‘A free sample, a gadget with a corporate logo, rewarding faithful buyers and suppliers with a small gift…’ Every company is familiar with this situation, but are they also aware of the tax-consequences of these generous gestures? The tax authorities recently published a circular as a reminder of the most significant tax-related points for attention in this respect.
Before taking a closer look at the VAT implications for a number of common handouts, let’s take a brief look at the general principles.
Not entitled to VAT deduction vs. a VAT-liable disposal
A taxpayer can only deduct the VAT that pertains to those goods or services that were intended at the time of purchase to be used to perform a VAT-liable action (this is the ‘designated use principle’). Succinctly defined, a VAT-liable action can be called the delivery of a good or service that is performed for pecuniary interest. When it was already known at the time of purchase that the good or service would be delivered free of charge, the taxpayer is in principle not entitled to the deduction of VAT.
Sometimes, at the time of purchase, the designated use of the goods is not yet known and the VAT is deducted upon purchase. Should it emerge at a later stage that the goods were given away as gifts, then the deduction shall have to be corrected. This is done by means of a ‘disposal’ - i.e. the taxpayer acts as if he has sold the gifted good to himself for pecuniary interest and pays the VAT through the VAT return. The VAT payable is calculated on the purchase price or the cost price, as assessed at the time when the disposal occurs.
Legal presumption of the sold stock vs. evidence to the contrary
The goods that a taxpayer has obtained or manufactured for sale are deemed to also have been actually delivered subject to those conditions that make the VAT payable. Moreover, such a delivery is deemed to have been performed at the time when the goods are no longer a part of the taxpayer’s stock. However, these presumptions are refutable, which is why one must present the evidence that the goods given away constituted a free delivery. This evidence can take the form of an internal document, or an acknowledgement of receipt signed by the recipient. Please note that this document should not only be drafted in the event of a disposal, but also when the right to VAT deduction was not initially exercised.
Statutory deduction restriction vs. tolerances
A bottle of liquor or a box of cigars make perfect promotional gifts, but VAT legislation throws a spanner in the works. Because of the nature of their goods, no deductions whatsoever are allowed for the makers of spirits and tobacco products, which takes priority over any tolerances in this respect.
The exceptions to the rule(s)
On the basis of the general VAT principles, the VAT charged for the purchase or manufacture of goods that are given away for free cannot be deducted. But there are a number of exceptions, and it is these that are explained in the new circular released by the tax authorities.
Trade and other samples
Freely handing out trade samples is explicitly excluded from the obligation of disposal in the VAT laws. That means that any VAT levied on the purchase or cost price is deductible in full. A ‘trade sample’ must entail a small quantity of a product that is manufactured or sold by the taxpayer and serves the purpose of letting a future user become acquainted with the characteristics of that product.
VAT on the purchase of objects such as ballpoint pens and key rings that are not sold or manufactured by the taxpayer but are instead handed out free for the purpose of increasing brand awareness is, under certain conditions, likewise deductible. These conditions are in line with those for the deductibility (100%) of direct taxes and can be summarised as follows:
- The objects are durable consumer goods;
- The objects are limited in value;
- The objects permanently bear the name, abbreviated name, the logo or the trademark of the company giving the gift;
- The objects are intended for very wide distribution.
So consumables (such as chocolates bearing the company name) and valuable articles cannot be considered as advertising materials.
Victims of disasters
Until recently, when a taxpayer gave goods to the victims of a disaster, he was required to perform a disposal of goods in those cases where the purchase price or the standard value of the good exceeded €50. This restriction has been scrapped in the new circular, which means that charity can be unlimited, from a tax point of view, when it comes to aiding victims of disasters.
Should you have reached the limits of your generosity and you wish to deliver your goods for pecuniary interest, then it is good to know that an exemption from VAT is available – that does not restrict the right to deduct VAT – if these goods were delivered to accredited organisations that take them to a location outside of the EU for the purpose of benevolent, charitable or educational work in a non-EU country.
In recent years companies have been able to give away surplus food stock, under certain conditions, without losing the right to deducting VAT or having to perform a VAT-liable disposal. Tolerance is only applicable to food surpluses given away for free, and they must be foodstuffs for human consumption that are subject to a reduced VAT rate (6% or 12%) and that cannot or are not able to be sold for commercial reasons. The tolerance is furthermore only applicable when the food surpluses are donated to accredited food banks, local authorities (such as public social welfare centres) or local charitable institutions that in turn distribute the products free of charge to those in need. For companies gifts are considered to be a rejected expense, unless these are cash gifts to specific accredited institutions within set boundaries. No exemptions are applicable for gifts in kind (such as food surpluses) to accredited institutions, as this exception only holds for monetary gifts.
As with the free distribution of commercial samples, commercial gifts of a limited value are likewise excluded by law from the scope of disposals. Commercial gifts are understood to be ‘the objects that are periodically or incidentally offered within the framework of professional relationships’. As opposed to commercial samples, these are generally (but not necessarily) goods that are not manufactured and/or purchased by the taxpayer.
To be fully deductible, the commercial gift must have a limited value, which is considered as anything under €50, excluding VAT. The publication of this circular also marks an additional condition, in that the right to the deduction of VAT is only granted for one gift per business relation per calendar year. Any other gifts worth less than €50 (excluding VAT) given to the same person within the same calendar year are consequently no longer all eligible for the right to the deduction of VAT, even if the total value of the various gifts together amount to less than €50.
This tolerance only applies to gifts of goods, not services, with the sole exception being the gift of a Single Purpose Voucher that will provide a service to its holder (such as a movie theatre ticket). Corporate relationship gifts are only 50% deductible as a professional expense for direct taxes, irrespective of their worth. One exception to this are those gifts provided within the scope of business travel abroad, which are deductible in full.
Gifts to staff
Gifts given to staff or their children on a special occasion – maybe New Year’s or Christmas – can also enjoy full deductibility of VAT under certain conditions. While the taxman until recently adhered to their qualification as a deductible collective social benefit for income tax, it seems as if the VAT administration has now compiled it’s ‘own’ conditions:
- The gift is given to all members of staff or all their children, in which case an age limit could be imposed;
- The value of the gift is less than €50 (excluding VAT).
The right to the deduction of VAT is, analogous to that of commercial gifts, again only permitted for one gift per member of staff and per child per calendar year. Please note that the limit has been raised from €35 to €50, in any event for VAT purposes, and it remains (for now) at €35 for direct taxes. We assume that the latter maximum sum for income tax will still be raised. It’s a relief that the tax authorities have brought together these matters in a single document and have to some degree harmonised their opinion through the provisions concerning income tax. But there remains one minor point: the circular does not contain a date upon which the measures come into effect, so that it is anybody’s guess when the amended rules will be applicable and a number of old VAT decisions are revoked.