Rzeczpospolita: Company's Christmas expenses - when they are tax costs

The entrepreneur will settle expenses on greeting cards and gifts as a common standard of conduct in economic practice. However, providing gifts with the company logo will reduce the risk of being challenged by the tax.

BOMBS AND DECORATIONS...

As a general rule, expenditure linked to the purchase of Christmas decorations is the cost of obtaining income. This is mainly due to the universality of such action among economic operators, which means that it is difficult to look for the characteristics of representation in such action. On the contrary, the lack of such elements is now treated as something unusual. So these are not reasons on which you can build prestige or positive image of the company.

...They cannot be productive

However, it is worth to be careful when tuning the office or premises. Crossing standard customs through extremely extravagant and expensive Christmas decorations can be treated as representation costs. This position is supported by interpretations by tax authorities.

In the interpretation of the Director of the Tax Chamber in Bydgoszcz with 5 March 2015 (ITPB3/423-626/14/KK) reads: “If the above decorations were above the usual standards in a given industry or area, they were extremely lavish, more exclusive, elegant, expensive, significantly improved the aesthetic image of the company and were placed only in rooms where only specified customers are admitted (e.g.

conference room, offices of representatives of the company), then the provision would apply. Article 16(1)(28) Corporate Income Tax Act, i.e. the company's expenditure on lavish decorations could not be regarded by the company as revenue-making costs".

CLIENTS...

The expenses incurred to customers and contractors are, in principle, intended to give them a commitment to the brand and to increase their satisfaction in dealing with the taxpayer, with the aim of increasing the company's financial performance.

Therefore, such expenditure is in line with one of certain conditions under Article 15(1) CIT and Article 22(1) PIT Act. However, some may be excluded from costs as representation expenses. It's about Christmas gifts offered to customers in the form of expensive alcohols or candy baskets.

True, there is a view that when attaching advertising material to such a gift of the company (e.g. folders, leaflets, etc.) it is possible to prove that expenditure was incurred for advertising purposes and that the gift was only a "additional" to the campaign.

However, this is a questionable argument which may be contested by the tax authority.

Less doubts arise in the case of gifts marked with the logo of the taxpayer. The opinions on this subject are not conclusive, but the position that approves them as tax costs prevails.

As we read in the WSA judgment in Wrocław with 5 May 2016 (I SA/Wr 321/16): „(...) According to the facts presented, some of the small gifts presented to counterparties and potential counterparties are covered by the company's logo and are therefore advertising items.

Expenditure incurred on the acquisition of such items is not expenditure on representation but on advertising)". As part of the additional security, it is also worth putting in a gift elements clearly advertising, e.g. the slogan of the campaign promoting the activity of the taxpayer.

Even so, the precautionary principle and the limits of the market standard must be respected. Presents too impressive or well above the standards adopted in business contacts will not be included in the cost of obtaining revenue as they will be treated by the body as expenses for representation.

This also applies to Christmas cards with wishes. Although it is accepted that they can be classified as income costs, as a generally accepted standard of conduct in economic practice, their logo will further reduce the risk of unfavourable interpretation.

A good entrepreneur cares not only about his clients, but also about employees.

... AND WORKERS

However, an important condition in the case of gifts to employees is that they are not covered by the share benefit fund, since according to Article 16(1)(45) The CIT Act does not include such expenses as revenue costs.

As Christmas presents are associated rather with social activities, the right to credit them for tax costs can be undermined. This should be avoided by ensuring that expenditure is not an element of social activity and is covered by revenue. It is best that the gifts have the same value.

Even so, this does not preclude an adverse interpretation of the tax authority, but the risk is negligible. The case is different in the case of gifts given to children of workers. It is very difficult to demonstrate in such a situation that this cost is related to the revenues obtained by the entrepreneur.

The Company's VIGILIA

Another type of spending on workers is the tradition of the Christmas Eve. This often involves ordering catering services, which further increases doubts about these costs. In this situation too, the purpose of such a meeting is important, as stressed by tax authorities.

‘The objective of the meeting organised by the company is determined by the possibility of crediting the expenditure incurred with tax costs.

On the occasion of Christmas, the company organizes a meeting which aims to improve interpersonal communication and motivation to work by integrating individuals with the company, building a team, improving the working atmosphere and facilitating the arrangement of mutual relations between employees and employers" (interview of the Director of the Tax Chamber in Poznań with 13 February 2015, ILPB3/423-610/14-4/JG).

In order to be able to conclude that expenditure on the organisation of an employee Christmas Eve is one of the costs of obtaining income, it is therefore necessary to demonstrate the inclusive or motivating nature of the meeting and to document it accordingly. Meeting plans, agendas or subjects discussed during the meeting may be helpful, such as a summary of the company's results for the year ending.

PERSONS ASSOCIATED

Authorisation to attend such a meeting of non-work-related persons was for many years the basis for not recognising the expenditure in question for the cost of obtaining income. This approach was expressed by tax authorities in the interpretations issued (e.g.

the Director of the Tax Chamber in Poznań in the interpretation of 18 December 2007, ILPB3/423-119/07-2/MC; Director of the Tax Chamber in Katowice in interpretation of 15 January 2014, IBPBI/2/423-1335/13/PC) despite criticism of taxpayers and representatives of doctrine.

The approach of tax authorities now seems to have changed. In issued 31 March 2015 individual interpretation (IBPBI/2/423- 1570/ 14/AP) The Director of the Tax Chamber in Katowice stressed: “Workshops can also be spent on organising an integration event for employees’ family members.

This benefit relates to the relationship between the employee and the employer (if not for this relationship, family members would not attend the meeting)". This means that expenses related to the participation of employees' family members in the Christmas meeting can also constitute revenue costs?

Author is a tax advisor and lawyer At Russell Bedford

CONCLUSION

When planning Christmas expenses, the most important thing is two issues: adapting to industry and market standards, as well as documenting and proving that the expenditure incurred is advertising rather than representative. In complying with these recommendations, there should be no doubt as to the inclusion of expenditure incurred in the cost of obtaining revenue.

Source: Republic of

Author: Andrzej Dmowski

Lawyer and Doctor of Legal Sciences of the University of Warsaw. From 2011 one from Corporate Management Partners Russell Bedford Poland. Previously on the BDO advisory network, as well as Deloitte & Touche. Author of the book “Transfer Prices”, co-author of the commentary “The Corporate Income Tax Act”, author of many publications on tax law.