How to Ensure Your Israeli
Trustee Plan Works for You and
Your Employees
Yair Benjamini, ERM Law Office (IL)
Matt Connor, Morgan Stanley (US)
Carolina Ellerker, PwC (US)
Jennifer Kirk, Google (US)
Odelia Pollak, ESOP-EXCELLENCE (IL)
Tim Shanahan, Google (US)
GOOGLE ISRAEL TEAM
Jennifer Kirk, Director of Stock ‐ Google Inc. ([email protected])
Tim Shanahan, Senior Stock Administrator – Google Inc. ([email protected])
Matthew Connor, Vice President ‐ Morgan Stanley ([email protected])
Yair Benjamini, Head of Tax Practice ‐ ERM Law Office (benjamini@erm‐law.com)
Carolina Ellerker, Tax Director – PwC ([email protected])
Odelia Pollak, CEO – ESOP – EXCELLENCE ([email protected])
Google Israel
• 450 Employees in two office locations (Tel Aviv and Haifa)
• 33 Inbound Transfers from 5 Countries
• 27 Outbound Transfers to 5 Countries
And growing – organically and by acquisition
Google Trustee
• Google has appointed ESOP‐EXCELLENCE (“ESOP”) with
ITA approval to serve as the Trustee and administrator of
its employees’ equity based compensation plans.
• ESOP provides comprehensive services related to
employees
compensation
plans,
from
stock
administration and trusteeship to trading services and the
applicable clearing processes.
Taxation
• General overview of taxation of equity: • grants made to employees and officers are subject to Section 102; • grants made to consultants, controlling shareholders etc. are subject to Section 3(i). Israeli Taxation –
Section 102 of the Israeli Tax Ordinance
• According to Section 102 the company may choose one of the
following tax tracks:
With Trustee:
Ordinary Income Track;
OR
Capital Gain Track
OR
With No Trustee: Non Trustee
Difference Between the Tax Tracks
The “capital gain track”:
The Employee ‐ part of the gain will be subject to Capital Gain tax
at the rate of 25%.
The Employer – can take a corporate tax deduction only on part
of the gain subject to a recharge agreement.
The “Ordinary Income Track”:
The Employee – the gain will be subject to Ordinary Income tax
(marginal tax + social security + health care ‐ up to 50%).
The Employer – can take a corporate tax deduction on all of the
gain subject to a recharge agreement
Difference Between the Tax Tracks – Cont.
The “Non Trustee Track”:
The Employee – the gain will be subject to Ordinary
Income tax (marginal tax + social security + health
care ‐ up to 50%).
The Employer – no corporate tax deduction allowed.
Without qualifying the Plan and the Grant – the default is Non Trustee Track.
Section 3(i)
Non‐Trustee Track
Ordinary Income Track
Capital Gains Track
Tax at grant
No
No
No
No
Tax at vest
Options – no; No
RSUs ‐ yes
No
No
Tax at exercise
Yes – for options No
No
No
Tax upon Sale of Shares
Yes
Yes
Yes
Yes
Section 3(i)
Tax Rate
Non‐Trustee Track
At exercise – Ordinary ordinary rates Income (up to 50%) (up to 50%)
Ordinary Income Track
Capital Gains Track
Ordinary Income (up to 50%)
For traded companies Gain divided: Original discount (FMV at grant minus exercise price) taxed at up to 50%; rest of gain taxed at 25%
For private companies –
25%
Upon Sale –
capital gain (25%)
Social Contributions
Yes, at exercise
Yes
Yes
Only on original discount portion
Corporate Tax Deduction
No
No
Yes, subject to chargeback arrangement
Yes, only on original discount portion and subject to chargeback
Most Common Track in Israel –
Capital Gain Track
Tax event:
Deferred tax event ‐ Upon selling the shares or their release from
the trustee to the employee. Vest of RSUs or exercise of options is
not a tax event in Israel.
