The District Court of Tel Aviv ("Court") recently held
that the cost of grants of options to purchase shares in a parent
company ("Options") pursuant to Section 102 of
Israel's Income Tax Ordinance were to be considered
"costs" under an intercompany Research and Services
Agreement entered into by the subsidiary and its parent company,
pursuant to which the parent company paid the subsidiary on a
Based on the specific facts of the case, the Court held that the
cost of the Options were best classified as "costs expended in
the production of income", as the purpose of granting the
Options was to motivate the subsidiary's employees. The Court
also mentioned that the result was notwithstanding the fact that
the subsidiary was not entitled to deduct the value of the Options
as an expense for reasons related to the terms of the Section 102
Option plan benefiting the employees. The Court reached a similar
decision with respect to other social benefits provided by the
subsidiary, such as employee pensions, holding that as an objective
of these benefits was to motivate employees, they should also be
considered part of production costs and included in the
"cost+" calculation under the Research and Services
The Court rejected the argument that as an employee receiving
the Options could classify income from the Options as capital
income on tax filings, the same capital income classification
should be applicable to the subsidiary with respect to the Options.
The Court pointed to case law holding that there is no requirement
that payments be classified in the same manner by both payor and
payee, or in this case, by both employer and employee.
Finally, the Court also held that the fact that the parent
company (and not the subsidiary) had de facto granted the Options
to the subsidiary's employees was irrelevant, as the options
had been granted in order to motivate the employees of the
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Israeli tax law is changing regularly. There were various amendments to the Israeli Tax Code, including the reduction of tax rates. The following summarizes Israeli tax rates and other tax information for 2016.
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