Following the spread of the Coronavirus in Israel, the Israel tax authorities have published special helpful guidelines regarding the taxation of company car benefits as it pertains to employees sent on unpaid leave.
As a general rule, an employer who provides the employee with a vehicle for his continuous use is required to calculate taxable income for the employee for the benefit of use of a private car. Certain Regulations – Income Tax Regulations 1987 (regarding the Value of the Use of a Vehicle) – provide instructions on the value of the benefit of a company car (or vehicle) (the "Car Benefit") which an employer must include in the salary slip of the employee as "taxable income".
Even when the vehicle is in the employee’s possession only for part of the month, in principle the full Car Benefit should be subject to wage tax withholding, national insurance premiums and health care participation. An exception to this rule is given in situations where an employee-employer relationship was not in effect during the entire month, for example when commencing or ending employment (such as dismissal). In situations like these, the amount of the Car Benefit will be reflected in proportion to the days of actual employment during the particular salary month.
An employee who started working for the employer on March 11 should be credited with income for the value of a car for 20 days in March. An employee who terminated his employment March 10 and returned the vehicle to the employer at that date will be charged tax on a pro rata of the monthly benefit for only 10 days in March.
In light of the extraordinary Covid-19 situation, in which many employees find themselves inactive for an unknown period, it was decided that the calculation of tax regarding the Car Benefit for employees who were sent on unpaid leave (but after the return of the vehicle to the employer) may be performed on a pro rata time basis in connection with the period that the vehicle was actually at the avail of the employee (the "Relative Value“). This Relative Value rule may also be followed when an employee returns from unpaid leave.
Note that a condition for this relief is that from the time the car was returned to the employer until the employee returns to work, the employer did not put any other vehicle to the avail of the employee.
The importance of the above applies to the local operations in Israel of many of our firms' international clients, who retain tens if not hundreds of employees in Israel and carry the employers' charges on their company cars.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.