We write to inform you that the Israeli Tax Authority (the “ITA”) has recently published a draft circular (“Draft Circular”) on the tax treatment of holdback payments and reverse vesting mechanism in the context of merger and acquisition transactions.
According to the Draft Circular, subject to certain conditions as will detail below, the sale of shares to which holdback payments and reverse vesting mechanisms apply would be subject to a capital gains tax rate of 25% (30% in case of controlling shareholders). This is in contrast to the ITA’s previous position which attributed consideration for continued employment of founders and key employees as employment income taxable at a marginal rate (up to 50%).
