ESOP in Israel: A Guide to Section 102 Trustee Track
Under the Section 102 capital gains track, employee options are deposited with a trustee for at least 24 months, and the gain is taxed at a flat 25% when the shares are sold (for listed companies, the part reflecting the share price at grant is taxed as salary), rather than as salary at marginal rates. There is no tax event at grant or at exercise while the shares stay with the trustee. Controlling shareholders holding 10% or more are excluded.
The Capital Gains Track (Trustee)
This is the most popular route for tech companies. Requirements:
Trustee: Options must be deposited with a trustee for at least 24 months.
Filings: The plan must be filed with the Tax Authority 30 days prior to the first grant.
Employees Only: Applies to employees and office holders (excluding >10% controlling shareholders).
Taxation Mechanism
At Grant: No tax event.
At Exercise: No tax event (if shares are still with the trustee).
At Sale: Taxed at a flat rate of 25% (plus Surtax where the employee's income crosses the threshold). For a listed company, the part of the gain up to the average share price in the 30 days before the grant is taxed as employment income.
Compare this to the alternative: Without Section 102, options are taxed as regular salary income (up to 50% + National Insurance).
When is tax paid on Section 102 trustee-track options?
Not at grant, and not at exercise while the shares remain with the trustee. Tax is due on sale, at a flat 25% on the capital gain, plus Surtax where the employee crosses the threshold. For a listed company, the part of the gain reflecting the share price at grant is taxed as salary.
How long must the options stay with the trustee?
At least 24 months. The plan must also be filed with the Tax Authority 30 days before the first grant.
Can a company founder receive options under the capital gains track?
Not if they are a controlling shareholder holding 10% or more. The track is limited to employees and office holders who are not controlling shareholders.