Blocked stocks can be part of an incentive program for employees, but it is important to consider aspects of taxation and their impact on the net profit. In addition, it is advisable to know the difference between the way that these stocks are taxed in the United States compared to Israel.
Blocked stocks, or as they are originally known, restricted stock units or RSU for short, represent the right of the employee to purchase the company’s stock at predetermined conditions. Usually, the conditions determine that it would be possible to allow an employee to purchase the stocks once every certain period of time, like for example, as part of an incentive program.
When it comes to the employer, the advantage of using blocked stocks is a joint generated interest: because the employee once the stocks that they receive could be worth more, they have a clear interest for the company to make higher profits.
In any case, the agreement between the employer and the employee determines what the date for the stocks to be received by the employee automatically is. Alternatively, issues of taxation are external and there are of course differences between The United States and Israel.
Blocked Stocks in Israel
Article 102 of the income tax order determines that something that must be regarded is the date of selling the stocks originating from receiving and RSU as a tax event. Like in any such event, you must be familiar with the taxation aspects and calculate them when considering if this is a profitable action to take.
If the company in question is a public one and the employee had waited two years from the day of receiving the blocked stocks until the day that they were sold, the tax would be on the portion between the average price of the stock during 30 days before it was given to the employee.
This portion will be classified as work income or personal work and so the income tax paid would be according to the marginal tax rate that you need to pay. On the other hand, the rise in value above the average price of the last 30 trading days is, as mentioned, already considered capital gains – and so you will pay a set capital gains tax on it (which at the date of writing this today in Israel is 25 percent).
It is worth mentioning that whoever does not wait at least two years from the day they receive the blocked stocks from the employer until the date of selling them, will have to pay an income tax and all the profits made from selling the stocks.
What is Happening in the United States?
In the United States blocked stocks are taxed as if they are regular income. In Israel meanwhile, the taxation on a portion of the incentive is relatively low and only above a certain limit is the full set capital gains tax are paid, in the United States the taxation applies to the entirety of the rise in price.
In addition, in the United States treating the entirety of the rise in value of the blocked stocks as a paycheck means paying insurance rates and health insurance accordingly.
With all that being said, it should be pointed out that using RSUs as an incentive program for employees is attractive in any country because of its objective up – sides. Firstly, the employee receiving the blocked stocks does not pay for them. Secondly, the taxation on them is simple.
Despite the fact that in the United States it is higher than in Israel, it is uniform and not complicated. In order to receive the blocked stocks, all the employee needs to do is remain with the employer for a certain period of time. After that period of time, what is nicknamed “vesting” in American employment agreements, the stock becomes his property.
Who Needs to Pay the Tax in the United States?
Anyone who submits tax reports to the authorities in the United States is required to pay taxes. In most cases, submitting the tax report is a requirement by law as part of an having an American citizenship. Likewise, the law in the United States dictates that a tax report must be submitted even by those only have an American citizenship but do not reside in the United States.
The submission of the tax report is done once a year and hired employees from Israel might be subject to it because of relocation reasons, employment in an international company, and more.
It should be mentioned that the Israeli tax authorities are especially difficult when dealing with Israelis who have renounced their citizenship. One example of this is in the decision that determines that tax deduction should be imposed on workers leaving for relocation in the United States with options and units of blocked stocks.
According to the updated decision, the options would be taxed again even if they have already been used, sold, and taxed in full overseas. Although, there is an option to demand a tax refund from the foreign tax that was paid in the United States or other foreign countries – but only when it comes to options that have come to fruition during the workers stay in Israel.
What Can We Learn From the Different Taxation Repercussions?
Understanding the tax repercussions of blocked stocks in the United States, that as mentioned can be used only after a certain period of time, is a good opportunity for us to find out how much this is actually a tool that pays off as worker incentive.
Moreover, the difference between the Israeli system of taxation for blocked stocks and the way that it is done in other countries of the world must be considered for cases where the employer provides us with an option to choose between blocked stocks or options.
The main difference between options and blocked stocks is not the taxation, but the utilization addition. For example, every option has a utilization addition, that represents the price of buying the stock by the employee. In blocked stocks there is no utilization addition because they are handed out for free.
So, if the price of the stock goes down after the employee receives an option for example, it will not present the employee with any profit. But when it comes to blocked stocks there is no such issue, because RSU is done automatically on every fruition date and so the employee will always gain a profit. On the other hand, if the price of the stock goes down, the immediate profit of the employee will also be damaged.
In summation, different taxation aspects are a part of a larger system of considerations that employers and employees use when they want to use blocked stocks as part of an incentive program. In addition, they can also assist us in choosing a place to work and where to submit our tax reports.
