⚠️  The tax information below is an extremely brief summary for standard situations of the referred relationship, and each situation may of course be different from the norm and have its own specificities. ⚠

A more comprehensive set of information for this country and work relationship is available on Easop.

If you’re looking for more detailed information in this country (or if you are just curious about our global compliance offering and pricing), get in touch with us and we’ll tell you more about it! 💡

✅ Yes, you can grant non-qualified stock-options (NSO) to EoR employees in Israel, but there are a few things to be done to be compliant.
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In a nutshell, what does taxation look like?

• At grant 👉 Theoretically, the value of stock options at grant is considered as taxable income. However, the grant of stock options may not be considered as a taxable event under certain conditions.

• At exercise 👉 If the stock options have been taxed at grant, no taxation at exercise. If the stock options have not been taxed at grant, the fair market value of the stock options at exercise will be considered as taxable income.
  
  
• At sale 👉 The sale gain is considered as taxable income. Different tax rates apply depending on the means of control of the grantee. The sale gain will be (i) the difference between the fair market value of the stock options at grant and the sale price, if they have been taxed at grant (and not at exercise); or (ii) the difference between the fair market value of the stock options at exercise and the sale price, if they have been taxed at exercise (and not at grant).

💡 A way to reduce taxation for the grantee would be to allow the grantee to “early exercise” the stock options (i.e. exercising stock options that have not vested yet) but early exercises are not always easy to manage from the company’s perspective and on the grantee's side it may increase the risks of paying an exercise price (and taxes thereon) on something which may happen to be eventually worth nothing later down the road.

✅ Yes, you can grant non-qualified stock-options (NSO) to contractors in Israel.

Note that granting stock options to contractors could increase the misclassification risk (i.e. the contractor relationship being requalified as an employer-employee relationship, with all tax consequences that can go with it). This will never be the only factor though, what counts primarily for determining the degree of misclassification risk are factors relating to the modalities of the services performed (control over the contractor’s work, exclusivity, term of the services, etc.).

In a nutshell, what does taxation look like?

Generally, taxation is not entirely clear as stock options have been initially regulated for employees only, and taxation often depends on the legal form chosen by the contractor to perform their activities.

• At grant 👉 Theoretically, the value of stock options at grant is considered as taxable income. If the grantee is a corporation, the taxable income will be subject to corporate tax. However, the grant of stock options may not be considered as a taxable event under certain conditions.

• At exercise 👉 If the stock options have been taxed at grant, no taxation at exercise. If the stock options have not been taxed at grant, the fair market value of the stock options at exercise will be considered as taxable income. If the grantee is a corporation, the taxable income will be subject to corporate tax.
  
  
• At sale 👉 The sale gain is considered as taxable income. If the grantee is an individual, different tax rates apply depending on the means of control of the grantee. If the grantee is a corporation, the sale gain will be subject to corporate tax rate. The sale gain will be (i) the difference between the fair market value of the stock options at grant and the sale price, if they have been taxed at grant (and not at exercise); or (ii) the difference between the fair market value of the stock options at exercise and the sale price, if they have been taxed at exercise (and not at grant).

💡 A way to reduce taxation for the grantee would be to allow the grantee to “early exercise” the stock options (i.e. exercising stock options that have not vested yet) but early exercises are not always easy to manage from the company’s perspective and on the grantee's side it may increase the risks of paying an exercise price (and taxes thereon) on something which may happen to be eventually worth nothing later down the road.