Have fun at work? If the event cost more than NIS 400 per employee (or NIS 700 with accommodation), you are in the crosshairs of the IRS (Photo: ShutterStock)
In recent years, team building events such as parties and company vacations, which cost tens or even hundreds of thousands of shekels, have become a common phenomenon among many companies, among other things with the aim of capturing the hearts of employees and potential employees and tying the fate of employees with the company for many years, mainly due to the difficulty in recruiting quality employees.
The Human Resources Department organizes performances by singers, gourmet meals, flights abroad and all with an organized program of lecturers who make sure to 'maintain the existing' in terms of employees' professional knowledge. All expenses, of course, are paid by the company, which sees payment for the glittering production as a tax-deductible expense.
The management is satisfied and of course the employees, even though they raise the threshold of requirements for the next event, and only the state coffers remain deprived and harmed by its participation at the rate of 23% of the total amount of expenditure.
Did well-known artists sing at your company night? There is a chance that the show will still cost you dearly (Photo: ShutterStock)
Who benefits from the event: the employee or the employer?
The Tax Authority decided to go to war against the tax outcome for consolidation events, and as far as it is concerned, the employee must pay income tax and National Insurance for the consolidation events. These are hundreds of millions of shekels a year that are in the Tax Authority's crosshairs.
To determine whether the expense is recognized to the company and whether the employee must pay tax on company events, management must first ask itself, "Who is the main beneficiary of that team building event, the employer or the employee?" a difficult question.
If management determines that the company is the main beneficiary and not the employee, then the expense is recognized and the employee is not taxed on the value of the benefit, because he "enjoys" less from the company. But if, on the other hand, management determines that the employee is the main beneficiary, then the employee is liable for tax of up to 50% on the benefit!
So what do you think society determines? The answer is clear, which is the main beneficiary and the truth, there is justification from the company's point of view for holding events aimed at retaining employees and recruiting quality new employees, in a free-competitive market. It is reasonable to assume that an employee who receives a relatively high salary enjoys free hotel reservations, fancy meals and social activities and will be happy to continue working for the same employer. Wait, did we say the employee was having fun?
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What does the Tax Authority determine?
Well, the problem is that the answer to the question "who enjoys more?" can be interpreted and each side is absolutely right. The main question that the court is required to decide these days in two different cases dealt with the question "Who benefits more from these company events, the employer or the employee?"
A position paper on the subject published in the past by the Tax Authority relating to company events establishes additional cumulative criteria for recognizing expenses and without any tax liability of the employee:
1. The consolidation activity will take place in Israel;
2. The participants are employees only without spouses;
3. The event takes place Sunday-Thursday and not on weekends;
4. The cost of the consolidation day is up to 400 NIS per day per person without accommodation and 700 NIS per day per person including accommodation.
The general rule is that if all the cumulative conditions are not met, then the amount spent on the consolidation days constitutes taxable income in the hands of the employee at a tax rate of up to 50%, and the result is hundreds and thousands of shekels that the employee will pay for his participation in any event to income tax, national insurance and health tax!
Will the appeals against the rulings that adopted the Tax Authority's position pass? (Photo: ShutterStock)
What did the court rule?
Two rulings were recently heard in the Supreme Court and the Labor Court dealt mainly with prestigious team building events for employees. The court ruled that the employee is the main beneficiary and must pay taxes on the value of the benefit, meaning that the employee is required to pay up to 50% of the value of the benefit he received during the consolidation days. In the margins of the ruling, the court ruled that the expenditure will be considered recognized insofar as there is significant professional content.
So if you employ a hint to you, the court will give significant weight to professional content and we will add that the rules set out in the position paper of the Tax Authority must be complied with.
The final word has not yet been said on the matter, and we will wait for developments regarding appeals that will apparently be filed in respect of the rulings that benefit the Tax Authority. The hundreds of millions of shekels each year, which constitute benefits taxes on consolidation days, are now before the appellate courts.
Author: Ariel Patel, Accountant. Vice President of the Institute of Certified Public Accountants and candidate for the position of Director of the Tax Authority
- Tax Authority
- Tax Authority