U.S. Tax Seminar The Ins and Outs of Relocating to the U.S.

25 November 2013

Vered Kirshner, Tax Partner

Yair Zorea, Tax Partner

www.pwc.com/il

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Agenda

• Pointers

• Individual Taxation / Tax Residency (domestic laws)

• Israel-U.S. Double Tax Treaty

• Relocation Considerations

• Israeli Exit Tax (100A)

• Stock and Stock Based Compensation

• Illustrative Scenarios

• Points to take away

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Ask!

Plan!

Mitigate!

Double taxation

State and

Local taxation

Dual residency

Short-term relocation

Social Security

Tax equalization

Exit Tax

Foreign Tax Credit

Pointers

Breaking residency

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• Non-U.S. tax resident

• Non-Israeli tax resident

Individual Taxation

• Israeli tax resident

• U.S. tax resident

Taxed in Israel on worldwide

income;

Foreign Tax Credit (FTC)

generally available

(Federal & State)

Taxed in Israel on Israeli

source income (e.g., work

performed in Israel)

Taxed in the U.S. on

worldwide income

Taxed in the

U.S. on income from U.S. sources (e.g., U.S. workdays for employees)

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Tax Residency - domestic tax laws

• “Failure” to meet the number of days test ≠ Israeli tax nonresident

• At least 183 days outside Israel (period of 2 years) and center of life outside Israel in the following two years (4 years total)

Non-Israeli tax resident from day 1!

• Might be an Israeli tax resident after relocation date, until the tax residency has ceased. No clear guidance

• U.S. State & Local tax residency may differ; each State has its own tax residency rules

Israeli Tax Resident

Quantitative criteria - Number of days test (refutable

presumption)

Key test: qualitative considerations - “center of vital

interests”; employment, habitual residence, economic ties, etc.

U.S. Tax Resident

Citizenship

Permanent residency / “green card”

Substantial presence test: Number of days formula

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Tax Residency - Israel-U.S. Double Tax Treaty (DTT) Tie Breaker rules

Competent

authority

Citizenship

Habitual abode

Center of vital interests (closest personal and economic relations)

Permanent home

State!

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Relocation Considerations

• Factors in breaking Israeli tax residency (permanent home, substantial economic interests, memberships in organizations, medical insurance, etc.)

• Social Security

• Filing and reporting obligations in Israel

• Credit for foreign taxes paid (asymmetric between jurisdictions)

• Returning / Senior Returning residents ‘benefits’

• U.S. Exit tax

• Estate and gifts tax

• Source of income

• Taxing right (first/residual)

• Allocation of income cross-jurisdictions

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Israeli Exit Tax (100A) Upon Relocation • Exit tax when Israeli tax residency is terminated

• Capital assets (e.g., investment in marketable securities, including options/stocks) are deemed to have been sold a day before the termination of Israeli tax residency

• Where exit tax was not paid upon residency termination, it shall be deemed to have been postponed until the capital gains are actually realized – ability to utilize FTC ?

• Under Section 102, when options are considered sold upon Israeli residency termination prior to the end of the restricted period:

102 CG

Overrides the Tax Treaty (?)

- If 100A was triggered, and the options were held by the Trustee for less than two years, gain derived during the Israeli residency period is subject to tax at marginal tax rate (Holding Approach) – application?

- If 100A was not triggered - subject to tax upon disposition (pro-rata)

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Holding Approach / Vesting Approach – Israeli Viewpoint

Grant Date Vesting Ends

U.S.

Exercise & Sale

Israel

1.5 years 1.5 years 1 year

Assume: Total gain is $100

Holding Approach: 1.5 years = 37.5% x 100 $37.5 taxable gain 4 years Vesting Approach: 1.5 years = 50% x 100 $50 taxable gain 3 years

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Stock Based Compensation - Options Relocation Aspects

Grant

Vesting

Exercise

Sale

Potential Double Taxation ! • Timing of taxable event

differs

• Different income

classification

(Capital Gain /

Employment Income)

“Option life”

Cycle

?

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Non-qualified (NQ)

Stock Based Compensation - Options U.S. Viewpoint

X X X CG tax rate (if held until the end of the statutory holding period); marginal

tax rates otherwise

Grant Vesting date Exercise Sale

Ordinary income - marginal tax rate

CG tax rates X X

Qualified Incentive Stock Option (ISO) U.S.

Preferential tax treatment (generally Capital Gains Tax, ‘CG’)

No preferential tax treatment: Marginal tax rate upon exercise; Capital gains tax rate - upon sale

• Exercise for U.S. tax purposes - conversion of option to Stock

• Medicare Tax (up to 3.8%) generally applicable to U.S. residents only; FTC cannot be claimed

Grant Vesting date Exercise Sale

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Non Trustee Route

Stock Based Compensation - Options Israeli Viewpoint

Trustee Route Israel

Capital Gains route: generally 25% Capital Gains tax rate upon “sale”

Sale for Israeli tax purposes:

• The earlier between: the transfer of stock / option from the Trustee to the holder and the sale of the option / stock to 3rd party

• Change of tax residency (under 100A) - ?

Generally marginal tax rate deferred until sale

Employment Income route: marginal tax rate upon “sale”

No taxation upon grant, vesting or exercise

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Stock Based Compensation - Options Under Israeli Section 102

• Upon taxable event - full withholding tax by trustee / employer

• Potentially, also

taxed at host country

Filing an Israeli tax return (refund)

Ruling application for a pro-rata portion

of the withholding tax

Consider!

?

?

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What applies during the relocation?

Residency

at grant

Residency

at exercise

Residency during vesting period ?