The holding period:
In order to enjoy the lower tax rate, the employee must hold the
shares during a holding period of 24 months* from the grant date.
* It should be noted that it is possible to sell the shares during the
holding period, subject to a higher tax rate.
Google Trustee Grants
• Google elected the “Capital Gain Track” through a Trustee.
• The capital gain track provides significant tax benefit to the
employees.
• Google chose this tax track over the “Ordinary Income Track” in
which the tax rate for the employee is higher (marginal tax+
social security+ health care) but would provide Google with a
tax relief.
Broker accounts for Trustee Plan
• Google creates a Morgan Stanley stock plan account for every
Israeli employee.
• Employees may view unvested GSUs (RSUs) online.
• After GSUs vest, the Google shares are deposited at ESOP.
When the employee decides to sell shares, they sell them
through ESOP.
How can a Company qualify for the Capital Gain Track?
• Adopting an Israeli Addendum.
• Nomination of Trustee.
• Submission of forms to the Israeli Tax Authorities (30 day before the
first grant under the Plan).
• Applying to the Israeli Tax Authorities for:
– Approval for Supervisor Trustee (submission of a request per Tax
Ruling).
– Approval of RSUs (green path submission).
– USD index preference (a notification only).
On‐going Administration Required under the Capital Gain Track
• Onetime signature by each employee of an “Employee
Acknowledgment” (as required under the Israeli Ordinance).
• Receipt of report re any new grants, no later than 90 days from
the Grant Date, to the Trustee.
• The Trustee should maintain an up‐to‐date database (including
the tax calcifications).
• The Trustee should calculate and is responsible, with the
Company, to make withholding at source.
Trustee and Broker Partnership
Option Transactions
•
•
•
•
Trades are handled by equity plan broker.
Shares resultant from cashless exercise must be sent to trustee for
further tax tracking.
Cash resultant from cashless exercise must be sent to trustee for
further tax withholding.
Report details to include:
• Grant Date
• FMV/Sale Price
• Options Exercised
• Deductions (taxes and Commissions)
Trustee and Broker Partnership – Cont.
RSU Transactions
•
•
•
•
Vesting is processed.
Shares should be delivered directly to trustee for tax tracking rather than
held in participant US brokerage account.
If shares can not be sent to trustee, then when participant sells qualified
shares the funds need to be sent to the trustee for further tax withholding
(similar to option trades).
Report details to include:
• Award Date
• FMV at Vest
• Shares Vesting
• Deductions (taxes and Commissions)
Trustee and Broker Partnership – Considerations
• Good working relationship between your broker and trustee.
• Direct interaction is critical for the success of the trustee arrangement (Gets
you out of the middle).
• Has your broker worked with trustee before?
• Do they have the right tools and processes in place to help support and
facilitate this function for success?
• How to communicate this to your participants that things happen in two
locations:
–
–
–
–
Option Exercises ‐ Broker
Payment – Trustee
RSU Vesting – Broker
Sale Post Vesting ‐ Trustee
In Israel ‐ the Employer and the Trustee have an obligation to withhold tax at source per the equity Awards.
Various Roles in the administration of Google’s Plan in Israel
• Morgan Stanley (“MSSB”) –
Stock Plan Administrator
• ESOP – Excellence (“ESOP”) –
Israeli Trustee required per the “Capital Gain
Track”
Equity vehicles for Googlers in Israel
• RSUs –
Handled by MSSB and ESOP, as the Trustee. ESOP receives
the shares upon vest and the Googler sales the shares
through ESOP – EXCELLENCE, that then makes the relevant
tax deduction.
• Options –
Handled by MSSB and ESOP, as the Trustee. ESOP receives
from MSSB the proceeds after the sale (+ report) and make
the relevant tax deduction.
Challenges
• Building the process with the Stock Admin./Broker, in
compliance with the Israeli Tax requirements.
• Any Corporate Action–
ITA/possible ruling:
– Dividend – Google’s Class C
– Split
requires
notification
to
Challenges – Cont.
