Hamburg, 25 October 2010 – Anyone who invites business friends to dinner, gives away football or opera tickets and hands over presents can easily cause the recipient a lot of trouble with the fiscal authorities or even the prosecution. This was underlined by WTS (World Tax Service) in Hamburg. WTS pointed out that travelling and the participation in incentive events almost always cause tax disputes with the fiscal authorities. WTS is now offering seminars on this topic which very often has serious consequences.

More and more businesses are now appointing compliance officers. With adequate and effective means they ensure that companies and their employees are protected from committing unlawful acts. In the so-called "Code of Conduct" the principles are laid down according to which employees are allowed to accept gifts or extend invitations to business partners. In trainings and using practical examples good compliance officers communicate these rules. They hand out checklists and pocket cards and offer to be personally available for advice in case of doubt, for instance, whether a government representative can be invited to dinner or not. Irrespective of the consequences under labour and criminal law, gifts, invitations and benefits to third parties will always have tax implications.

"Even if it had not been permissible to accept the benefit in kind in the first place, it would still be taxable“, explains Eva Doyé, tax consultant and attorney-at-law as well as head of the Hamburg Office. "Anyone accepting a gift should therefore know exactly what is stipulated in the tax law. And anyone making a gift and trying to save the recipient from harm should also look into the law."

Prior to the World Cup 2006 held in Germany German tax experts looked into this topic in more detail. The organisers of the World Cup were assuming that companies would invite their clients into the so-called VIP lounges on a grand scale – an important source of income for funding the construction of new stadiums. "Up to then, however, there had not been any legal alternative for the host to assume the responsibility for paying the tax on this benefit in kind“, reports Eva Doyé.

On 22 August 2005 the Federal Ministry of Finance issued the so-called "VIP lounges decree". These administrative rules allowed a host for the first time to pay the tax on behalf of the person invited. Here 60 percent of the costs for the VIP lounge package are subject to taxation by the host. In 2007 the legal framework for the flat-rate taxation of benefits in kind given to external recipients was established. If you wish a recipient of a gift to be spared the payment of tax on a benefit in kind, you can pay the income tax due at a flat-rate of 30 percent. To this tax the solidarity surcharge as well as church tax at the rate applicable in the respective federal state have to be added.

In case of particularly good business partnerships the benefits in kind and gifts might be of a higher value - irrespective of whether such a gift, made for example to the head buyer of the most important customer, is still morally and legally acceptable. If the value of the benefits and gifts to one and the same recipient exceeds €10,000 in one year, the fiscal authorities will deny the flat-rate taxation.

Should a company decide to pay tax at a flat rate of 30 percent on gifts made to external recipients, it is allowed to exclude gifts that cost less than €10 to produce or buy from the flat-rate taxation. The fiscal authorities regard these low-value benefits in kind as "giveaways". If the value of €10 is exceeded, though, the flat-rate taxation applies, even if the gift has for instance a logo printed on it.

"Whenever I am invited or receive a gift, I should always ask myself two questions", explains WTS tax consultant and payroll tax specialist Susanne Weber: "Is the gift taxable since it is made in a professional context? And: Do I have to pay tax on it or has the person making the gift already done this on my behalf? “

Anyone making a gift can also benefit from this. Benefits in kind given to external recipients of up to €35 are fully tax-deductible for the person making the gift. Input tax is refunded and the net amount is deductible as operating expenses. In addition, the tax paid on behalf of the recipient on gifts worth less than €35 is deemed a tax-deductible operating expenditure. The fiscal authorities do, however, require the date, the name of the recipient, the value of the gift and the occasion on which the gift is made to be recorded in a separate expense account. “This is very rarely done in practice", states tax consultant Eva Doyé and warns: "In a tax audit it can then happen that any gifts made are no longer considered tax-deductible as an operating expenditure.“

If you invite others to dinner, the costs are also tax-deductible: This does not only apply to business lunches and dinners but also to entertaining the company’s own employees.

• An appointment is only considered a business lunch or dinner when business partners attend and the focus is clearly on business interests– for instance when strengthening existing or establishing new business contacts. The inviting company can claim a refund of the full input tax, but only 70 percent of the net expense is tax-deductible as an operating expenditure. The guest does not have to pay any tax on the food and service received. The host is obliged to state the business reason for the invitation and to list all participants.
  
  
• Entertaining the company’s own employees is norally not due to business but rather internal reasons, for instance a working lunch which is only attended by the company's own staff. The company can claim a refund of the full input tax and deduct 100 percent of the net expense as an operating expenditure. As a rule, payroll tax will have to be paid since the fiscal authorities generally assume that the invitation is extended as a reward. The company will therefore also have to check whether input tax has to be paid to the tax office for such an invitation.
  

The tax treatment of incentive trips for the host is still in dispute. In its circular of 1996 the Federal Ministry of Finance stipulated that the entertainment costs incurred on such a trip are subject to the same rules as for business lunches and dinners. "The fiscal authorities, however, currently do not always apply these rules but treat entertainment cost as part of the benefit“, says Eva Doyé, head of the WTS Hamburg office. "With respect to incentive trips you may well expect controversial discussions with your tax auditor.“

Tax consultants and compliance officers are allies when it comes to the tax treatment of gifts, invitations and benefits in kind to third parties. Both require an efficient process including transparent and detailed documentation of the transactions. This can save you trouble with the fiscal authorities or even the prosecution.

WTS Hamburg offers to events on this topic:
28 October 2010:"Making and receiving gifts - how to get it right? “
11 November 2010: Compliance Tools and Processes in Practice – using the example "Making and receiving gifts the right way“

Pictures and Press Materials

 Eva Doyé is tax consultant and attorney-at-law as well as head of the Hamburg Office.

 Sussane Weber is WTS tax consultant and payroll tax specialist.