Recent Amendment to the Income Tax Rules under Section 102
On September 17, 2024, an amendment to the Income Tax Rules (Tax Benefits in Allocating Shares to Employees), 2003 (the “102 Rules“), was published (Hereinafter: “the Amendment“). The Amendment shall become effective as of January 1, 2025.
Generally, the Amendment somewhat increases the complexity of filing trustee-track equity plans with the ITA, adding a questionnaire as an additional requirement to filing. The inclusion of the questionnaire is aimed at assisting the ITA to discover plans which include terms that the ITA could find objectionable.
Additionally, the Amendment includes an update of the requirement to annual and periodical reports by the trustee and the employing company, a requirement which was suspended shortly after it was first introduced in 2003. Based on unofficial information, it seems that the ITA plans to complete the move by implementing a computerized reporting system which will allow companies to file the annual and periodical reports.
Here are the main aspects of the Amendment:
1. Submission of Trustee-Track plans:
The procedure for filing a new plan has been changed. The updated procedure is submitting the following two forms:
A. “Application for the approval of an Allocation plan” – the form that has already been in use prior to the Amendment was updated and expanded in the Amendment to include additional technical details.
B. Answers to a questionnaire (marked as Appendix D of the new Rules) (free translation into English of said questionnaire is attached to this update, for your convenience – Amendment to the 102 Rules – New Questionnaire – Appendix D).
The questionnaire includes many questions regarding issues that the ITA often views as disqualifying a plan from trustee-track treatment, even if Section 102 does not explicitly forbid plans from including these provisions. For instance, the questionnaire requires information of plans which allow:
The questionnaire is intended to draw the attention of the ITA to these issues, where prior to the amendment there was no obstacle to file plans including similar provisions (other than the ITA’s ability to object to such plans within 90 days of submission).
Note however, that highlighting these issues questionnaire does not, by itself, disqualify the plan from trustee-track eligibility. The mechanism of implied approval of the plan in the absence of an answer by the ITA within 90 days from the submission of the application remains intact. Hence, it remains up to the ITA to review the questionnaire and decide whether to approve the plan.
The new procedure for filing as detailed above will apply to plans submitted on January 1, 2025, or thereafter.
With respect to existing plans – prior to the Amendment, it was unclear in which cases a change of the plan or of the terms of the award granted thereunder was substantial enough to trigger the requirement to refile the equity plan with the ITA. The Amendment explicitly states that any change in the terms of an existing grant, which would have changed an answer to any question in the questionnaire – will automatically trigger the requirement for the submission of a new application for the approval of the plan (including, inter alia, limiting the possibility of new grant of shares during the 30 days following the submission).
Please note that according to the new questionnaire – any plan which is not written in either Hebrew or English, must be translated into Hebrew and the translation should be submitted to the ITA as part of the application for approval of that plan.
2. Annual and Quarterly Filings
Under the amendment, companies and trustees are required to file the following reports:
We will be happy to further clarify should you have any additional questions regarding the Amendment.
Yair / Ariel
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