• Special transactions – Sale to Cover, Exercise and Hold and
Releases.
• Mobile Employees – double taxation/tax ruling
• Acquisitions – Waze acquisition required ruling
• ESPP
Examples on cross border cases
RSUs ‐ Inbound • When individuals move to Israel with grants received in another
jurisdiction, they are considered Non Trustee awards.
• The individual will be taxed at the sale of the awards.
• This could cause double taxation if all shares are not sold at the taxable
event in the other country.
• The award will be subject to income tax in Israel on the Israel source
income at a rate up to 50%.
• When additional already taxed shares are sold, Israel will subject the
Israel source income to income tax.
Examples on cross border cases – Cont.
RSUs ‐ Outbounds •When individuals leave Israel some conditions have to be met to break
residency from Israel.
•Once individuals leave Israel, depending certain conditions, they will have a
period of 6‐12 months called the “separation period”.
•Once the individual has separated from Israel a portion of the gain will be
exempt.
•During the separation period, Israel will still seek to tax the gain but in some
cases credits will be available.
•Amounts will be taxed differently depending on whether the shares were held
for a 2 year period or not.
•If the Israeli authorities have not agreed to exempt foreign income the full gain
will be subject to tax in Israel.
Examples on cross border cases – Cont.
NQ ‐ Inbound • When individuals move to Israel with grants received in another
jurisdiction, they are considered Non Trustee awards.
• They will be subject to income tax in full in Israel at the date the shares
are sold without regard to apportionment.
• This could cause double taxation if all shares are not sold at the taxable
event in the other country.
• The award will be subject to income tax in Israel at a rate up to 50%.
• If the award is also subject to tax in the country were the award was
granted there is potential double taxation.
• There is a different treatment for shares that have been held for two
years and shares that are sold after exercise.
Examples on cross border cases – Cont.
NQ ‐ Outbound
• When individuals move to Israel with grants received in another
jurisdiction, they are considered Non Trustee awards.
• They will be subject to income tax in full in Israel at the date the shares
are sold without regard to apportionment.
• This could cause double taxation if all shares are not sold at the taxable
event in the other country.
• The award will be subject to income tax in Israel at a rate up to 50%.
• If the award is also subject to tax in the country were the award was
granted there is potential double taxation.
• There is a different treatment for shares that have been held for two
years and shares that are sold after exercise.
Examples on cross border cases – Cont.
NQs ‐ Outbounds •When individuals leave Israel some conditions have to be met to break
residency from Israel.
•Once individuals leave Israel depending certain conditions they will have a
period of 6‐12 months called the “separation period”.
•Once the individual has separated from Israel a portion of the gain will be
exempt.
•During the separation period Israel will still seek to tax the gain but in some
cases credits will be available.
•Amounts will be taxed differently depending on whether the shares were
held for a two year period or not.
•If the Israeli authorities have not agreed to exempt foreign income the full
gain will be subject to tax in Israel.
Israeli Securities Requirements
• Basic Rule: Offering equity (including options, RSUs, and ESPPs)
requires a prospectus to be published, unless an exemption can
be relied upon.
• Other Award Types: SARs, bonus plans with stock metric?
• Statutory Exemption: Any company can offer equity to up to 35
individuals over a rolling 12‐month period.

No prospectus or filing required.

Aggregation rules?

Includes grants to non‐employees such as independent
contractors.
RSU – Example #1 (Tax Event after the Holding Period)
Average share price
30 trade days before allocation
$850
Sale price
Tax calculation
$1,000
$150
$850
Capital
Gain
Ordinary
Gain
RSU – Example #2 (breaching the Holding Period)
Average share price
30 trade days before allocation
$850
Sale price
Tax calculation
$1,000
$1,000
Ordinary
Gain
RSU – Example #3 (Sale price is lower than the Average Price)
Average share price
30 trade days before allocation
$850
Sale price
Tax calculation
$700
$700
Ordinary
Gain
THANK YOU!