What is a "green track"?
A ‘Green Track’ is a streamlined process whose primary goal is to shorten procedures with the tax authority in certain areas. This process is designed to establish predefined frameworks and criteria, allowing the tax authority to make a taxation decision based on the declarations and commitments of the applicants, through the filling and submission of a specific form for each type of request. The specific forms for each request are constructed in a fixed template of general details, a description of the facts, a detailed request, the requested tax arrangement and its terms, and a declaration and commitment. Our office handles all stages of the request, starting from the submission stage up to the receipt of the required tax decision, including assessment discussions and representation in front of the professional department at the tax authority, while paying attention to accuracies and important points that could prevent significant exposures. In this article, we will focus on the area of employee options and shares.
Detail and explanation of the forms found within the Green Track.
Form 906: Allocation of Units for Share – RSU (Restricted Stock Unit)
For RSU share allocations to be included under the tax tracks of Section 102 of the Income Tax Ordinance (the Ordinance), it is required to approve this before allocating the shares to employees and to establish that these shares will become options in the future of the employees. Only then, after the vesting period, will it be possible to apply the tax provisions of Section 102 of the Ordinance to the shares, even though these are shares at the time of their allocation without any additional realization from the employees.
To view the form, click here.
Form 911: Repricing of Employee Options
This is a request from the tax authority’s manager intended to regulate anew the pricing of employee options in cases where a change has occurred in the benefit to employees, such as when the market value of the company’s shares drops or for any other reason.
To view the form, click here.
Form 912: Net Exercise of Options for Employees in a Public Company (NET EXERCISE)
The purpose of this referral to the tax authority with a request to be included in the Green Track is to ensure that the tax liability of the employees at the time of exercising the options is not adversely affected by the implementation of a net exercise mechanism. Net exercise is a taxation mechanism that taxes only the amount of the benefit, simplifying the direct taxation procedures and bypassing the technical process of option allocation, share purchase, sale, and taxation.
To view the form, click here.
Form 916: Switching from Section 3(i) Option Plan to Section 102 Capital Track with a Trustee
Section 3(i) of the Ordinance defers the tax obligation on the benefit received by a controlling shareholder until the options are exercised, subject to meeting certain conditions. An allocation track under Section 3(i) is taxed at employment income rates, which can be as high as 50%. This request is intended to switch the option plan allocated under Section 3(i) to an option plan under Section 102 of the Ordinance, a capital track with a trustee for controlling shareholders who are also employees. The choice of the allocation track at the time of allocation is crucial in terms of the taxation of the shares at the time they are exercised. Therefore, it is important to consult with a professional expert in the field before choosing the allocation track.
To view the form, click here.
Form 917: Switching Option Plans from Non-Trustee to Trustee-Based
There are various types of employee option allocation plans. This request is designed to change the allocation track from a non-trustee to a trustee-based employee option allocation plan. This means that the trustee holds the options allocated within the framework of the allocation and acts as the tax authority’s executing hand against the allocating company.
To view the form, click here.
Form 922: Adjustment Mechanisms for Changes in Capital, Distribution of Benefit Shares, and Dividends
This request is intended to protect the level of benefit for the employee in the case of a decrease in the share value at the time of exercising the options compared to the share value at the time of receipt. For this purpose, adjustment mechanisms have been set up to address changes in the company’s capital structure as a result of capital changes and/or distribution of benefit shares and/or distribution of dividends/rights.
To view the form, click here.
Form 926: Allocations to Employees under an ESPP (Employee Stock Purchase Plan) with a Trustee
This request is designed to apply the provisions of Section 102 of the Ordinance to the shares issued to employees under the ESPP in the capital gain track with a trustee. This involves a compensation plan for employees who have the right to purchase shares of the parent company where they are employed and have voluntarily made payments from their salary (exercise premium) during the option vesting period.
It should be noted that there is also Form 927, which serves the same purpose, but should be filled out when there is no trustee.
To view Form 926 (with trustee) click here.
To view Form 927 (without trustee) click here.
Form 928: Exchange of Options/Shares Allocated as Part of a Company Share Sale Transaction
In the case of a Merger/Acquisition Involving a Company that Has a Share Allocation Plan under Section 102 of the Ordinance, it is crucial to obtain a tax decision to preserve the continuity of the employee’s rights under the existing plan, while canceling the options and allocating equivalent options for the rights that were canceled. To obtain this decision, certain conditions detailed in the ‘Green Track’ must be met to maintain the continuity of rights under Section 102 of the Ordinance.
To view the form, click here.
It is important to be mindful and consult with professionals who specialize in all aspects of employee option taxation even at the decision-making stage of a new allocation/change in an existing allocation. This is due to the importance of complying with the conditions and restrictions of Section 102 of the Ordinance to apply the preferred tax rules of Section 102. Contact us, and we will coordinate an introductory meeting with you as soon as possible.
