Is team building tax deductible?
The Start-Up Nation got where it is thanks to hard work and team building. Team building typically involves educational exercises intended to align team members around goals, build effective working relationships, clarify roles and find solutions to problems – and having some fun together.
So can a company deduct the expense of a trip for employees to a fancy hotel or restaurant on the Kinneret to learn about raft building, egg dropping or blind drawing? Or are the employees taxable on a fringe benefit at rates ranging up to 50%?
The Israel Tax Authority (ITA) has just published interesting guidance on team-building expenses, apparently after receiving many inquiries on the subject.
As a general rule, in cases where the good of the employer exceeds the good of the employee, employees are not taxable on team-building activities. All the conditions enumerated in the guidance must be met as summarized below:
The work requirements should justify a team-building event, e.g., many employees, teamwork needed, etc.;
The employer decides to hold the event and invites the relevant employees;
Team-building days are considered workdays, and employees receive full pay; Employees cannot bring their spouses or relatives to any part of the team-building event;
Teamwork activities are held during the workweek. If any part of the activity is held over the weekend or during vacations, the full value is taxable as a fringe benefit; The timetable is set or approved by the employer; The activity takes place in Israel; The goal of the activity is to improve work and the interaction between employees. Moreover, the activity must include a professional lecture or enrichment; The employer must keep documentation validating the above; Costs incurred by the employer must be reasonable, having regard to the activity and its goals, according to the Finance and Economy Rules of the State of Israel, pursuant to the State Assets Law, 1951. Currently, that means NIS 400 for a full day without accommodation, or NIS 700 for a full day with accommodation.
Comments: Generally, these rules seem reasonable for a team-building event, but the monetary limits may be on the low side. It is not clear whether these rules are meant to cover staff seminars.
A bone of contention not covered is that of food at workplaces for employees, which can be extensive, especially in hi-tech. But the takeaway from the ITA is this: Check whether the benefit to the employer exceeds the benefit to the employee.
As always, consult experienced tax advisers in each country at an early stage in specific cases.