Israel: Characterization of intragroup recharges for stock-based compensation

Israel: Characterization of intragroup recharges

Israel’s tax administration on 27 January 2021 released a tax circular as guidance intended to clarify the characterization of intragroup recharges for stock-based compensation from a tax perspective.



Many companies provide their employees with various forms of stock-based compensation that is often based on the equity of the group’s parent entity (or other listed entity in the group). In many cases, the group will implement a “recharge agreement” whereby the local subsidiary will reimburse the parent for the cost of its equity compensation.

In Israel, based on the local tax treatment of stock-based compensation expenses, recharges can be a material factor regarding the potential deductibility of stock-based compensation expenses for corporate tax purposes.

Recharges have also become more common following a 2018 High Court decision (Kontera Technologies Ltd. v. TA 3 Assessing Officer) that mandated the inclusion of the stock-based compensation expenses (per local GAAP) in the application of a cost-plus mechanism for related-party services, regardless of their eventual deductibility.

In recent years, the Israeli tax administration has placed a greater focus on recharge payments and the possibility that, in some cases, these payments may be classified as deemed dividends subject to withholding tax.

Circular 1/2021 details a number of criteria according to which intragroup recharges may be regarded as compensation (and not deemed dividends) including:

  • A classification as compensation will be allowed up to the level of the expense incurred for local GAAP purposes.
  • The recharge can be only be for equity grants that have already vested.
  • The recharge must be based on an intercompany agreement that was in place prior to the stock-based compensation grant and should be tied to the GAAP expense.
  • A classification of a repayment will be allowed only if the associated expense was included in the transfer pricing mechanism (if incurred in the context of related-party activity).
  • A recharge that does not meet these criteria will be deemed a dividend and subject to withholding tax—even if the recharge is to a group entity other than the ultimate parent (the circular is silent regarding how to determine what is the relevant jurisdiction for purposes of the withholding tax rate).

For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice in Israel:

David Samson | +(972) 3.684.8970 |

Itay Falb | +(972) 3.684.8000 |

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