Year's end is nigh, and firms busy themselves sending out New Year's wishes and delivering Christmas gifts to their clients. Let's have a closer look at how such gifts are treated from the vantage point of value-added tax and income tax.
Year's end is nigh, and firms busy themselves sending out New Year's wishes and delivering Christmas gifts to their clients.
Let's have a closer look at how such gifts are treated from the vantage point of value-added tax and income tax.
Generally speaking, gifts and costs of entertainment are non-deductible expenses. However, under certain exceptional circumstances, such expenses may become both tax-deductible and eligible for a VAT refund.
For a gift to enter the claim for an input tax refund, it must be priced below CZK 500 (net, i.e., without VAT), whereas it is of no concern whether or not it has been labeled with the name of a company, or of a particular product or service. What is relevant, though, is whether it has been made within the context of the giver's economic activity within the meaning of Sec. 13 (8) (c) of the VAT Act.
A company distributes among its clients branded calendars worth no more than CZK 500 without VAT – as such, the expenses will be recognized in the company's claim for the refund of input tax. A calendar without the firm's logo (but again priced at or below CZK 500 without VAT) is not a tax-deductible expense but the claim for input tax is preserved.
Income tax aspects
If your Christmas gifts are branded with the logo of your company, or the trade mark or designation of products or services which you offer (which would be the case e.g. in the case of a branded calendar), we are looking at advertising and promotional items, and thus at tax-deductible expenses for income tax purposes. Again, the value of such gifts must not exceed CZK 500 without VAT.
Gifts without such particulars (such as a corporate logo etc.) cannot be considered advertising and promotional items, and the expenses related to them are therefore considered costs of entertainment and thus (pursuant to Sec. 25 (1) (t) of the Income Tax Act) non-deductible.
As a Christmas gift, your clients receive a nice bottle of wine, without the logo of your company. The related expenses are deemed costs of entertainment, and as such are not deductible. However, unless the price of the wine stays at or below the CZK 500 mark (not including VAT), you will at least be able to claim an input tax refund.
Source: Act No. 586/1992 Coll., the Income Tax Act Act No. 235/2004 Coll., the VAT Act www. portál.pohoda.cz