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Israeli Government Lowers Tax on Startup Exits

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Thursday, April 21st, 2016

Company founders will pay 25-30% tax on the sale of their shares, instead of 48-50% in improved terms offered to high tech companies.

As reported in Globes;

The Israel Tax Authority is putting taxation on exits in order, after a period of uncertainty about taxes on the sale of shares in startups, following different rulings by courts classifying various payments to employees in the framework of exits as income from labor, rather than capital gains, on which taxes are less.

The Tax Authority said that when company founders sell their shares in their company (make an exit), but continuing working in the company, they will be taxed at only 25-30% on the sale of their shares. In other words, the proceeds from the shares count as capital gains, not income from labor.

The Tax Authority today stated that as part of the improved terms it was offering for mergers and acquisitions of high-tech companies, its professional department had published its decision to lower taxes on holdback proceeds in the sale of shares in companies, a very commonly used mechanism in high tech company deals.

In essence, this mechanism stipulates that part of the proceeds for certain shareholders in the company being sold will be paid subject to their continued employment in the company after the acquisition, thereby ensuring that key members of the company, such as founders, remain in it, so that the value of the acquisition itself is not affected.

The taxation decision makes it clear that subject to certain conditions, no change will take place in the taxation method for shareholders as a result of the implementation of this mechanism. The remuneration will be considered capital, not income from labor, meaning that the tax rate on the sale of shares will be only 25% (or 30% if a substantial shareholder is involved), instead of a 48-50% marginal tax rate (if a surtax applies).