Christmas gifts for business partners – tax implications

However, be mindful that giving and receiving gifts has its implications when it comes to income tax and value added tax. 

 

 

When it comes to VAT, a gift for a business partner should be looked at from two angles:

 

 

Taxpayers may deduct input tax from output tax if the purchased goods or services are incurred for the purpose of the trade, that is activities related to the taxpayer's business. Gifts given to business partners most often aim at promoting the company, so the main condition for the right to deduct is met. 

 

At the same time, a free-of-charge gift is treated for VAT purposes as a taxable supply of goods. Exceptions apply if:

 

 

Please remember that a free-of-charge supply of goods is taxable only if the taxpayer had the right to deduct input tax. This means that if purchases are not incurred for the purpose of the trade (no right to deduct), there will be no obligation to add tax to a free-of-charge supply. 

 

The assessment whether purchases are incurred for the purpose of the trade is not always easy and may require a closer look. 

 

 

When it comes to income taxes, expenses for gifts for business partners are non-deductible. Revenue authorities usually treat such expenses as 'official entertainment' which is non-tax-deductible. 

 

Exceptions include expenses for advertising purposes, e.g. small gifts which are mass distributed to all business partners and include the business logo. If you give away e.g. notepads, pens or cups with your logo, you can treat such expenses as advertising expenses, and deduct them from tax as such. 

 

Importantly, accepting a gift triggers income tax implications too. If a gift is given to a business entity, it must recognise income on account of a free-of-charge benefit. 

 

Identifying the correct tax treatment of a gift for a non-business entity (e.g. a business partner's employee or a contractor not entered in the Central Register and Information on Economic Activity – CEIDG) is more complicated.

 

A seemingly simple act of giving a gift to business partners may have significant tax consequences. If you do not know how to classify expenses for Christmas gifts for your business partners and employees, contact us.