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Illustrative Scenarios Key Assumptions: • Israeli private company • Section 102 Capital Gains Trustee route for Israeli tax

purposes • Non Qualified (non ISO) for U.S. tax purposes • Non U.S. citizens / Green Card holders • Same day Sale

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Israel

Year 6 Year 5 Year 4 Year 3 Year 2 Year 1

Grant Exercise & Sale

Vesting period

Example 1 No relocation

Israeli tax:

• Withholding tax by the Trustee at 25% (consider Excise tax)

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U.S. Israel

Year 6 Year 5 Year 4 Year 3 Year 2 Year 1

Grant Exercise Sale

U.S. tax:

• Subject to tax on 100% at marginal tax rate (assuming filed as a U.S. resident)

• U.S FTC on 100% (however, no Israeli taxes until Trustee transfers shares to holder)

Example 2A Vesting in Israel; Exercise & Sale in the U.S.

Vesting period

U.S. tax:

• Subject to Capital Gains tax

Israeli tax:

• Withholding tax by the Trustee at 25% (Vesting / Holding)

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U.S. Israel

Year 6 Year 5 Year 4 Year 3 Year 2 Year 1

Grant Exercise & Sale

U.S. tax:

• Subject to tax on 100% at marginal tax rate

• U.S. FTC on 100%

Israeli tax:

• Withholding tax by the Trustee at 25%

Example 2B Vesting in Israel, Exercise & Sale in the U.S.

Vesting period

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Exercise & Sale

X Y Israel U.S. Israel

Year 6 Year 5 Year 4 Year 3 Year 2 Year 1

Grant Vesting period

Example 3 Vesting Split, Exercise & Sale in the U.S.

U.S. tax:

• Subject to tax on 100% at marginal tax rate

• U.S. FTC on 2/3

Israeli tax:

• Withholding tax by the Trustee at 25% (Vesting / Holding)

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Israel US Israel

Year 6 Year 5 Year 4 Year 3 Year 2 Year 1

Grant Exercise & Sale

Vesting period

Example 4 Vesting Split, Exercise & Sale in Israel

U.S. tax:

• Subject to tax on 1/3 at marginal tax

Israeli tax:

• Withholding tax by the Trustee at 25% (Vesting / Holding)

• FTC

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83(b) Election for U.S. Tax Purposes • A taxpayer may elect to include in his/ her gross income, for the

taxable year of the grant, the excess of the FMV of the stock at the time of grant over an amount paid for such stock

• The election must be made within 30 days of the grant

• A future sale of the appreciated stock (assuming more than 1 year as of grant) will trigger capital gains tax, rather than ordinary income

Consider!!

• Risk of loss (if value declines post-grant)

• Reverse vesting

• Reverse vesting + bonus shares / split

Illustration:

Assuming tax rates as follows:

US Israel

Marginal 39.6% + 3.8% = 43.4% 50%

Capital Gains 20% + 3.8% = 23.8%

25%

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Example 5 A. Restricted Stock (no 83 (b) election)

Israel U.S.

Year 6 Year 5 Year 4 Year 3 Year 2 Year 1

Grant - $10 Vesting date - $50 Sale Price - $90 4 years vesting period

U.S. tax:

Ordinary income - $50, taxed at marginal tax rate -$50 x 43.4% = $21.70

Israeli tax:

$90 taxed at Capital Gains rate - $90 x 25% = $22.50

No tax at grant

Total tax:

$21.7 + $22.5 = $44.20

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Example 5 B. Restricted Stock (with 83 (b) election)

Total tax:

$4.34 + $22.5 = $26.84

Grant - $10 Vesting date - $50 Sale Price - $90 4 years vesting period U.S. tax:

Ordinary income - $10, taxed at marginal tax rate –

$10 x 43.4% = $4.34

Israel U.S.

Year 6 Year 5 Year 4 Year 3 Year 2 Year 1

Israeli tax:

$90 taxed at Capital Gains rate - $90 x 25% = $22.50

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Points to Take Away

Ask!

Plan!

Mitigate!

Withholding obligation /

shadow payroll

409A – if value < FMV;

recommended to consult

Consequences of: (1) filing a

refund request; and/or (2)

applying for a tax ruling

If 100A elected and essentially

no sale (low value, etc.)?

Potential PE

risk

M&A implications

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Scope and Limitations

The information contained in this presentation is for general guidance on matters of interest only. As such, it should not be used as a substitute for consultation with professional tax advisers.

This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding any U.S. federal, state or local tax penalties.

Circular 230: this document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties that may be imposed on the taxpayer.

©2013 Kesselman & Kesselman. All rights reserved.

In this document, “PwC Israel” refers to Kesselman & Kesselman, which is a member firm of PricewaterhouseCoopers

International Limited, each member firm of which is a separate legal entity. Please see www.pwc.com/structure for

further details.

PwC Israel helps organisations and individuals create the value they’re looking for. We’re a member of the PwC network

of firms with 169,000 people in more than 158 countries. We’re committed to delivering quality in assurance, tax and

advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com/il

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional

advice. It does not take into account any objectives, financial situation or needs of any recipient. Any recipient should not

act upon the information contained in this publication without obtaining specific professional advice. No representation or

warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication,

and, to the extent permitted by law, Kesselman & Kesselman, and any other member firm of PwC, its members,

employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you

or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision

based on it, or for any direct and/or indirect and/or other damage caused as a result of using the publication and/or the

information contained in it.

Thank you! Vered Kirshner, Tax Partner, PwC Israel

972 -3-7954-849

vered.kirshner@il.pwc.com

Yair Zorea, International Tax Partner , PwC Israel

972-3-7954-465

yair.zorea@il.pwc.com