The world of corporate philanthropy is far from uniform, especially when it comes to taxation. A closer look at European countries shows how the design of tax policies varies, a divergence that extends to neighboring countries. Using Latvia as the “base country,” this article looks at the domestic corporate income tax (CIT) treatment of cash donations in the Baltic countries and several other European jurisdictions (in-kind contributions are not addressed).
Unlike the stringent regulation observed in the area of VAT, which is characterized by predetermined standard rates and prescribed conditions applied uniformly across the EU, CIT remains distinctly decentralized. Within the corporate arena, the non-harmonized treatment of corporate donations incentivizes individual European countries to architect their own systems, which has implications for both donors and donees. For instance, the United Kingdom offers a more favorable landscape for corporate donations as compared to Latvia. Sweden does not allow CIT deductions for company donations.
Tax reforms play a pivotal role in shaping a country's economic landscape and social priorities by adjusting and adapting tax policies to changing realities. Latvia’s 2018 tax reform represented a significant departure from the status quo, introducing a series of changes that reverberated throughout the nation's fiscal framework. One of the key objectives was to stimulate economic growth, encourage business activities and attract foreign investment. Central to the reform was the transition from a traditional CIT regime to one based on the “Estonia model” (i.e., where companies pay CIT only if profits are distributed as dividends or if certain transactions are treated as equivalent to dividend payments).
Exploring the dynamics within the Baltic region, it becomes evident that Latvia's benefits for corporate donors are somewhat less accommodating as compared to its southern neighbor, Lithuania, but share some similarities with Estonia, although not as expansive. Lithuania offers a more inclusive approach by extending the benefits of charitable deductions to donors of all sizes. In Estonia and Latvia, the landscape is more nuanced, with limitations that render such deductions particularly advantageous for major employers and those generating significant profits.
Under Latvia’s previous CIT regime, tax had to be paid annually based on taxable profit, allowing all business entities with CIT obligations to use the CIT discount for donations, i.e., an 85% tax reduction provided the total tax relief did not exceed 20% of the total tax amount. As mentioned above, the 2018 reform introduced the deferral of the payment of tax until profits are distributed or used for non-development expenses with a view to stimulating economic growth by encouraging companies to retain more profits, thereby promoting investment. As a result, some business entities may not have CIT liabilities to which the donation discount can be applied. To address this, two new CIT reliefs were introduced, allowing business entities to make donations without paying CIT up to 5% of the previous year's profit or 2% of the previous year's gross wages and salaries. Additionally, entities were only allowed to reduce dividend tax by 75% of the donated amount up to a maximum of 20% of the calculated CIT for dividends. The less economically advantageous deduction policies weakened incentives for companies to donate to sports and culture; in fact, in the first half of 2018, non-governmental organizations received 38% less in donations in connection with the tax reform than in the corresponding previous period. In 2021, the provision reverted to the pre-tax reform situation by again allowing 85% of the donated amount to be deducted up to a maximum of 30% of the total tax relief.
Since the reform, a more favorable arrangement has been available for substantial profit earners and employers interested in making donations in Latvia. However, despite the availability of a range of options, the attributes associated with these choices, in some instances, have had a deterrent effect on donation behavior. To illustrate, consider a hypothetical scenario: a Latvian company generates profits of EUR 2 million and decides to donate EUR 100,000 to a non-profit of its choice. In this case, the company can choose from three available deduction options:
- Exclude the donated amount from the corporate tax base, up to 5% of the prior year's after-tax profits. With an after-tax profit of EUR 2 million, 5% amounts to EUR 100,000. In this case, expenses are EUR 100,000, with no tax implications. If the after-tax profit was EUR 1 million, 5% is EUR 50,000, so the remaining EUR 50,000 (out of the EUR 100,000 donation) incurs a 20% CIT, totaling EUR 12,500. Hence, the donor's overall expenses are EUR 100,000 + EUR 12,500, totaling EUR 112,500.
- Exclude the donated amount from the corporate taxable base, up to 2% of the prior year's total gross wage expenses for mandatory state social insurance contributions. If the total payroll expenses were EUR 5 million, 2% equates to EUR 100,000, making the donor's expenses EUR 100,000. Similarly, with total payroll expenses at EUR 3 million, 2% is EUR 60,000; the remaining EUR 40,000 incurs a 20% CIT, resulting in EUR 10,000. Thus, the donor's expenses total EUR 100,000 + EUR 10,000, amounting to EUR 110,000.
- Reduce taxable income by factoring in the donated amount for profit and/or loss calculations. The calculated CIT decreases by 85% of the donation, not exceeding 30% of the calculated CIT. For instance, if a company donates EUR 100,000 and the CIT reduction is 85% of the donated amount, the tax is calculated based on EUR 15,000. With the formula applying a coefficient of 0.8, the donor's expenses—donation plus payable CIT—total EUR 103,750.
