The company is engaged in the retail trade of tobacco and alcohol. A two-day event is being held, which will be attended only by invited customers and cooperation partners. The purpose of the event is to introduce the newest products and to conduct their tasting. Premises, various types of equipment are rented for the event, food is ordered, and the manager of the event is invited. Contests and prizes are planned for the event. Some guests are billed to the hotel. Can these expenses be directly attributed as economic activity expenses or are they still representation expenses?
When identifying the expense of economic activity, the expenses must be evaluated according to the legal and economic form, and the purpose and impact of the incurred expense on the business must also be understood.
Business expenses
Business expenses are those expenses that are directly related to the economic activity of the entrepreneur, for example, expenses related to product promotion.
The purpose of advertising is to increase the demand for goods or services - that's why a public advertising campaign is created. Therefore, if goods are advertised at the event with the aim of promoting their sales and the company can justify such a goal with, for example, market change studies, contracts concluded at the event or otherwise, the event can be classified as related to advertising.
From the description of the question, it is not clear what type of event is being planned, so we will consider several options and their possible consequences.
Representation expenses
Taking into account that the purpose of the event is to introduce customers and cooperation partners to news in the assortment of goods, it can be considered as raising the visibility of the company's image.
Representation expenses are those expenses related to building the entrepreneur's prestige - hosting business partners and cooperation partners and organizing meals, including the purchase of low-value items (up to 20 euros) that contain the entrepreneur's logo and are used to promote the company. For representation expenses, 40% of the value added tax (VAT) amount is deductible as input tax.
In the specific situation, the entrepreneur organizes an event intended for customers and cooperation partners. So, it can be assumed that the company's image and goods are being promoted. Accordingly, expenses related to the creation of such an event are considered representation expenses, however, the nature of each expense must be evaluated separately.
In this case, the expenses for the rental of premises, equipment, meals, the event leader and the organization of contests will be considered representation expenses. Representation expenses are not included in the corporate income tax (CIT) base if they do not exceed 5% of the gross wages calculated for the previous year's total employees for which mandatory state social insurance contributions have been paid in the reporting year. The expenses of the personnel sustainability measure are also added to this threshold.
If, however, the organized event is considered an advertising event and it can be argued with justification documents or conducted sales growth studies, these expenses can be considered as expenses related to economic activity. In that case, they do not increase the taxable base of the CIT.
Prize expenses
Event prizes are considered an item of representation and are judged separately based on their monetary value. If the value of the object does not exceed 20 euros, such an issue is not included in the UIN database. On the other hand, if the value of the object exceeds 20 euros, then if the recipient is identified, the application of the specific tax must be additionally evaluated. Accordingly:
- if the prize is presented to a natural person - personal income tax must be applied, but CIT is not required;
- if the prize will be received by a legal entity, this expense, if it does not exceed the 5% threshold, is added to the representation expenses, if the recipient of the prize is not identified, these costs are considered for expenses not related to economic activities, which are subject to CIT and the effective CIT rate of 25% is applied.
However, if the competition prizes are awarded within the framework of a public advertising campaign, the prize provided does not exceed the value of a low-value item (€70) and the results of the competition are reflected in the media, such expenses may be considered economic expenses. Otherwise, such costs are made up of the taxable base of the CIT.
Hotel expenses
Guest hotel expenses are considered personalizable expenses. In this context, such expenses are not related to the direct employee and do not contribute to business development or sales of goods. Therefore, they are classified as not related to economic activity, and the effective CIT rate of 25% is applicable to them.
However, if the organized event can be classified as a public advertising campaign, such expenses can also be attributed to advertising expenses. Then the taxable base with the CIT does not need to be increased.
In order to apply any of the exemptions provided for in the Corporate Income Tax Law (CIT Law) to expenses, the company must have a justification document for each expense, as well as the ability to justify the economic nature of the transaction.
When holding a representation event, there must be an order of the manager or a representation act, so that the relief provided for in the CIT Act can be applied to the specific expenses. In addition, in order to apply the 5% tax-free threshold, expenses for representation and staff sustainability measures must be accounted for and allocated separately from other expenses.
If, however, the amount of representation expenses exceeds the 5% threshold, then the effective CIT rate of 25% is applied to the excess part and the non-deductible VAT part.