Quick Answer: When your Israeli employer gives you a company car, the Israel Tax Authority (ITA, Reshut HaMisim) adds a fixed monthly shekel amount to your taxable employment income under Section 2(2) of the Income Tax Ordinance. That amount — called the shvut rechev (vehicle benefit value) — is set each January in an ITA circular and ranges from roughly NIS 560 per month for a mild-hybrid vehicle to over NIS 5,000 for a high-value car. You pay income tax on it at your marginal rate, which at NIS 3,000–4,000 per month can mean an extra NIS 1,000–1,500 in annual tax for a mid-bracket employee, and considerably more for those in the top brackets.

Getting a company car from your Israeli employer looks like a pure benefit until you see your pay slip. A fixed shekels-per-month figure appears as additional income before tax is calculated, which can push an already-high earner into a steeper bracket or simply add a recurring monthly tax cost that nobody warned you about. Foreign employees and new immigrants are sometimes the most surprised: they expected Israeli tax complexity around their salary or foreign assets, but not around the car sitting in the car park.

The system is not complicated once you understand its logic. The ITA publishes a table, each car in Israel belongs to a group in that table, each group carries a monthly shekels value, and that value goes straight onto your payroll as additional income. This guide walks through the full picture for employees, employers, and foreign nationals working in Israel.

1. Why a Company Car Is Taxable Income in Israel

Section 2(2) of the Pekudat Mas Hachnasa (Income Tax Ordinance, 5721-1961) defines employment income broadly: it covers salary, bonuses, commissions, and "any benefit or advantage" that an employee receives by reason of employment. A car provided by an employer at no charge — or at a price below its market value — is a benefit within the meaning of that section.

Rather than valuing each car individually, the ITA uses a standardized table, the ta'arif ha-shvut (benefit tariff). It assigns every passenger vehicle to a group (kvutzah) based on its list price in Israel, and each group carries a monthly benefit value in shekels. Your employer takes that monthly NIS figure, adds it to your gross salary, calculates income tax and Bituach Leumi (National Insurance) withholding on the combined amount, and reports everything on Form 106 at year end.

The legal obligation runs in both directions. The employee owes income tax on the benefit. The employer is the tax-withholding agent and is required to apply the correct shvut value every month. Using a wrong value, or failing to apply one at all, is a payroll compliance failure that the ITA can discover and assess retroactively for up to seven years.

In Practice — Section 2(2) Catches Every Employment Benefit:

A UK citizen took a management role at a Tel Aviv tech company and received, among other benefits, a Group 7 company car with a 2026 shvut value of approximately NIS 4,200 per month. Her Israeli salary was NIS 35,000 per month, putting her in the 47% marginal bracket. The payroll system added NIS 4,200 to her gross income, which the employer withheld at 47% — an extra NIS 1,974 deducted from her net pay every month, or roughly NIS 23,688 per year. Nobody at the UK parent company had factored that into the offer. Reviewing the shvut tariff before accepting the package would have changed the negotiation entirely.

2. How the Car Group System Works

Every passenger vehicle registered or sold in Israel has an official list price (mchir reshumi), which the ITA uses to assign it to a group. Group 1 covers the lowest-priced cars; the numbers run upward as list prices rise. For 2026, the ITA table runs from Group 1 through Group 15 with a separate "above ceiling" category for very expensive vehicles.

Two points that regularly trip up employees and HR departments:

  • The group follows the list price, not the market price. A three-year-old executive saloon that cost NIS 280,000 new but is now worth NIS 170,000 on the secondhand market still sits in the same group as a brand-new car with the same original list price. Depreciation does not reduce the shvut value.
  • Leased vehicles follow the same rules. Leasing is very common for company cars in Israel. The group is determined by the car's original list price at the time of manufacture or import, not by the monthly lease payment the employer makes. A company paying NIS 3,500 per month in lease costs may be assigning an employee a car whose shvut value is NIS 4,200 per month.

If the employer cannot identify the car's group — for example, because it is an older import vehicle and the original list price is unclear — the ITA has a default assessment process. It is better to get a formal valuation than to guess, because an incorrect low group value creates a retroactive tax exposure.

