In March 2022, a ruling was issued by the Regional Labor Court regarding the national insurance payments of employees at Elbit Systems. The ruling addressed whether the deductions Elbit makes for its employees for leasing expenses, such as car upgrade costs, fuel budget overruns, toll roads, etc., should be made from the gross salary, thus reducing the salary for National Insurance purposes, or from the Net salary, as per the approach of the National Insurance Institute. The Regional Labor Court upheld the position of the National Insurance Institute, ruling that the deductions should be made from the Net.
Following the ruling, on September 26, 2023, the National Insurance Institute issued Audit Bulletin No. 16 concerning the deduction of employee expenses from the Gross Salary for the purpose of national insurance payments. In this Memo, the National Insurance Institute instructed employers not to make deductions related to the company car provided to the employee, such as car upgrades and fuel, from the gross salary.
It should be stated that we disagree with the findings of the Elbit verdict and the position of the National Insurance Institute, and we will explain.
There is no dispute that the employment contract signed between the employer and the employee, after negotiations between the parties, includes the agreements of the parties and the entire set of conditions related to the terms of the employee’s employment. We believe that when signing the employment agreement, the employer considers the total employment cost consisting of salary and car. For example, if the employer is willing to pay an employee a gross monthly salary of ₪20,000 and the cost of providing a car to the employee amounts to ₪3,000 each month, it means the employer is willing to pay a total of ₪23,000 per month for employing that employee. Similarly, the parties could agree that the employee would be entitled to a gross salary of ₪23,000 without a company car, or to a gross salary of ₪18,000 with a company car costing the employer ₪5,000 per month. In essence, the employer is indifferent between the three cases, as in all of them, the cost to the employer sums up to ₪23,000, and we believe the salary for National Insurance should be approximately the same in each of these alternatives. It is noted that typically the amount of the car’s value for such purposes is approximately equal to the cost to the employer.
According to the National Insurance Institute’s approach, which was affirmed in the Elbit ruling, in the case where the employee chose the above example, with his salary reduced to ₪18,000 plus a company car costing ₪5,000, the reduction of ₪2,000 in salary should be ignored, so that his Gross Salary for calculating National Insurance remains ₪20,000, to which is added the imputed value of an upgraded car totalling ₪5,000. Therefore, in this case, both the employer and the employee are required to pay national insurance on a salary of ₪25,000, instead of ₪23,000 in the other two examples.
As known, an employee receiving a car from the employer has a value attributed to it according to the regulations. The regulations specify a uniform formula, which takes into account many parameters, including the price of the car provided to the employee and related expenses such as fuel, tolls, insurance, etc. It means that the legislator took into account the whole set of parameters and determined the value of the car that should be imputed to the employee for each type of car. Therefore, we are convinced that the value of the car as set by the regulations encompasses all the benefits received by the employee, and since the employee pays income tax and national insurance for the attributed value, all payments made by the employee to the employer for the car should be deducted from the gross salary.
We believe that the car upgrade should not be seen as a private expense of the employee but as an integral part of the salary adjustment. Any other approach would lead to excessive tax payments and even lead to national insurance payments on a non-existent income.
Currently, tax withholding officers have also begun to implement the Elbit ruling, and there are cases before the courts concerning this issue.
It should be clarified that the Elbit ruling is a lower court decision that is not binding, and the same applies to the Bulletin, which does not have a binding status.
The purpose of this article is to provide you with general information on various topics. The law itself is more complex and includes additional exceptions. Accordingly, the contents of this article should not be applied without consulting an appropriate professional. Nothing in this article should be taken as legal advice or acted upon as a legal opinion.