Previously, the total spending would amount to EUR 106,000, which is marginally less advantageous than the third option under the revised rules. The changes afford room for variety, increased donations and a slightly augmented profit margin for entrepreneurs. However, it is important to note that the prerequisite for donations lies in the company's profitability; philanthropic contributions are typically viable for already profitable entities. Seemingly minute discrepancies wield a significant influence in determining a company's inclination towards charitable contributions.
Situations in other European countries
The tax treatment of donations in select European countries varies widely, reflecting diverse approaches to incentivizing corporate philanthropy. This overview explores how Austria, Belgium, Czech Republic, Estonia, Finland, France, Germany, Italy, Lithuania, Luxembourg, Netherlands, Poland, Portugal, Spain, Slovenia, Sweden and the United Kingdom structure their tax systems to encourage charitable contributions. These countries impose different limits on deductible amounts, require donations to benefit specific sectors or offer enhanced deductions for targeted causes. While some nations prioritize deductions based on a percentage of profits, others emphasize supporting cultural, scientific or humanitarian initiatives. Understanding these distinctive tax policies provides insight into how corporate donors engage in philanthropy across Europe and contribute to social and economic development.
Austria
Charitable donations are tax-deductible up to 10% of the current year's profits. This includes contributions to certain Austrian public institutions, non-profits supporting Austrian science and economy and fire brigades under specific agreements with Austria. The focus should be on benefiting Austrian science or economy.
Belgium
Donations to eligible charities must fall within the range of EUR 40 and up to 5% of total net income for the taxable period, with the maximum deductible amount capped at EUR 500,000. The donation must be made to an organization whose activities are in the cultural, scientific, environmental, humanitarian or developmental domains, including support for various vulnerable groups and disaster relief.
Czech Republic
The maximum deductible donation amount in the Czech Republic is 10% of the CIT base. Donations made by legal entities are deductible up to 10% of the tax base if at least 2% of the tax base is donated (the deductible percentage was increased temporarily to 30% for donations made during the period March 2020 through February 2023). To qualify for the deduction, the minimum donation must be at least CZK 2,000.
Estonia
In Estonia, money or property donated by a legal entity or a permanent place of business to a person listed as a non-profit organization, foundation or religious association, or to another association established in an European Economic Area (EEA) contracting state that is considered a tax-exempt association (referred to as persons on the list of income tax-exempt associations) are generally tax-free within certain limits. The taxpayer can choose the limit they want to apply, but only one limit can be used for the entire year. Donations and gifts are tax-free up to either 3% of the amount of payments taxed with social tax made by the taxpayer in the same calendar year (equivalent to 3% of the "salary fund") or 10% of the taxpayer's profit from the previous financial year ending on 1 January of the calendar year. If the total value of gifts and donations in the year exceeds these limits, the amount exceeding the limit is subject to income tax at a rate of 20/80.
Finland
Tax deductions for companies are available only if the donations support organizations that promote science, art or Finnish cultural heritage. The minimum threshold for donations is EUR 850 and the maximum is EUR 250,000, provided the recipient is located in an EEA state, or is a state-funded university, higher education institution or university-funded structure. The maximum donation is EUR 50,000 if the recipient is an association or a fund approved by Finland’s State Tax Board. The list of eligible organizations is relatively short, and does not include all social, youth, sports and recreational organizations.
France
Companies can donate to nonprofit organizations through corporate sponsorship, which provides the donor with tax benefits provided certain requirements are met. The tax reduction is deducted from the company's tax liability in the year of the donation, regardless of whether the company is subject to CIT or income tax, with the reduction rate depending on the recipient. In other cases, the company can receive a tax reduction of 60% of the donation amount for donations up to EUR 2 million and 40% for the portion that exceeds that amount. However, there is a maximum amount for which the reduction can be obtained, i.e., EUR 20,000 or 0.5% of the company's annual turnover (excluding taxes), whichever is higher. If the maximum amount is exceeded in a fiscal year, the excess donation can be spread over the following five fiscal years, along with any new donations made during that period, applying the same rate as the initial amount.
Germany
Corporate donations in Germany are deductible up to 20% of total income or 0.4% of total revenue and wages paid in the calendar year. It is important to note that membership fees paid to organizations promoting sports, special cultural activities, cultural heritage, customs and traditions are not eligible for deduction. Additionally, there are strict rules regarding donor benefits, where the purchase of goods and services at their true market value from a foundation or public benefit organization, such as buying tickets from a foundation, cannot be claimed as tax deduction.
Italy
The deductibility of donations is possible up to 10% of total declared income, without additional restrictions (the EUR 70,000 ceiling has been abolished). This includes donations to charitable organizations meeting “ONLUS” criteria (i.e., contributions to schools, universities and scientific research). Special deductions are available under the “Art Bonus” initiative for companies making donations for the restoration and upkeep of public cultural assets, as well as assistance to cultural venues such as museums, libraries, archives and archaeological parks. Since 2016, a 65% tax incentive has been in place for donations aiding cultural endeavors in order to foster support for culture.
