Donating to sports, culture or art is more profitable for companies operating in Lithuania, the donor support system in Latvia is not as welcoming as in its southern neighbor, and it is on par with Estonia, but it is also not as generous.
This is shown by AS BDO's research on corporate income tax discounts for donors. "Peculiarities of corporate income tax - differences in Latvia and Estonia (where it is paid only when dividends are paid or transactions comparable to it) from Lithuania and the rest of Europe, as well as the settings and decisions of the political governments of the countries, as well as the public's understanding of self-donation the most important reasons why the incentive package for donors differs," Jānis Zelmenis, partner of AS BDO Latvia, describes the research data. He points out that, basically, a company that works in several countries can choose in which of them to make a donation after calculating the benefit.
"Corporate income tax in the European Union is not strictly regulated, as is the case with value added tax, which has a standard rate, as well as reduced rates and conditions for its taxation, which must be observed in all EU member states; basically, each member state can do as it wants, and this is also clearly manifested," emphasizes J. Zelmenis.
The revolution of 2018 changed everything.
"As a result of the corporate income tax reform implemented in 2018, companies were deprived of the incentive in the form of this tax discount - to donate money to sports and culture, because it was no longer economically profitable," reminds J. Zelmenis.
He adds that in 2021, the Saeima already increased the incentive for donors and essentially returned to the situation that existed before the tax reform. "If companies have been used to receiving a carrot in the form of a corporate income tax discount in return for sharing a share of their profits over several decades, why should they now suddenly become patrons - donate without asking for anything in return?" to the question of why the corporate income tax reform 2018-2021 scared away donors, J. Zelmenis answers with a counter question. As an important nuance in this context, he cites the fact that since 2018, corporate income tax must be paid only if profits are distributed as dividends or purchases are made that are equated with the payment of dividends, while last year corporate income tax had to be paid also for profits that are not divided into dividends, as a result of which, by donating some amount, the amount of this tax payment could actually be kept at a very minimal level. "Of course, this has been the case for the last 27 years, and in the early 1990s, companies-donors had a discount, not as it is now - 85% of the amount of donations - but all 90%, but in the period from 2018 to 2021 the amount of this discount was reduced to 75%," explains J. Zelmenis. He does not deny that, in essence, the donor companies were rewarded for such sharing with their share of profit with the share of profit tax not collected by the state.
Innovations are only good for the big ones.
The BDO partner draws attention to the fact that since 2018, there has been a very advantageous system for large profit-makers and large employers who want to donate. J. Zelmenis proves this fact with the example of a company whose profit is 2 million euros but whose donated amount is 100,000 euros. Namely, the company can use one of the three donor discounts, let's say, not including the amount donated in the taxable base with corporate income tax but no more than 5% of the profit of the previous reporting year after calculated taxes. So, if the profit of the donor company after taxes was 2 million euros in the previous reporting year, 5% of it is 100,000 euros. Thus, in such a case, if the donor's spending is 100,000 euros, the amount of the donation does not create CIT consequences.
At the same time, J. Zelmenis draws attention to the fact that in the situation where the profit after taxes of the donor company in the previous reporting year was 1 million euros, 5% of it is EUR 50,000, and the remaining EUR 50,000 is subject to corporate income tax of 20%, or EUR 12,500. Total spending by the donor: EUR 100,000 + EUR 12,500 = EUR 112,500. "There is another option, which is also beneficial for large companies," says J. Zelmenis. Specifically, not including the amount donated in the taxable base with corporate income tax, but no more than 2% of the total gross wages calculated for the employees of the previous reporting year, from which the mandatory state social insurance contributions were made. So, if the gross salary of the company-donor in the previous reporting year was 5 million euros, 2% of this amount is EUR 100,000, and the total spending by the donor is EUR 100,000. At the same time, if the gross salary of the company-donor in the previous reporting year was 3 million euros, 2% of it is EUR 60,000, and the remaining EUR 40,000 is subject to corporate income tax (CIT) of 20%, or EUR 10,000. In this case, the donor spends EUR 100,000 + EUR 10,000 = EUR 110,000. " There is also a third option, which is suitable for companies of all sizes; that is, by reducing the CIT, the taxable income is increased by the amount of the donation included in the expenses of the profit or loss statement; the calculated CIT is reduced by 85% of the donated amount, but no more than 30% of the calculated CIT amount. So, when donating 100,000 euros and assuming that the CIT is reduced by 85% of the donated amount, the CIT is calculated at 15,000 euros.
"Since the coefficient 0.8 must be used in the calculation formula, the expenses of such a donor—donation plus payable corporate income tax—will already be 103,750 euros," explains J. Zelmenis. He points out that the variety of different restrictions is a factor that scares away potential donors.
In Lithuania, donate, and you will get a double discount.
The laws of Lithuania differ significantly from the laws of the neighboring Baltic countries in the matter of deductions for donations. "In the southern neighboring country, the number of donations can be doubled for the purposes of tax deductions (i.e., a 200% deduction is possible), but only up to 40% of the taxable income before deducting the donation and using previous tax losses," explains J. Zelmenis. He points out that according to the previous assumption (100,000 euros are donated by a company whose previous year's profit before taxes was 2 million euros), 40% of the profit would be 800,000 euros, which would not exceed the donation amount of 100,000 euros. "Thus, there is no taxable surplus, and the total expenses remain at 100,000 euros, but there is a lower corporate income tax payment for the dividends to be paid," emphasizes J. Zelmenis.
Estonia is close to Latvia.
