Expenses for alcohol during integration meetings and tax deductible costs
The company will not treat alcohol served at a meeting of one if its departments as tax deductible costs, even if the purpose of department meetings is to enhance the level of motivation for work and integration, which should bring about an increase in the company’s revenues. Such conclusion is evident from the individual binding ruling issued on 1 September 2017 (ref. no. 0114-KDIP2-1.4010.127.2017.1), confirming position of the tax authority in the matter significant for many taxpayers.
The company providing logistics services submitted an enquiry whether the expenses it incurs for the organisation of meetings for employees and individuals employed under civil contracts, covering the expenses for food, alcohol and additional attractions like e.g. the use of go-karts, may be included under tax deductible costs.
Pursuant to Article 15 paragraph 1 of the CIT Act, tax deductible costs shall be all costs incurred in order to derive revenues or to maintain or secure the source of revenues, with the exception of costs listed in Article 16 paragraph 1. So it is deemed that an expense may be recognised as cost on condition that:
it has been incurred by a taxpayer,
it is definite,
it is in connection with the activity carried on,
it has been incurred in order to derive, maintain or secure revenues, or it may affect the amount thereof,
it is properly documented,
it has not been listed in the negative catalogue included in Article 16 paragraph 1 of the CIT Act.
The above conditions must be satisfied jointly.
At the same time, as stipulated by Article 16 paragraph 1 point 28 of the CIT Act, the costs of representation, in particular incurred for catering services, purchase of food and drinks, including alcoholic drinks, shall not be treated as tax deductible costs. Nevertheless, there is no legal definition of the said representation.
Notion of representation – judgment of the Supreme Administrative Court
In its judgment issued by the panel of 7 judges on 17 June 2013 (court ref. no. II FSK 702/11), the Supreme Administrative Court noted that representation constitutes action aimed at creating or strengthening the positive image of the taxpayer towards other entities, above all – every action directed to the taxpayer’s existing or potential customers or a third party in order to create the expected image of the taxpayer for the purpose of facilitating the conclusion of a contract or creating favourable conditions of its conclusion. So an expense for representation may be costs incurred in order to create one’s positive image, highlight prosperity, professionalism, while representation should not be connected with “sumptuousness”, “splendour” or “glamour”.
For the assessment whether a given action constitutes representation referred to in Article 16 paragraph 1 point 28, all the factual circumstances of the case in question should be analysed.
Costs of integration meeting in the assessment of tax authority
The tax authority noted rightly in the discussed binding ruling that although representation constitutes action directed to other entities, it does not mean automatically that expenses for an employee must be always tax deductible (in view of having not been covered by Article 16 paragraph 1 point 28 of the CIT Act). An expense must satisfy the conditions arising from Article 15 paragraph 1 of the CIT Act, unless participation of an employee in a given business meeting is connected with the performance of business activities and also unless it is a form of equivalent for the remuneration for work. In conclusion, if an expense has been incurred in order to build positive relations among the employees, and those in turn may contribute to the actual increase of revenues, or to the maintenance of or securing their source, according to the tax authority they expense may in principle be tax deductible.
Nonetheless, the tax authority differentiated expenses for food and additional attractions for employees and expenses incurred for alcohol. While the first ones will be tax deductible, the other ones are, according to the authority, outside the casual relation envisaged by Article 15 paragraph 1 of the Act. The authority noted Article 2 paragraph 1 point 1 of the Act on Upbringing in Sobriety of 26 October 1982, according to which the tasks related to counteracting alcoholism shall be performed by establishing appropriate social policies, in particular by creating conditions fostering the fulfilment of needs the satisfaction of which shall motivate one to abstain from consuming alcohol.
The tax authority confirmed thus the position known already from other binding rulings. So when planning integration meetings, taxpayers should remember that not all costs related thereto will be tax deductible.
Barbara Otrzonsek, Tax Consultant, ATA Finance.