As part of a series of incentives designed to encourage IPOs in Israel of R&D companies, Section 102 of the Israeli Income Tax Ordinance ("Section 102") has been amended ("Amendment"). The Amendment enables employees of Israeli R&D companies that are also controlling shareholders to enjoy lower tax rates with respect to shares received through the exercise of employee stock options ("Securities") provided that specific conditions are met, including that the employing company will be registered on the Tel Aviv Stock Exchange ("TASE") for the first time between 1 July 2016 and 30 June 2019 inclusive ("Amendment Period").
Prior to the Amendment, under Section 102 employees could enjoy a tax rate of 25% with respect to Securities, unless they were also controlling shareholders in which case a higher tax rate generally applied. The Amendment clarifies that for the purpose of Section 102, the term "controlling shareholder" in a research and development company that will be listed on the TASE within the Amendment Period (and meets several other criteria) is deemed not to include an employee in such same company, to the extent that a Security was granted in the context of the employee's employer-employee relationship. This effectively provides the controlling shareholder with the same tax benefits available to other employees.
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