What really moves an Israeli? In many cases it's a company car. Israelis love to explore every inch of the promised land with their families in cars provided by their employer or business. Until now this fringe benefit has been taxed relatively leniently. Not any more. New regulations were issued on the last day of 2007 that change the tax treatment of company cars. The aim of these regulations is a more egalitarian distribution of the tax burden, by raising taxable car usage benefit amounts (shovi shimush) for employees over the next four years. At the same time, the rules for deducting car expenses from income of the employing firm have also been reformed. The Treasury is also reviewing proposals to introduce "green regulations" that may reduce or increase purchase tax and annual car levies of vehicles, depending on their environmental characteristics. (These proposals are not discussed here; their details have not yet been finalized.) The car-usage benefit is a prescribed amount added to the salary of an employee for Israeli income tax purposes if the employer makes a car (or other vehicle) available for the employee's use. No taxable usage benefit applies to "operational vehicles" used to generate income but not allocated to any specific employee. When an auto is allocated to an employee, the prescribed usage amount depends on the cost of the vehicle when it is new. The regulations contain seven groups - the cheapest is Group 1 and the most expensive is Group 7. The car-usage benefit for each group amount is intended to reflect the value of the benefit enjoyed by the employee. In practice, the amount taxed may be considerably lower than the real economic value of the car provided to the employee. Therefore, the new regulations increase the taxable car-usage benefit amounts over the years 2008-2011. For example, take a basic Mazda 3 or Mitsubishi Lancer with a 1.6 liter engine in Group 2. Under the new regulations, the monthly taxable car-usage benefit will increase from NIS 1,330 per month in 2007 to NIS 1,570 in 2008, NIS 1,730 in 2009, NIS 2,090 in 2010 and NIS 2,450 commencing in 2011. These amounts are periodically adjusted for inflation. But if your company car is a more expensive Mercedes Class C or a Volvo S60 with a 2.4 liter (or above) in Group 7, you can expect the monthly taxable car benefit to increase from NIS 4,850 per month in 2007 to NIS 5,980 in 2008, NIS 6,790 in 2009, NIS 7,760 in 2010 and NIS 8,720 commencing in 2011. If that seems a bit steep, a new group has now been added - two-wheel motorbikes (known as "L3"). Their monthly taxable benefit is a mere NIS 250 per month in 2008, NIS 500 in 2009 and NIS 750 commencing in 2010. But who rides a company motorbike? The above increases for company cars will be marginally tempered by a lowering of the marginal income tax rates from 48 percent in 2007 to 47% in 2008, 46% in 2009 and 44% commencing in 2010. And the lower tax-rate bands will be enlarged. But national insurance (social security) contributions will also be due at various rates on monthly income of up to NIS 36,760 (employers 5.43%, employees 12%) in 2008. As for the employing firm, various changes have been made to the auto-expense deduction rules starting this year. Until the end of 2007, auto expenses were only deductible to the extent the auto traveled more than 9,900 kilometers per year. So if the vehicle traveled 18,800 km. in a tax year, 50% of its expenses and depreciation (15% straight-line basis) were deductible. Commencing in 2008, it is no longer necessary to note the kilometer clock reading at the end of each year. Under the new rules, employers may deduct ALL expenses of autos made available to an employee. In addition, the expenses of "operational vehicles" are fully deductible if the auto is used to generate income but is not allocated to any specific employee. However, self-employed independent contractors will be allowed to deduct the higher of: (1) total auto costs minus taxable car-usage benefits taxed to employees, or (2) 45% of the total auto costs (increased from 25% prior to 2008). To sum up, the new "egalitarian" taxation of company cars requires employees to start paying more tax for this privilege, while their employers will get to deduct more car expenses for Israeli tax purposes. All this is before further proposals are finalized for imposing higher taxes on cars that pollute more than others. As always, consult experienced tax advisors in each country at an early stage in specific cases. firstname.lastname@example.org Ofer.email@example.com Leon Harris and Ofer Ezra are tax partners at Ernst & Young Israel.