in the past and that currently do not comply with its new provisions.


Granting options contingent on performance-based vesting pursuant to Section 102

In Section 102 of the Israeli Income Tax Ordinance, the legislator does not issue any specific provisions to determine the option vesting terms and vesting periods, leaving this matter to the discretion of the company.


The customary vesting terms in companies are:

  • time-based terms – terms that require the employee, in a defined period of time, to complete a period of employment;
  • performance terms – terms that require the employee, in a defined period of time, to achieve predefined performance targets within a defined time frame, such as achieving sales targets; and
  • market terms – terms that are contingent upon a defined performance, which affects the company’s value and is measured according to the share price (such as a predefined rate of increase in the share price or value of the company).

The new circular defines the cumulative criteria under which options with performance-based vesting may be granted to employees (besides the other criteria prescribed in the Ordinance). This type of option grant will be entitled under the equity track specified in Section 102.


Said option grant, inclusive of all its terms (exercise price, vesting dates, and option expiration date) must be approved by the company’s board of directors or such other competent organ in the company.

  • The vesting terms must be fixed, measurable, and pre-defined on the date the option granting is approved by the company. Vague and general references to the vesting terms and/or leaving additional discretion to the company to decide whether vesting terms are met will cause the grant date to be deemed the day on which the terms were finalized and not the approval date of the original option granting by the board of directors. Therefore, the two-year blocking period prescribed in Section 102 will begin on the grant date.
  • The option grant must conform to the company’s remuneration policy, which allows for performance-based vesting and which was duly submitted for approval by the tax assessor.

Vesting contingent upon an exit or share-issue event

The circular prescribes that vesting terms in options contingent upon an exit event or an issuing of the company’s shares for trading on the TASE (IPO) do not uphold the terms for application of the equity track under Section 102. According to the Israel Tax Authority, the stipulation of these terms constitutes remuneration being provided to an employee within the framework of employment relations, as the income deriving from the options is classified as a bonus or a success grant. Under these circumstances, the employee’s income will be taxed, upon the occurrence of the qualifying event, as wage earnings and according to the employee’s marginal tax rate.


Interim arrangements

The circular will also apply retroactively to options granted prior to its promulgation and that do not comply with its provisions.


The circular allows companies that granted options not in accordance with its provisions to take the following actions:

  1. Insofar as the options were already granted but the exercise date has not yet occurred, the companies may apply to the professional division of the ITA to obtain an individual tax ruling.
  2. Insofar as the options have not yet vested, companies are required to change the vesting terms defined in their existing option plans within 180 days of the promulgation date of the circular (i.e. by June 4, 2019). Additionally, they must send notice of the adoption of a “tax arrangement for a new grant of options” to the ITA’s professional division and to the tax assessor appointed to the company’s file, in the wording attached as an appendix to the circular.

The outcome of amending the vesting terms and their compliance with the circular’s conditions will correct those option grants and entitle them under the equity track of Section 102. However, the two-year blocking period applying to the option grant will restart.


This circular constitutes a very significant course of action that will dictate not only how companies conduct themselves from now on, but will also obligate every company that granted options in the past not in accordance with the conditions of the new circular to regroup and apply to the ITA to make arrangements for those grants in order to minimize the tax exposure of employees. Companies that fail to take care of this matter will expose their employees to very high tax rates when they sell such shares.


In light of the importance of this matter and its centrality for companies granting equity incentives to their employees, we recommend conducting a thorough examination of the application of the circular to past options granted to employees.