PART FIVE "A": SHARE ALLOCATIONS TO EMPLOYEES

Share allocations to employees
102. (a) In this section –
"choice" – an employer company's choice of one of two courses of
taxation for share allocations to employees through a trustee – the work
income course or the capital gains course;
"controlling member" – as defined in section 32(9);
"share allocation through a trustee" – the allocation of an employer
company's shares to an employee, on condition that the employee is
not a controlling member of it at the time of the allocation and
thereafter, and that all the following conditions are complied with:
(1) the shares, including any right vested by virtue of them, were
deposited with a trustee at the time of their allocation, at least
until the end of the period;
(2) the company informed the Assessing Officer of its choice as part
of its application for the plan's approval, which was submitted at
least 30 days before the date of the allocation;
(3) the allocation plan and the trustee were approved by the
Assessing Officer, but if the Assessing Officer did not reply within
90 days after he received the notification, then the allocation plan
or the trustee, as the case may be, shall be deemed to have
been approved;
"employer company" – any of the following:
(1) an employer that is an Israel resident company or a foreign
resident company with a permanent enterprise or a research and
development center in Israel, if the Director so approved (for this
purpose: the employer);
(2) a company that is a controlling member of the employer or of
which the employer is a controlling member;
(3) a company, if the same person controls it and the employer;
"date of realization" –
(1) in respect of a share allocation through a trustee – the date on 145
which the shares are transferred from the trustee to the
employees or the date on which the shares are sold by the
trustee, whichever is earlier;
(2) in respect of a share allocation not through a trustee – the date
on which the shares are sold, including the sale of a share that
stems from the right to acquire it;
"share" – including the right to acquire a share;
"share listed for trading on an Exchange" – including a share in a
company, all or some of the shares of which are listed for trading on an
Exchange in Israel or abroad;
"trustee" – a person approved by the Assessing Officer as trustee for
purposes of this section, including an employee;
"employee" – including an officer of the company, but exclusive of a
controlling member;

"value of benefit" – the consideration or the value at the time of the
realization, less expenses incurred by the employee in acquiring the
share, adjusted from the day of issue until the date of the realization,
and also expenses incurred by the employee in respect of the sale;
"end of the period" – each of the following:
(1) if the company chose the work income course – a period of 12
months after the day on which the shares were issued and
deposited with the trustee;
(2) if the company chose the capital gains course – a period of 24
months after the day on which the shares were issued and
deposited with the trustee;
(3) in the case of an involuntary sale, as defined in section 103 – the
date of the said sale.
(b) An employee's income from an allocation of shares in the employer
company through a trustee shall not be charged tax at the time of the
allocation, and the following shall apply on the date of realization:
(1) if the employer company chose the work income course, then the
employee's income shall be deemed income under section 2(1)
or (2), as the case may be, in the amount of the value of the
benefit;
(2) if the company chose the capital gains course, and if the trustee
held the shares at least until the end of the period, then the
employee's income shall be deemed a capital gain in the amount
of the value of the benefit, and on it he shall be charged tax at the
rate of 25%;
(3) notwithstanding the provisions of paragraph (2), if the allocated
share is a share that is listed for trading on an Exchange or a
share in a company, the shares of which were listed for trading
on an Exchange within 90 days after the allocation, then the part
of the value of the benefit in the amount of the average value of
the company's shares on the Exchange at the end of the 30
trading days before the allocation or at the end of the 30 trading
days after the said listing for trading, as the case may be, less
expenses, shall be deemed income under section 2(1) or (2), as
the case may be, and the balance of the value of the benefit shall
be deemed a capital gain that is liable to tax at the rate of 25%,
on condition that the amount determined to be income under
section 2(1) or (2), as aforesaid, does not exceed the value of the
benefit at the time of realization; for the adjustment of expenses 146
incurred by an employee in acquiring the allocated share, said
expenses shall be multiplied by the index on the day of the
allocation or on the day of listing for trading, as the case may be,
and divided by the index on the day of the expenditure, and all
shall be adjusted from the day of the allocation or of the listing
until the date of the realization.
(4) Notwithstanding the provisions of this section, if the company
chose the capital gains course and the date of the realization
comes before the end of the period, then the employee's income
shall be deemed to be income under section 2(1) or (2), as the
case may be.
(c) (1) An employee's income from an allocation of shares that is not an
allocation through a trustee shall be charged tax at the time of the
allocation as income under section 2(1) or (2), as the case may
be, and at the time of the realization as income said in Part Five
or in Part Five "C", as the case may be.
(2) Notwithstanding the provisions of paragraph (1), an employee's
income from the allocation of a right – not listed for trading on an
Exchange – to acquire a share not through a trustee shall not be
charged tax at the time of the allocation, and at the time of the
realization it will be charged tax as income under section 2(1) or
(2), as the case may be,.
(d) (1) When shares are allocated as said in subsections (b)(1) and (3)
and (c)(1), then the company that employs that employee will be
allowed to deduct the said allocation as a wage expense, in the
amount of the employee's income under section 2(1) or (2), or in
the amount of its participation, which it was charged because of
its obligation to the allocating employer company, whichever is
lower, and all that in the tax year in which tax was deducted in
respect of the employee's income and transmitted to the
Assessing Officer.
(2) The company shall not be allowed any expense in respect of the
sale of a share, in respect of which the employer company chose
the capital gains course, even if the share was sold before the
end of the period said in subsection (b)(4).
(e) The provisions of section 3(i) shall not apply to share allocations to
employees in an employer company, including undertakings to allocate
as aforesaid.
(f) Notwithstanding the provisions of section 100A, the rate of tax that shall
apply to the chargeable part of the profit of an employee who ceased
being an Israel resident, as defined in that section, shall be at the tax
rate prescribed in section 121, in each of the following instances:
(1) in the case of a share allocation through a trustee, in respect of
which the company chose the work income course;
(2) in the case of a share allocation through a trustee, in respect of
which the company chose the capital gains course, but the share
was realized before the end of the period;
(3) in the case of a share allocation not through a trustee, to which
the provision of subsection (c)(2) applies .
(g) The choice under this section shall apply to every employee to whom
shares were allocated, and to every share allocation in the year after
the end of the year of the first allocation, and thereafter as long as the
company did not make a different choice; a company shall be entitled to
choose differently only if a year has passed since the end of the year in 147
which the first allocation was made after the previous choice.
(h) The Director may prescribe any of the following:
(1) conditions in respect of the allocation;
(2) provisions on charging with tax an employee, in respect of whom
all or some of the conditions prescribed in and under this section
were not complied with because the shares were realized by
involuntary sale;
(3) repealed;
(4) rules on the allocation of shares to a foreign resident employee in
respect of the period of his work in Israel;
(5) rules for the deduction of tax at the source and the submission of
reports by the employer company and the trustee, and setting
times for their submission.