Background

In recent years, several multinationals began granting equity-based rights in Luxembourgian SCAs (société en commandite par actions), which are essentially partnerships limited by shares.

Under Section 102 of the Israeli Tax Ordinance (respectively: "Section 102" and the "Ordinance"), the favorable tax treatment under Section 102 cannot apply to partnerships, but only to legal entities with distinct characteristics of a "company", as applicable under the Israeli Companies Law, the Ordinance and applicable tax circulars.

Accordingly, absent a favorable tax ruling, employees receiving equity awards in a SCA, would have been subject to tax as 'earned income' (i.e., up to 50% + Israeli Social Security and Health Tax) and not as 'capital gains' (25% for privately held companies) at the date of receipt of shares, or at the date of exercise of options, as the case may be.

The Tax Ruling

Due to the unique characteristics of a SCA and after lengthy discussions with the Israeli Tax Authority, the GKH Tax Department was able to secure a favorable tax ruling stating explicitly for the first time in Israel, that employees receiving rights in a SCA will be entitled to the beneficial tax treatment under Section 102.

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