ITA Clarifies Position on the Taxation of Section 102 Awards with “double-trigger” vesting provisions

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Newsletter March 2025

ITA Clarifies Position on the Taxation of Section 102 Awards with “double-trigger” vesting provisions

After years of uncertainty regarding whether “double-trigger” options qualify for Section 102 treatment, the Israeli Tax Authority (ITA) has finally published its updated stance. On March 11, 2025, the ITA issued Professional Position Notice No. 01/2025 (“the Notice”), addressing the tax implications of accelerated vesting mechanisms—both single and double triggers—within employee equity awards in the context of an IPO or exit event.

Below is a summary of the key aspects of the Notice:

a. Single-Trigger Acceleration

The ITA clarifies that a single-trigger acceleration mechanism—where unvested options automatically vest upon an exit event or IPO, provided this condition is set in advance—does not violate Section 102 and does not alter the tax treatment of the awards.

b. Double-Trigger Acceleration

For a double-trigger acceleration mechanism, where vesting is contingent upon both (i) an exit event and (ii) termination of employment due to the transaction, the ITA takes the position that the resulting gain may be split into two portions: a capital gains portion and an ordinary income portion.

The Notice specifies different tax treatment depending on whether the consideration is received in cash or stock:

  • Cash Consideration: Taxation is determined based on the acquiring company’s stock price at the time the employee receives the cash for selling shares subject to Section 102.
    • If the stock price at the time of payment is equal to or higher than at closing, the entire gain is taxed at capital gains rates.
    • If the stock price at the time of payment is lower than at closing, the gain is bifurcated into capital gains and ordinary income, with the ordinary income portion increasing in proportion to the stock price drop.
  • Stock Consideration: When consideration is received in the form of stock (e.g., options, RSUs, shares, or restricted shares) as part of an exit transaction, the tax advantages of capital gains treatment remain available.

 

Example:

Elie received double-trigger stock options in private Company A under Section 102 in December 2021 with a four-year vesting schedule. In January 2024, Company A was acquired by Company B, and Elie’s unvested stock options were replaced with equivalent options in Company B under a tax ruling that ensured that Section 102 would apply to the substitute options. In February 2024, Elie was terminated, triggering full acceleration of his options. He exercised and sold the shares for cash in March 2024.

    • If Company B’s stock price was $100 at closing (January 2024) and $50 at sale (March 2024), then 50% of Elie’s proceeds would be taxed as capital gains and 50% as ordinary income.
    • If Company B’s stock price at sale was $120—higher than at the exit—Elie’s entire gain would be taxed at capital gains rates.

c. Vesting Acceleration Due to Termination Alone

The ITA also states that if accelerated vesting is triggered solely by termination of employment (and not linked to an IPO or exit event), the resulting income will be classified as salary income and taxed at ordinary income tax rates under Sections 121 and 121B of the Ordinance.

Our Comments:

We find it important to highlight the following points:

  • The Notice is not legally binding. It merely represents the ITA’s position on the issues discussed.
  • Many aspects of the Notice, particularly the imposition of ordinary income tax on double-trigger options based on the acquiring company’s stock price, lack clear legal grounding. We anticipate that affected employees will challenge this position in the coming years.
  • However, we assume that most employers will abide by the Notice, in order to avoid this issue arising in withholding audited.
  • The methodology used to determine taxation of cash consideration assumes that the acquiring company’s shares are publicly traded. However, in cases where the acquirer is a private company or fund, the valuation process becomes unclear.
  • The silver lining: Despite the tax uncertainties, the Notice confirms that double-trigger options are not disqualified from Section 102 treatment, ending years of ambiguity on this issue.

For more information, you can contact Yair Benjamini or Ariel Schaffer from our firm.

This memo’s objective is to inform you of general information on various topics. The law’s provisions themselves are more complex and include additional exceptions. Accordingly, the foregoing in this memo should not be implemented without consulting the relevant professional