Introduction
On March 11, 2025, the Israeli Tax Authority (ITA) released Position Paper 1/25 (the “Paper”), introducing a new interpretation of how double trigger acceleration provisions affect the tax treatment of equity awards under Section 102 of the Israeli Income Tax Ordinance (1961).
This update marks a significant shift from the ITA’s previous stance and provides greater certainty for companies and employees benefiting from equity-based compensation.
What is Double Trigger Acceleration?
Double trigger acceleration occurs when unvested equity awards (such as stock options or RSUs) become vested due to two specific conditions being met:
- The occurrence of an exit event, such as an IPO or company sale.
- The termination of employment following the exit event.
Previously, the ITA’s position was that double trigger acceleration disqualified awards from the preferential tax treatment under Section 102, effectively reclassifying the income as ordinary taxable income rather than capital gains.
The new Paper reverses this position, confirming that double trigger acceleration, when pre-defined at the time of grant, does not automatically violate Section 102’s tax benefits.
Key Tax Treatment Updates
Double Trigger Acceleration – Tax Implications
A. Unvested Awards Exchanged for Future Cash Compensation
If unvested awards are converted into future cash payments upon an exit event:
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If the purchaser’s share price at payment is equal to or higher than the price at transaction closing:
- The cash amount is fully subject to Section 102 tax treatment (typically lower capital gains tax rates).
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If the purchaser’s share price at payment is lower than at transaction closing:
- The percentage of decrease in value multiplied by the cash amount is taxed as ordinary income.
- The remaining balance is taxed under Section 102’s beneficial tax rates.
B. Unvested Awards Remain Outstanding or Are Replaced with New Equity Awards
- If the original equity awards remain in place or are exchanged for new equity awards following an exit event, the acceleration does not impact their tax classification.
- The original tax treatment remains intact under Section 102’s capital gains route.
- This is particularly important for companies structuring exit transactions to ensure continued tax benefits for employees.
Single Trigger Acceleration – No Tax Impact
- The ITA also clarified that single trigger acceleration (where vesting occurs solely due to an exit event, without termination of employment) does not affect the taxation of the equity awards.
- As long as the acceleration provision was pre-agreed at the time of grant, the equity awards continue to benefit from Section 102 tax treatment.
3. Acceleration Due to Termination of Employment (Unrelated to Exit Events)
- If acceleration occurs due to termination of employment alone, without an accompanying exit event, the ITA does not recognize the preferential tax treatment of Section 102.
- Instead, any income received from the accelerated equity awards will be taxed as ordinary income.
- This reinforces the ITA’s view that the purpose of Section 102 is to incentivize long-term employee retention and alignment with corporate performance, rather than to serve as a tax shelter for severance benefits.
Key Takeaways for Companies and Employees
- Double trigger acceleration no longer automatically disqualifies equity awards from Section 102 benefits, provided the acceleration terms were set at the time of grant.
- Future cash compensation linked to an exit event is subject to favorable tax treatment, unless there is a loss in share value, in which case a portion is taxed as ordinary income.
- Single trigger acceleration is tax-neutral, meaning it does not impact Section 102 eligibility.
- Equity awards accelerated purely due to employment termination are fully taxable as ordinary income, reinforcing the ITA’s stance that Section 102 benefits should not extend beyond incentivizing long-term employment.
Final Thoughts
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