Indirect Inputs Related to a “Meal” do not constitute Employee Benefits and are Deductible
1 February 2023
Dear friends and colleagues,
The Supreme Court rejected the state’s appeal and fully adopted the judgment of the Honorable Judge Shmuel Bornstein of the Center-Lod District Court in this matter.
Regulation 15A of the Value Added Tax Regulations, 1976, stipulates that input tax that employers have incurred due to their employees, cannot be deducted by the employer unless it was proven to the VAT director that the input was sold or provided as a service to the employee, and the sale or provision of the service is included in the dealer’s periodic report as taxable transaction. This regulation further provides that an input due to an employee is: an asset or a service, such as a meal, housing, gift, or entertainment, intended for the enjoyment, benefit, and welfare of the employee or his or her family member.
The District Court discussed whether the term “meal” includes only the direct inputs related to the meal (such as raw materials, kitchen equipment, dining room equipment, etc.) or also the actual kitchens and dining rooms.
Factually, the court determined that the appellant (Amdocs) did not prove its claim that it was not possible to rent the entire building without renting the actual dining rooms and kitchens. In addition, the court ruled that the appellant did not prove that the dining rooms were used for the employer’s benefit (such as holding conferences and the like).
Despite this, the court ruled that the term “meal” should only include inputs that are distinctly and exclusively related to the meal. “Thus, the raw materials and the work… the equipment and the furniture, are inputs due to the employee, and no input tax should be deducted for them. On the other hand, the relative inputs related to the place assigned by the employer, from within the factory or office building, for the preparation and consumption of the meal, i.e. the relative part of the rent, electricity, water, property tax, and management fees, there is no reason to consider them as inputs due to the employee”, and it is allowed to deduct them.
The court also noted that it is allowed to deduct inputs related to additional areas located at the workplace and not used for work purposes, such as rest areas or a gym.
The state appealed this ruling to the Supreme Court. The court advised the state to withdraw its appeal. Since the state refused and insisted on receiving a verdict, the Supreme Court fully adopted the ruling of the District Court and stated:
“At this point and after re-considering the matter, we have no choice but to adopt the District Court ruling. Our ruling is based on the interpretation of the regulation before us, and we do not take any position regarding the possibility of changing the legal situation by amending it insofar as the appellant seeks to promote a change in this direction.”
We note that following this ruling, in our opinion, it is possible to examine in each case whether it is allowed to retroactively deduct the input tax in connection with the inputs related to the premises that the employer allocated for the benefit of employees, which and are not used by the business in a distinct manner, such as dining areas and kitchens, gyms, library and the like.
In light of the above, we recommend contacting our VAT department for legal advice if you have any doubt regarding the question of input tax deduction by the employer, whether concerning “meals” as detailed above or concerning other cases such as events for employees, employee transportation, etc.
This update cannot and should not be construed as tax advice. Such advice depends on the specific circumstances of each case.
We will be happy to assist you with any questions or clarification regarding this matter.
Herzog Fox & Neeman