Following recent amendment to the Income Tax Regulations (Tax Relief in Employee Stock Allocations), 2003, updated on 17 September 2024 and effective as of 1 January 2025 (the Amended Regulations), the Israel Tax Authority (ITA) has published new guidance and a professional circular:

1. On 5 December 2024, the ITA released a guideline (Guideline) detailing the submission process for employee equity incentive plans (Equity Plan) for approval by the tax assessing officer.
2. On 9 December 2024, the ITA issued Professional Circular No. 01/2024 (Circular), which provides further clarification on submitting Equity Plans via trustees under Section 102 of the Israeli Tax Ordinance (ITO).

Key changes effective 1 January 2025

Online submission requirements

Starting 1 January 2025, all Equity Plans must be submitted exclusively through the ITA's online system, the "Employee Stock Plan Submission System" (the System). Manual submissions will no longer be accepted.

• Submission timeline: Applications must be submitted at least 30 days prior to the first allocation under the Equity Plan.
• Required documentation: Submissions must include the Equity Plan and supporting materials, including Appendices A, B, the updated Appendix C, and Appendix D. Appendix D is a computerized questionnaire designed to identify potential deficiencies (Red Flags).

Red Flag compliance

The Circular explains the purpose of the Appendix D questionnaire. Any flagged responses will trigger a more thorough review by the tax assessing officer, and the Equity Plan will be deemed unapproved until satisfactory explanations and supporting documentation are provided.

Submission limitations

Incomplete or illegible submissions will not be considered as filed. Review will only begin after all required documents are submitted.

Post-submission amendments or additions are not allowed. However, applicants may cancel and resubmit applications before formal approval or rejection.

Material changes to an approved Equity Plan must be resubmitted for approval, while technical amendments may still be updated via a manual notice to the tax assessing officer, including a revised plan with changes shown in "Track Changes."

Applicability to previous plans

Equity Plans submitted manually before the Amended Regulations take effect (Previous Plans) will continue to be reviewed under prior practices at the time of the company's assessment. As stated above, amendments to these plans, whether technical or material, will require manual updates submitted to the relevant assessing officer.

Noncompliance consequences

Equity Plans that fail to meet the updated submission requirements will be treated as non-trustee allocations, subject to the provisions of Section 102(c) of the ITO.

Reporting obligations

The Circular emphasizes that, commencing 1 January 2025, the following electronic reporting requirements to be implemented and enforced with respect to all Equity Plans (i.e., including Previous Plans) for allocations under an approved Equity Plan — via the trustee, or for allocation under an unapproved Equity Plan — via the employer:

• Form 146: Quarterly reporting of allocations made during the quarter, effective Q1 2025
• Form 156: Annual reporting of allocation balances as of December 31, starting with the 2024 tax year

Implications

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