ITA increased the tax of warrants that depend on an exit or IPO

ITA increased the tax of warrants that depend on an exit or IPO

According to a new circular of ITA (No. 18/2018), high-tech employees’ income out of sale of shares vested as a result of an exit or an IPO, will be taxed up to 50% as an employment income.

What does it mean? ITA has taken a stand that vesting of warrants that depends not only on a period lapsed but on a certain event, doesn’t meet the requirements of section 102 of Income Tax Ordinance for taxation as capital-based remuneration, as such event is uncertain and may never occur. So, this kind of warrants is classified as employee bonus and the income from their sale should be taxed as employee income, i.e. up to 50%.

How the Circular will influence the high-tech industry? The answer is very simple and short. If until now the owners of such warrants has been taxed flat 25% of their income from the sale, now they can pay up to 50% in the same circumstances.

It’s noted, that this kind of vesting is not frequent in stock option plans for employees. So, probably, the change of ITA’s policy won’t influence large number of employees in high- tech industry. However, the circular carries on the ITA’s trend of a much harder approach in the taxation of the stock options (following a recent change in policy regarding stock options of employees who have made a relocation abroad). Additionally, no transitional period has been set for the options that have already been allocated, and companies are forced to revise existing plans and separate the options that have already been vested from those that are still pending.