Government Grabs Employee Fringe Benefit

written by Leon Harris, May 27th 2025

Sent to me from Barbara Billauer

The Knesset has passed a law to make employers in Israel divert parts of the statutory recreation bonuses payable to employees (Havraah) and hand them over instead to the Israeli government, i.e. an additional hidden tax (Law to Freeze Recreation Bonuses in 2025, of March 27, 2025).

The Israeli Tax Authority (ITA) issued a Commentary on the subject on May 14, 2025.

The Israeli government apparently needs to finance the war partly at the expense of employees notwithstanding the lengthy service of many on IDF reserve duty.

The recreation bonus is a very Israeli fringe benefit dating back to Israel’s socialist past. It usually amounts to a few thousand shekels per employee and is usually paid each July to give employees some extra spending money for vacations etc. Sometimes employers’ spread this bonus out over the entire year, sometimes they instead cover the cost of hotel accommodation.

How is the recreation bonus calculated?

Employees generally become entitled to the recreation bonus once they have worked 12 months for a particular employer. The amount is usually updated for inflation each July – but not this year. The amount due is expressed in units known as days which increase the longer an employee has worked for the employer. Each day is worth NIS 418 in the private sector or NIS 471.40 in the public sector. The number of “days” credited to an employee is: 5 days at the end of his first year of employment, 6 days in years 2 and 3, 7 days in years 4-10, 8 days in years 11-15, 9 days in years 16-19, 10 days in year 20 onwards.

For example, an employee in year 5 of his employment for a private sector employer is entitled to 7 days times NIS 418 equals NIS 2,926 gross before tax.

A pro rata calculation is done for part time employees and employees paid on an hourly basis.

For employees, these amounts are not huge, but nice to have at vacation time. For employers with many employees, it can be a significant cost.

Government Take:

The new law reinstates and extends in 2025 a temporary law that applied in 2024. The amounts carved out the recreation bonus are really a tax but are called “participation amounts”.

There are two types of “participation amount”.

• First, employees generally forfeit a “recreation price” of one day of the recreation bonus. If they earn under NIS 6150 per month in 2024, they forfeit only half a day.
• Second, the recreation bonus is pegged at 2024 levels, but the employer must hand over the difference between the pegged and unpegged recreation bonus. This includes national insurance on the amount of the difference.

How does it work?

The employer must hand over the above recreation bonus participation amounts via the payroll withholding tax system. If the bonuses are paid in cash, the participation amounts are payable to the ITA along with July 2025 payroll withholding taxes. Extra data regarding the recreation bonuses are best reported online by the employer or the employer’s accountant (or other representative) but specific contact can be made at a local tax office.

If the employee is paid the recreation bonus in kind e.g. by paying a hotel, the employer must still calculate the recreation price (tax) (NIS 418 or NIS 471.40) and withhold it from other benefits paid to the employee. All this is pursuant to Section 247 of the Income tax Ordinance.

Employees will be relieved to know that participation amounts (=tax) are not themselves taxed. Also. The participation amounts are not taken into account when calculating pension fund contributions.

Office Holders:

Office holders (i.e. directors) are not off the hook – participation amounts must be handed over to the ITA on their behalf too. This is especially relevant to owner directors of private companies who probably don’t bother to pay themselves recreation bonuses.

Other points in the ITA Commentary:

Employment agreements that postpone payment of recreation bonuses to a date before or after 2025 are invalid.

If an individual holds down two jobs, each employer applies the above rules.

If an employer managed to pay recreation bonuses before the law came into effect, the participation amounts are still due along with the July 2025 salary – unless the employee left and was all paid up before the law came into effect.

More Comments:

Some might say the government is scraping the barrel. Others may say recreation bonuses are a socialist era relic that won’t be missed…..

The lesson is to watch the micro as well as the macro.

Next Steps:

Please contact us to discuss any of the above matters further, or any other matter.

As always, consult experienced legal and tax advisors in each country at an early stage in specific cases.

leon@hcat.co

© Leon Harris 27.5.2025

Kategorien:Barbaras' and Norman's corner, Israel