The Israeli national labor court has now ruled that employees are taxable in full on the taxable “usage value” any use of a company vehicle, no matter how slight the benefit may be (Berliner Elevators Ltd vs. National Insurance Institute, 29703-01-21, July 3, 2022). Although this was a national insurance case, it is relevant for income tax purposes too as reference was made to income tax regulations.

 Background:

In Israel, as in many countries, driving a company vehicle is a taxable fringe benefit. In Israel this means adding several thousand shekels to an employee’s monthly taxable salary and imposing taxes. Taxes means income tax and national insurance. The taxable amount of fringe benefit, known as “usage value” (Shovi Shimush in Hebrew) depends on the model. You can look up the usage value by entering the model’s code number appearing in the vehicle license document into: https://www.misim.gov.il/MM_UseCar10/UseCarScreen.aspx.

Companies and freelancers can then deduct 45% of vehicle expenses and depreciation (15% per year) rising to 100% of usage value on which employees were taxed.

But what if the vehicle is not a nice smooth saloon car, more of noisy bumpy work horse? And suppose any private use is marginal? Is the employee still taxable on the usage value? That was discussed in the Berliner case.

Facts of the case:

In this case, the company concerned had three types of vehicle: (1) service vehicles “given” to employees, (2)  two Toyota minibuses with seats removed to enable equipment to be installed, and (3) two vehicles driven by the company owners in their capacity as technicians, and in those vehicles hydraulic lifting equipment was fitted.

An earlier regional labor tribunal had issued a compromise ruling that in the circumstances, 50% of the usage amounts should be assessed to national insurance contributions. The company appealed this 50% decision, only to lose outright in the present national labor court.

The Court judgement:

The national labor court ruled against the company after reviewing the law in detail.

The Income Tax Regulations (Vehicle Expense Deduction), 1995, defines a “vehicle” as almost any type of vehicle weighing under 3,500 kilograms, owned or not, except a “work vehicle” under the traffic regulations, and an “operational vehicle”.

An “operational vehicle” is either a security vehicle (as defined) or a vehicle which is not placed at the employee’s disposal, it is used for the purposes of the employer or owner, is not at his/her home after work hours and does not leave the work place.  All these conditions must be met to avoid taxes on a deemed usage benefit.

The vehicles were “attached” to specific employees after work hours, they were allowed to make private use of the vehicles albeit limited use because of the equipment installed in them. They were used for short trips not substantial trips or big touring trips (“tiyulim”) apparently, although no trip log was kept.

Given this, the court found that the vehicles were placed at the employees’ disposal and they were sometimes located outside the work place. Therefore the employee tax exemption conditions for an “operational vehicle” were not met.

The company had claimed that attaching the cars to employees enabled them to better serve the business and the good of its clients, as this enabled rapid arrival when clients called them regarding maintenance and operations of elevators (lifts). But such use fell outside the definition of “operational vehicle” in the tax regulations.

The Court also said that it the tax regulations did not differentiate between different sectors and aimed for simplicity. Even if the employer benefitted from attaching the vehicles to the employees, so did the employees gain a personal benefit, for example during evenings, weekends and holiday periods, which is taxable under the regulations. And the owners should be subject to the same rules as their employees.

One unanswered question was whether the vehicles were “work vehicles” rather than “operational vehicles”, as the question wasn’t raised in time, so it was rejected!

 Comment:

There have been earlier cases in which taxpayers unsuccessfully challenged in court the taxable “usage amounts” by keeping accurate travel logs. In practice, you should assume the usage amounts fixed in the regulations will generally be taxable, regardless of the actual business:private travel split. You can drive a company car travel every weekend on vacation to Eilat or no weekend at all, and still pay income tax and national insurance on the same deemed usage value. If you have use of the vehicle, that’s all that counts.

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(c) 8.11.22