3. Monthly Benefit Values for 2026

The ITA published the 2026 ta'arif ha-shvut in January 2026. The following are approximate figures for standard petrol and diesel vehicles by group. The precise NIS amounts for each group are in the official circular, which your employer's payroll provider should be applying:

  • Groups 1–3 (list price up to approximately NIS 120,000): NIS 2,050–2,550 per month
  • Groups 4–6 (approximately NIS 120,000–220,000): NIS 2,700–3,500 per month
  • Groups 7–9 (approximately NIS 220,000–340,000): NIS 3,700–4,400 per month
  • Groups 10–12 (approximately NIS 340,000–520,000): NIS 4,600–5,200 per month
  • Groups 13 and above (above NIS 520,000): NIS 5,400+ per month, subject to the ITA's upper ceiling

At a 35% marginal income tax rate, a Group 5 car with a monthly benefit of approximately NIS 3,200 costs an employee roughly NIS 1,120 per month in additional income tax — NIS 13,440 per year. At the top rate of 50%, the same car costs NIS 1,600 per month, or NIS 19,200 per year. These are not small numbers, and they explain why many Israeli companies allow employees to choose between a company car and a higher cash salary.

In Practice — The Group Matters More Than the Lease Payment:

An Israeli subsidiary of a Dutch company leased two cars for its senior staff: a Group 5 vehicle for the local sales director and a Group 9 vehicle for the country manager. The lease payments were NIS 3,400 and NIS 4,100 per month respectively. Under the 2026 ITA tariff, the taxable benefit values were approximately NIS 3,200 (Group 5) and NIS 4,200 (Group 9). The country manager's car carried NIS 1,000 more per month in taxable income than its lease payment — a gap that did not appear in any salary negotiation document. The HR team had confused the lease cost with the shvut value and had to issue corrected pay slips for three months when the ITA's payroll audit unit queried the withholding records.

Advertisement

4. Electric and Hybrid Vehicles

Israel deliberately reduced the taxable benefit values for electric and low-emission vehicles to push corporate fleets toward cleaner options. For 2026, the ITA set the following approximate shvut values — well below the petrol equivalent for the same price group:

  • Full electric vehicles (BEV): approximately NIS 1,350 per month
  • Plug-in hybrid electric vehicles (PHEV): approximately NIS 1,130 per month
  • Mild hybrid (non-plug-in): approximately NIS 560 per month

That is a large gap. A full electric car in what would otherwise be a Group 6 category carries roughly NIS 1,900 less in monthly taxable income than its petrol equivalent. At a 35% marginal rate, the employee saves about NIS 665 per month — NIS 7,980 over a full year. For someone in the 47% bracket, the annual saving is roughly NIS 10,700.

The government extended these reduced values through at least December 2026. The Finance Ministry has reviewed them annually, and there is no guarantee they remain unchanged for 2027. Employees offered a new car lease on a multi-year arrangement should factor in the possibility that the benefit value for their vehicle category may rise in future years.

One nuance: the reduced values apply only when the vehicle meets the ITA's technical classification for that category. A plug-in hybrid that spends most of its time running on petrol still qualifies for the PHEV rate, because the classification is based on the vehicle's specification, not actual usage patterns.

In Practice — Switching to an EV Saves NIS 10,000+ Per Year:

A senior engineer at a Herzliya company drove a Group 7 petrol car with a 2026 shvut value of approximately NIS 3,900 per month. His employer offered him a swap to a full electric SUV in the same price range, at approximately NIS 1,350 per month shvut. At his 47% marginal rate, the petrol car cost him NIS 1,833 per month in extra income tax; the EV cost him NIS 635 per month. The difference was NIS 1,198 per month — NIS 14,376 per year in reduced tax, with no change to the car he got to drive. He accepted. His employer also saved on VAT input-credit restrictions because some EV leasing costs attract more favorable treatment.

5. How Payroll Withholding Works in Practice

The mechanics run through the monthly payroll cycle. Your payroll department or payroll provider takes the following steps each month:

  • Identify the car's ITA group and look up the 2026 shvut value for that group.
  • Add that NIS amount to your gross monthly salary on the pay slip (tofes 102).
  • Calculate income tax withholding on the combined gross figure — salary plus benefit — after applying your tax credit points (nekudot zikui).
  • Calculate Bituach Leumi and health insurance contributions on the combined gross, subject to the applicable ceilings.
  • Deduct the additional withholding from your net pay.

You receive the car but get a smaller net salary. The shvut value appears as a separate line on your pay slip and is included in the totals on Form 106, which your employer files with the ITA after the tax year ends. The Form 106 is also the document you use when preparing your personal income tax return (Form 1301) if you file one.

A practical point on credit points: tax credit points (nekudot zikui) reduce your final income tax liability in shekels, not your taxable income. Adding a NIS 3,500 shvut value to your salary does not reduce the shekel value of your credit points, but it may push more of your income above a bracket threshold. The combined effect is higher tax, and credit points provide only partial relief.