Lithuania
The donation deduction rules in Lithuania differ significantly from the rules in neighboring Baltic countries. In Lithuania, the deduction for a donation can be doubled (i.e., a 200% deduction is possible), but only up to 40% of taxable income before deducting the donation and utilizing previous year tax losses. Assuming a company donates EUR 100,000 and its previous year's pretax profit is EUR 2 million, 40% of the profit would be EUR 800,000, which would not exceed the donation amount of EUR 100,000. There is no taxable surplus, and the total expenses remain at EUR 100,000, but a reduced CIT payment would be due on distributed dividends.
Luxembourg
In Luxembourg, donations made for scientific, charitable or public purposes to institutions serving the general interest are tax-deductible up to 20% of net income or up to EUR 1 million, with a minimum annual amount of EUR 120. If the donation exceeds this limit, the deduction can be spread over a two-year period.
Netherlands
Corporate donations made to recognized charitable organizations (ANBI or SBBI) may be deducted from taxable income in the Netherlands, typically up to 50% of taxable profits subject to a maximum of EUR 100,000, provided the gift is documented in writing. Donations to cultural organizations can be deducted at 1.5 times the value of the donation, capped at EUR 2,500 (or EUR 5,000 for cultural gifts).
Poland
Companies in Poland have the opportunity to support public benefit and voluntary organizations by deducting donations up to 10% of their taxable base. Some restrictions apply, and deductions cannot be taken for donations made by companies engaged in specific commercial activities, such as the production of certain goods or restricted availability of goods in trade.
Portugal
Corporate donations in Portugal are fully deductible for CIT purposes, with the possibility of enhancement up to 150% based on the nature or purpose of the recipient. Charitable institutions can allow deductions of up to 0.8% of turnover, potentially increased to 150%, while donations to authorized educational, sports and environmental entities may be deductible up to 0.6% of turnover, possibly increased to 140%. Additionally, donations to the state, municipalities and foundations with initial capital participation are fully deductible, with potential enhancement to 140%.
Spain
Tax-deductible donations in Spain are limited to charities registered in the country and that are in specific legal forms, including foundations and associations with a certificate that the charity is in the public interest or that are registered with Spain's development agency. Corporations, foundations and associations in Spain are eligible for a 35% deduction in computing the CIT liability. The deduction can be increased to 40% if similar or higher donations are made to the same entity for at least three consecutive years. However, the deduction is subject to a limit of 10% of the tax base and applies to all annual donations made to entities eligible for tax relief.
Slovenia
A taxpayer can request a deduction from its taxable profits for donations made for various purposes, including humanitarian, charitable, educational, medical, cultural and religious initiatives within Slovenia or EU/EEA member states. The deduction is limited to 1% of the taxpayer's taxable revenue. An additional allowance of 0.2% is applicable for cultural, sports and public interest organizations focused on disaster prevention. A tax allowance of 3.8% payments supporting top sport programs has been available since 1 January 2022.
Sweden
There are no tax incentives for companies that make donations, but they can deduct certain expenses as business expenses.
United Kingdom
Companies and even unincorporated associations in the UK can claim tax relief for qualifying donations made to charitable organizations or Community Amateur Sports Clubs (CASC). These donations are considered potential taxable income. However, donations made to charities or CASCs are tax-exempt if they are used for charitable or qualifying purposes. Relief is available in the period in which the donation is made, except for companies that are wholly owned by charitable organizations with specific rules. If a company makes a qualifying donation, it can deduct the amount from its profits for purposes of calculating its corporation tax. The company can claim this deduction in its corporate tax self-assessment return, reducing the taxable profit to zero. However, charitable donations cannot be used to create or augment trading losses of the company, and any excess donations cannot be carried forward to the next period, although they can be surrendered as group relief.
BDO insight
As is evident from the above survey, there are substantial disparities in the rules governing the deductibility of charitable donations across countries in Europe, encompassing both financial advantages and inducements for specific sectors. For instance, in Slovenia, only 0.3% of CIT may be contributed annually to charity (with an additional 0.2% for specific causes), while in Portugal, potential deductions can amount to 150% against taxable income. These differences, however, are not confined to fiscal implications. They are also present in a range of charitable causes, and information requirements differ: in Slovenia, donor information is not required for processing incentives but the country allows only a 1% income deduction, whereas in the UK, companies can potentially deduct 100% of their donation from taxable income but charities must provide donor and donation details to the tax authorities.
Some countries may offer more generous deductions to encourage corporate philanthropy, while others may have stricter limits or different eligibility criteria. This divergence can lead to differing levels of corporate engagement in charitable activities throughout Europe.
Tax reforms, such as the 2018 reform in Latvia, also have a substantial impact on corporate charitable deduction policies by altering limits, eligible recipients and causes. These reforms can incentivize or discourage corporate giving through changes in matching programs, carryforward periods and caps on benefits. Stricter reporting requirements and transparency measures enhance accountability, while targeted incentives for specific causes promote socially responsible actions.