Do You Employ Teams in Israel? Major Changes to Equity Compensation Reporting Are Here
If your company employs teams in Israel and offers equity compensation, it’s critical to understand the sweeping regulatory changes coming into effect in January 2025. The Israel Tax Authority (ITA) has announced significant amendments to the Income Tax Rules governing employee stock allocation. These changes are designed to modernize the reporting and control system for equity plans but will also introduce complexities that companies must address to ensure compliance and safeguard employee tax benefits under Section 102.
Key Changes to Note
1. Transition to an Online Reporting System
One of the most fundamental changes is the mandatory transition to an online reporting system through the ITA portal. The system is tailored to manage submissions differently based on the type of equity award:
- 102 Trustee Awards: Submitted by the trustee managing the plan.
- Non-102 Trustee Awards: Submitted directly by the company.
This digital system will streamline the submission process, providing immediate feedback on compliance issues and ruling requirements.
2. Enhanced Reporting Requirements
Beginning with the first quarter of 2025, companies will need to meet new reporting deadlines:
- Quarterly Reports (Form 146): Due within 120 days of the quarter’s end. These must include detailed information about employees, grant specifications, vesting schedules, and trustee deposit dates.
- Annual Reports (Form 156): Starting in April 2025 for the 2024 tax year (potentially shifting to 2026), companies must provide comprehensive details on grants, dividend payments, tax withholdings, and employee status changes.
This enhanced reporting demands meticulous tracking and organization of all equity-related data.
3. Comprehensive Plan Questionnaires
The ITA now requires a detailed questionnaire for plan documentation, demanding thorough disclosures about:
- Shareholder rights, including voting and dividend entitlements.
- Vesting conditions and performance metrics.
- Buy-back provisions and other plan terms.
Publicly traded companies will also need to provide expanded details about their listing status. Any material changes to existing plans that affect the answers in the questionnaire will necessitate updated filings with the ITA.
Failure to provide accurate information could delay plan approval and jeopardize employee tax benefits.
4. Increased Oversight
The ITA will assume broader oversight authority, including the ability to:
- Request clarifications or additional documentation.
- Conduct comprehensive reviews before granting plan approvals.
Recent draft tax circulars provide clarifications, including:
- Treasury Shares: Can be used if purchased at least 18 months before issuance.
- LLC Compliance: Must adhere to ruling 1267/09 requirements.
- “Insignificant Changes”: Certain minor plan changes won’t require the standard 30-day waiting period, though adding subsidiaries will still trigger this requirement.
- Buy-Back Restrictions: Clear guidance on plan buy-back provisions.
Companies that fail to meet these new standards risk exposing themselves to audits, delays, and financial penalties.
The Stakes: Employee Tax Benefits
Compliance isn’t just a regulatory formality; the stakes are significant. Non-compliance could:
- Jeopardize employees’ favorable tax treatment under Section 102.
- Expose the company to audits and financial penalties.
- Delay grant approvals, creating employee dissatisfaction.
- Trigger a shift from capital gains tax treatment to standard income tax rates.
To avoid these risks, companies must begin reviewing equity plans now, assessing their ability to adapt to the new online reporting system, and ensuring their documentation is ready for questionnaire requirements.
How to Prepare
Preparing for these changes requires strategic planning and operational adjustments, including:
- Implementing Robust Tracking Systems: Ensure your equity administration software is capable of handling the ITA’s online reporting demands.
- Training Internal Teams: Educate personnel on the new requirements to avoid errors and delays.
- Engaging Experts: Partner with equity compensation professionals and local tax advisors to navigate compliance complexities.
At Infinite Equity, we specialize in guiding companies through regulatory changes, offering end-to-end solutions to maximize the value of equity compensation programs while ensuring compliance. Whether you need help preparing reports, structuring plans, or navigating ITA regulations, our expertise ensures your company is ready for the January 2025 implementation date.
Start preparing today to protect your employees and your business. Contact us to learn more about how Infinite Equity can support your compliance journey.