"At one time, Latvia copied (with improvements) the Estonian corporate income tax system, and it is no wonder that donors in the northern neighboring country have similar conditions to Latvia," says J. Zelmenis. He substantiates what he said with the example of a donor who donates 100,000 euros and earns 2 million in the previous year. euro. The company would have two options for deducting donations. The first would allow deducting the amount of the donation from the tax base, but no more than 10% (that is 50% more than in Latvia) of the taxpayer's profit of the previous financial year. In fact, in such an example, it is necessary to check whether 10% of the profit of 2 million euros exceeds the amount of the donation of 100,000 euros. There is no excess since 10% of the previous year's profit was 200,000 euros. Therefore, the donor's total expenses will be the value of the initial donation of 100,000 euros and not a cent more. "It should be noted that when donating 100,000 euros, the previous year's profit will be enough for the donor in Estonia—one million euros—while in the case of Latvia, twice as much profit would be required—2 million euros—so that the company income tax does not have to be paid", J. Zelmenis hastens to add.
In Estonia, the donor has another option: to exclude the number of donations from the corporate income tax base but no more than 3% of the total amount of salary paid by the taxpayer in the previous reporting year (in Latvia, 2% of the total gross salary calculated for employees in the previous reporting year).
Assuming that the company's total salary payment was 3 million in the amount of EUR, then the 3% limit is EUR 90,000, which is less than the donation amount of EUR 100,000, so the effective corporate income tax rate of 25% must be paid for this EUR 10,000. As a result, the total cost to the donor will be 102,500 euros. "Yes, more expensive than in the first solution in Estonia, but cheaper (by 7,500 euros) than for the donor in Latvia according to the criteria of labor wages in the second analyzed case of Latvia, taking into account the higher allowance for wages," concludes J. Zelmenis.
Opposite poles
The BDO study shows that in Sweden there are no corporate tax rebates or any other incentives for companies that donate, while those that do in the UK have the option of not paying corporate tax at all. "There is no single order, and each country acts according to its own discretion," said J. Zelmenis.
When donating 100,000 euros, the previous year's profit of one million euros will be enough for the donor in Estonia. EUR, while in the case of Latvia, twice as much profit would be required—2 million euros—so that you don't have to pay corporate income tax.
Czech Republic
The maximum amount of the deductible donation is set at 10% of the corporate income tax base. A donation made by a legal entity is deductible up to 10% of the tax base if at least 2% of the tax base is donated (30% for donations made between March 2020 and February 2023).
Individuals are able to deduct certain charitable donations from their taxes. In order to receive a deduction, the minimum donation amount must be 2,000 Czech crowns (approximately 84.68 euros), thus ensuring that donations of various sizes can be recognized.
France
Businesses have the option of donating to non-profit organizations through corporate sponsorships, which provide them with a tax deduction. Special conditions must be met to receive this tax benefit.
The tax reduction is deducted from the company's tax liability in the year of the donation, regardless of whether the company is a corporation or an income tax payer.
The rate of reduction depends on the organization receiving the donation. In the general case, the company can receive a tax reduction of 60% of the donation amount for donations up to 2 million euros and 40% for the part that exceeds 2 million euros. However, there is a maximum amount for which you can receive a reduction, namely 20,000 euros or 0.5% of the company's annual turnover (excluding taxes), whichever is greater. If the maximum amount is exceeded in a financial year, the excess donation may be spread over up to five subsequent financial years, together with any new donations made during that period, at the same rate as the original amount.
Germany
Private individuals can deduct donations as special expenses from their personal income tax base in full.
Legal entities, on the other hand, have certain limits for this deduction, which allow deducting no more than 20% of the total income or 4% of the total turnover and the amount of wages paid in the calendar year. It is important to note that it is not possible to deduct membership fees for organizations that promote sports, special cultural or cultural heritage activities, as well as customs and traditions.
In addition, Germany has strict rules regarding donor benefits, where purchases of goods and services at fair market value from a foundation or public benefit organization, such as the purchase of fund tickets, cannot be claimed as tax deductions.
Sweden
There are no tax benefits for corporate donors, but they can deduct some expenses as business expenses.
Great Britain
Businesses and even unincorporated associations can claim tax relief for matching donations made to charities or Community Amateur Sports Clubs (CASCs). These donations are considered potential taxable income.
Donations to a charity or CASC are tax-exempt if used for charitable or eligible purposes. Relief is available for the accounting period in which the donation is made, except for companies wholly owned by charities, which have special rules.
If a company makes a matching donation, it can deduct the amount from its profits for corporation tax purposes. A company can claim this deduction in its corporation tax self-assessment return, reducing its taxable profit to zero. However, charitable donations cannot be used to create or supplement a company's trading losses, and surplus donations cannot be carried forward, although they can be returned as group relief.
Poland
Companies are able to support public-benefit and voluntary organizations by deducting donations from their taxable base up to 10%. Certain limitations apply, and deductions cannot be claimed for donations to individuals or businesses engaged in specific economic activities, such as the production of certain goods or the sale of limited-availability goods.
Finland
A tax deduction can only be granted to companies if the donations support organizations that promote science, art, or Finnish cultural heritage.
The minimum threshold for eligible donations is €850, and the maximum donation is €250,000, provided that the recipient is a European Economic Area (EEA) country, a publicly funded university, a higher education institution, or a university-funded body resident in the EEA.
Alternatively, the maximum donation is 50,000 euros, provided that the recipient is approved by the State Tax Council as an association or foundation. The list of eligible organizations is quite short and does not include all social, youth, sports, and leisure organizations.
Source: Dienas Bizness