Dear colleagues and clients,

Regulation 15A of the Value Added Tax Regulations, 1976 (the “VAT Regulations”) stipulates that input VAT 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 VAT was sold or provided as a service to the employee and such sale or provision of service is liable to VAT at the hands of the employer.

Regulation 15A of the VAT Regulations further provides that input VAT due to an employee, is an asset or a service, such as a meal, housing, gift or entertainment, intended for the enjoyment, benefit or welfare of the employee or his family member.

This has often created controversy as to whether input VAT incurred by employers due to an “employee benefit” are deductible by the employers, or whether these are input VAT that cannot be deducted. This issue was discussed at length in Tax Appeal 22467-09-17 Amdocs Israel Ltd. V. Netanya VAT Director (issued on December 17^th 2020).

Amdocs Israel Ltd. (the “Appellant”) allocated certain spaces in its buildings for activities (the “Buildings“) such as dining rooms for its employees, kitchens, dishwashers, storage rooms and cold rooms (the “Catering Complexes“).

Following a VAT audit of the Appellant by the Israel Tax Authority (the “Respondent“), the Appellant was issued a VAT input assessment in the amount of NIS 5,150,961 (principal) in which the relative share of the inputs allocable to the Catering Complexes was disallowed (the “Assessment“). In the Assessment, the Respondent determined that such inputs constitute an “employee benefit” and are included as part of a “meal” for the purposes of Regulation 15A of the VAT Regulations. The Appellant’s administrative appeal on the Assessment was denied and hence the court appeal.

The appeal was heard by the Honorable Judge Dr. Shmuel Bornstein of the Central District Court. Following the parties’ arguments, the main issue considered by the court was whether the VAT regulations intend to classify a portion of rent payments made by an employer as “employee benefits” for the purposes of regulation 15A of the VAT Regulations. According to the Respondent, it is sufficient that an activity other than work activity is carried out in certain areas of the buildings, whether large or small, luxurious or basic, notwithstanding the fact that this activity takes place within the working hours and as part of the employee’s daily routine, in order to classify such inputs as “employee benefits”.

The court ruled in favor of the Appellant. The court examined the purpose of the legislation and regulation and ruled that while providing meals to employees constitutes a benefit in kind that substitutes wages, the relevant question is what should be included in the term “meal” for the purposes of Regulation 15A.

In this context, the court ruled that the relative inputs of the Appellant related to the space allocated to the Catering Complexes in the Buildings should not be seen as an “employee benefit” that are included as part of a “meal” for the purposes of Regulation 15A of the VAT Regulations. Inputs incurred by the employer in connection with the space where the meal is provided are deductible by the employer. On the other hand, inputs related exclusively to the meals provided by an employer to his employees – i.e., raw materials, kitchen equipment, cooking and baking expenses, tables, chairs, utensils, expenses for washing the dishes, cleaning the tables and the floor of the dining room – are all an integral part of the service called a “meal” for the purpose of Regulation 15A of the VAT Regulations and therefore these inputs are not deductible

We believe that following this ruling, taxpayers may consider in relevant cases whether the input VAT incurred with respect to the office space in which meals were provided to employees are also deductible for past periods. Such deduction may be possible regardless of whether the meals are provided directly by the employer or not and regardless of whether the employer rents or owns the building.

Accordingly, we recommend to our clients that have doubts as to whether an input VAT can be deducted by the employer, whether in respect of “meals” as detailed above, or in respect of other inputs such as inputs incurred due to employee events, transportation of employees and etc., to contact our VAT department for legal advice.

This circular cannot and should not be construed as tax advice. Such advice depends on the specific circumstances of each and every case.

Regards,

Value Added Tax Department

Herzog Fox Neeman