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14 March 2025

Israel issues professional circular on acceleration of vesting period for equity plans under Ordinance Section 102

  • The Israel Tax Authority has issued a new professional circular addressing the acceleration mechanisms for stock option vesting under Section 102 of the Israeli Tax Ordinance.
  • The circular clarifies the tax implications of different acceleration types, including single trigger, double trigger and termination-based accelerations, while distinguishing between cash and equity compensation tax treatments.
 

On 11 March 2025, the Israel Tax Authority (ITA) published a professional circular regarding the acceleration mechanism for the vesting period of stock options granted under Israeli Tax Ordinance (Ordinance) Section 102.

According to the circular, the ITA distinguishes between three different types of acceleration mechanisms.

Single-trigger acceleration: If the acceleration mechanism is included as an inherent part of the grant terms, under which unvested options will be accelerated and become vested upon the sale of all or a majority of the company's shares or assets (Exit Event) or upon an initial public offering (IPO), the acceleration will not be considered a violation of Ordinance Section 102. Consequently, the tax treatment under Section 102(b) will continue to apply.

Double-trigger acceleration: If the acceleration mechanism is based on two cumulative conditions — (1) an Exit Event and (2) termination of employment due to the Exit Event — unvested options will be accelerated and become vested if both conditions are met and the acceleration will not be considered a violation of Section 102 of the Ordinance. The ITA, however, distinguishes between the two following situations:

  1. Cash consideration. If, at the time of receiving the cash consideration, the acquiring company's stock price is lower than its price at the closing date of the Exit Event, the portion reflecting the decrease in value will be subject to taxation as regular employment income.
  2. Equity consideration. Stock-based compensation will continue to be taxed under Section 102(b) of the Ordinance.

Acceleration upon termination of employment (unrelated to an Exit or IPO Event): In cases where unvested options are accelerated due to employment termination that is not connected to an Exit Event or IPO, the income will be classified as regular employment income.

Implications

Taxpayers affected by these changes should ask their tax advisors for additional details on the new guidance and help navigating the process and implementing the changes.

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Contact Information

For additional information concerning this Alert, please contact:

EY Israel, Tel Aviv

Ernst & Young LLP, Israel Tax Desk, New York

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

Document ID: 2025-0688

 
 

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