The ITA published a new Tax Circular Regarding Taxation of Holdback Payments and of the Reverse Vesting Mechanism in the Context of Mergers & Acquisitions
We write to inform you that the Israeli Tax Authority (the “ITA“) has recently published a tax circular (the “Circular“) on the tax treatment of holdback payments and of the reverse vesting mechanism in the context of merger and acquisition transactions.
According to the Circular, subject to certain conditions, that will be detailed 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%).
The following is a summary of the conditions set out in the Circular:
In general, the mechanism aims to ensure that founders and key employees of a company will continue to work for the company and act for its benefit by imposing restrictions on their shares for a certain period of time – restrictions which are removed (in stages or at one time), subject to their continued employment with the company. The following summarizes the conditions that were set out in the Circular which, if fulfilled, will result in the classification of the sale of the shares under the reverse vesting mechanism as a capital gain and not as employment income:
In general, a holdback consideration is a mechanism in which part of the consideration from the sale of the founders/key employees’ shares is paid to them in stages during a defined period of time following the closing date of a transaction, subject to their continued employment with the company.
The following summarizes the conditions that were set out in the Circular which, if fulfilled, the consideration paid to the founders/key employees pursuant to the holdback arrangement that is part of the share purchase transaction will be classified as capital gain and not as employment income:
It should be noted that if the share price paid to the founders/key employees is higher than the share price paid to other entitled shareholders of the company (excluding interest or profits of the holdback consideration), such difference will be subject to employment income taxable at a marginal rate (up to 50%).
Please contact us with any questions:
Adv. Anat Shavit firstname.lastname@example.org +972.3.6944162
Adv. Keren Alon email@example.com +972.3.6944203