Your Taxes: National Insurance on stock options

Your Taxes National Ins

October 27, 2009 23:51
2 minute read.

Stock options are a popular fringe benefit for many employees in Israel, especially in the technology sector. It was reported this week that the Bezeq workers' committee will seek more options following the imminent sale of Bezeq to 012 Smile Communications Ltd. announced at the beginning of the week. Employees are encouraged to stay on and contribute at their employer's success. In return they receive options which can be exercised after a period at a pre-determined price, when the resulting stock (shares) can be sold onwards at a profit. For income tax purposes, many employees pay tax at a rate of 25 percent if their options are held by an approved trustee for at least two years and the employer obtains approval for the plan under Section 102 of the Income tax Ordinance under the capital gain alternative in that section. But under that alternative, the employer cannot deduct the benefit as an expense. Various conditions apply and if met, tax is deferred until an actual sale of the options or resulting shares. However, not all plans are approved under Section 102. There is also a simpler section - 3(i) (shalosh tet) which requires no approval and is the only section that benefits non-employees (service suppliers, etc) as well as employees who hold over 10% of the company's shares. Section 3(i) imposes regular Israeli tax on the difference between the fair market value of the shares and the pre-determined exercise price, but only when the options are exercised. And there are other possibilities. But what about National Insurance payments? Are they due when the options are granted at the outset or later when the options are exercised? This question of timing has just been resolved in a judgment of the National Labor Court (Sharon Topaz and Sharon Saltzman v. the National Insurance Institute, 574/07). These women needed to know when to count stock option income for the purposes of calculating their maternity allowance under the National Insurance Law. The women on maternity leave were employees of Check Point Software, a prominent Israeli hi-tech listed company. They claimed the stock option benefit should be recognized when the options are actually exercised. The National Insurance Institute (NII) wanted to recognize an earlier date - the "vesting date" when the women were free to exercise the options, even if they didn't yet do so. Initially a regional labor court accepted the NII's claim. However, the women appealed and an out-of-court settlement was reached which the National Labor Court ratified on September 3, 2009, giving the legal effect of a judgment. This provides that in the circumstances of the Check Point case, the date the option benefit is recognized for National Insurance purposes is the date the options are exercised, not the vesting date. The benefit is then treated as additional salary. However, if the employee leaves the employment of that employer, the leaving date becomes the relevant date. This is helpful in avoiding National Insurance liabilities on paper gains at the vesting stage which may not always translate into actual gains if the underlying share price drops before the employee exercises the options. What about Section 102 option plans? Those on the capital gain alternative are usually considered to exempt from national Insurance payments. As always, consult experienced tax advisors in each country at an early stage in specific cases. The writer is an international tax specialist at Harris Consulting & tax Ltd, in association with Moore Stephens Israel.

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