Tax Authority cracks down on tech stock options with new reporting rules
Tax Authority cracks down on tech stock options with new reporting rules
New digital system aims to prevent misuse of NIS 15 billion in tax benefits.
A significant change in reporting mechanisms for the allocation of employee stock options will take effect in 2025. The Tax Authority has announced that starting January 1, 2025, companies granting stock options to employees will be required to report on every stage of the process—ranging from allocation plans to the exercise of the options—through a new digital system. This move aims to ensure that tax benefits associated with options, which amount to over NIS 15 billion annually, are properly managed, while enabling effective audits and providing a clearer picture of the tax benefit’s scope in the Israeli economy.
Employee stock options have become increasingly common in recent years, especially among high-tech companies and startups. These options give employees the opportunity to purchase company shares in the future at a predetermined price. The income derived from exercising these options can be classified as employment income, subject to marginal tax rates of up to 50%. However, when the options are granted under a plan approved by the Tax Authority, and the shares are held by a trustee for at least two years, employees are eligible for a significant tax benefit: the income is treated as a capital gain, taxed at a reduced rate of 25% (in accordance with Section 102 of the Income Tax Ordinance).
Until now, companies reported option allocations to the Tax Authority manually, and the information was not centralized within an organized system. As a result, the Tax Authority has faced challenges in conducting effective audits to verify compliance with the conditions for tax benefits and assessing the overall scope of these benefits.
Following an inspection, the Tax Authority found that the volume of employee stock options exceeds NIS 15 billion annually and that trustees holding these options are already using digital systems capable of interfacing with the Tax Authority’s system. Consequently, a decision was made to fully digitize the reporting process.
In the coming weeks, companies will need to submit allocation plans through an online system, complete questionnaires, and report quarterly on the exercise of options. According to the Tax Authority, the transition to the new system will enable companies to quickly determine whether they meet the criteria for tax benefits. These benefits include a reduced capital gains tax rate of 25%, compared to the marginal tax rate, which can reach up to 50%.
