The ITA published a tax ruling summary that presents its current position (as of June 2017) with respect to the tax treatment of inbound and outbound transferees holding equity awards. The decision, which relates to a NASDAQ traded Israeli company, is noteworthy because it provides somewhat disparate treatment for inbound and outbound transferees and conflicts with previous guidance.

According to the summary, in the case of employees who have transferred out of Israel prior to sale, the gain at sale of shares acquired pursuant to an award granted under Section 102 will be subject to tax withholding by the trustee as if the employee was still an Israeli tax resident. A tax credit will be permitted for foreign tax paid on the "non-Israeli portion" of the gain.

Based on recent discussions with the ITA, the employee may also be entitled to a refund of Israeli tax paid on the non-Israeli portion if the foreign tax due exceeds the Israeli tax withheld. The Israeli portion of the gain is computed by multiplying the total gain by the ratio of the number of days between the departure date and the grant date (or vesting, if earlier) divided by the number of days between the sale date and grant date.

In contrast, awards granted to employees before transferring into Israel will be characterized as Section 3(i) awards. As a result, upon exercise of an option or vesting of an RSU, the employee will be subject to Israeli income tax at marginal rates and likely subject to social security and health tax. Furthermore, upon sale of the shares, the employee will be subject to Israeli capital gains tax on the difference between the sale price and market value of the shares at exercise/vesting. Withholding by the Israeli employer is required at exercise of options and vesting of RSUs.

The ITA's prior position was that awards granted to an employee who later relocated to Israel could be treated as non-trustee track awards under Section 102. As a result, they were not taxed until sale, at which time ordinary income tax applied (no portion of the gain was eligible for capital gains treatment) and the employer was required to withhold applicable taxes. We note that income tax treaties may change the treatment described above.