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!
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