6. Claiming a Business Use Deduction

If you use the company car for genuine business travel — visiting clients, driving between project sites, going to meetings outside your regular workplace — you can claim a deduction for the business portion of the annual shvut value on your personal income tax return.

The deduction requires a contemporaneous trip logbook (yoman nesishot) recording every journey: date, starting point, destination, purpose, and distance in kilometers. The ITA's Field Circular 40/2007 sets out the documentation requirements. "Contemporaneous" matters: a logbook written at the time of travel holds up; one reconstructed at year end from memory or GPS history generally does not, particularly if the ITA's audit unit requests it.

At the end of the year you calculate the percentage of total kilometers driven that were for business and apply that percentage to the annual shvut value. If the car covered 24,000 km in the year and 8,000 of those were business trips logged with full documentation, 33% of the shvut value is deductible. That portion reduces your taxable income on Form 1301.

The deduction is not available if no logbook exists. An estimate — even a sincere one — is not sufficient. Many employees who actually do use their company cars heavily for business miss the deduction entirely because nobody told them to keep the logbook from month one. Starting it partway through the year reduces the available deduction proportionally.

Ordinary commuting from home to your regular workplace does not count as business use. The deduction covers travel that serves the employer's business beyond the routine commute. If your company car is primarily a commuting vehicle, your deductible percentage will be low regardless of total kilometers.

In Practice — A Logbook Recovers NIS 8,400 in Tax:

A French national worked as a regional sales manager for an Israeli food-distribution company, covering clients in Tel Aviv, Hadera, and Be'er Sheva. His Group 6 company car carried a 2026 shvut value of approximately NIS 3,500 per month — NIS 42,000 for the year. He kept a detailed trip logbook throughout the year and, when filing his Form 1301 return by April 30, could document that 60% of his kilometers were client visits and field calls. His accountant deducted 60% of NIS 42,000 — NIS 25,200 — from his taxable income. At a 35% marginal rate, that saved him approximately NIS 8,820 in income tax. Without the logbook, the full NIS 42,000 would have been taxable and the deduction would not have been available.

7. Foreign Employees and New Immigrants

Several points arise specifically for employees who are not Israeli citizens or long-term residents:

New immigrants and returning residents (olim): The 10-year tax exemption available under the Income Tax Ordinance covers foreign-source income — income earned outside Israel. A company car provided by an Israeli employer is Israeli-source employment income. The shvut rechev is fully taxable from the first month, even if you arrived last week on an aliyah visa. The exemption does not apply here, and this comes as a genuine shock to olim who expected their initial years in Israel to be tax-light.

Foreign employees on secondment: An employee sent to Israel by a foreign parent company may receive part of their remuneration from the Israeli subsidiary and part from abroad. If the Israeli entity provides or funds the car, the full shvut applies to the Israeli payroll regardless of how the overall package is structured. The existence of a tax equalization policy at the parent company level does not reduce the Israeli income tax liability; it just means someone else bears the cost.

Short-term assignments: An employee present in Israel for fewer than 183 days in a tax year may be classified as a non-resident. If the company car is available for use during the Israeli period, the portion of the annual shvut attributable to the time spent in Israel is still taxable Israeli-source income. The employer should apply withholding on a pro-rated basis.

VAT implications for the employer: An employer providing a car to an employee faces a restricted input VAT credit on both the acquisition cost and running expenses. Under the Value Added Tax Law and its regulations, the deductible input VAT on a company car provided for an employee's personal use is generally limited to two-thirds of the total VAT charged, and in some cases one-third. This is a separate issue from the employee's income tax and affects the employer's own VAT recovery, not the employee's pay slip. Foreign employers setting up an Israeli operation and providing cars to local staff should factor this into their cost models.

In Practice — New Immigrant Discovers the Exemption Does Not Apply:

A Canadian professional made aliyah and started work at a Jerusalem-based pharmaceutical company four months later. He received a Group 5 company car on day one. He had carefully read about the 10-year tax exemption for new immigrants and assumed the car benefit fell within it. It did not. The company's payroll team added approximately NIS 3,200 per month to his taxable income from the first pay cycle, withholding income tax and Bituach Leumi on the combined figure. He had not accounted for this in his family's budget for the first year. Had he negotiated a cash allowance instead of the car — or chosen an electric vehicle with a shvut value of approximately NIS 1,350 — his monthly net take-home would have been materially different. The tax exemption for new immigrants is powerful for foreign dividends, rental income, and capital gains on foreign assets, but it stops where Israeli employment income begins.