SAC: Social events for clients not tax deductible
A company organised a meeting with clients to celebrate the anniversary of its foundation, with an accompanying programme titled "20 years – client event – social gathering – the priority is to relax, enjoy and try interesting activities". The Supreme Administrative Court was asked to assess whether the costs of the event were advertising and promotion, thus tax deductible, or whether they were tax non-deductible entertainment expenses.
In a case recently dealt with by the SAC (10 Afs 113/2021), a company included in its taxable base the costs of arranging an evening gathering with clients. Following an extensive tax inspection, the tax administrator concluded that the event had the character of entertainment rather than of advertising and promotion and treated the costs as tax non-deductible. The SAC further did not accept expenses for replacing lights or royalties/licence fees for a trademark as tax deductible.
Entertainment vs. advertising expenses
In the company's opinion, the expenses were tax-deductible advertising expenses. During the social evening, some social activities for clients were taking place, including a music band for listening and dancing and a magician’s show. But there was also a training, a presentation of the company's results, and the introduction of a new logo. According to the company, the event was organised to strengthen the position of the brand and the company’s name on the market to fight its competitors, and to promote the company’s products. Numerous informal meetings with clients took place during the event. The company among other things also paid for its clients' accommodations.
The SAC first commented on entertainment and advertising expenses in general. According to the SAC, the list of entertainment expenses in the Income Tax Act is only demonstrative (not exhaustive) and provides guidance for defining the content of the term. These are supplies of a certain type intended for direct consumption by, or a gift to, a specific person. On the other hand, advertising involves the process of finding new customers, in the SAC’s opinion. The SAC, like the tax administrator, assessed the event as a presentation: the video recording of the event suggests that it was a social event intended for direct consumption by business partners, and not a promotion of specific products or services.
Construction work
In the same judgment, the SAC also dealt with the tax deductibility of other expenses. Among other things, whether the replacement of lights in a warehouse was a repair (a one-off cost) or a technical improvement (to be depreciated gradually). The judgment reminds us how important it is for the taxpayer to be able to prove the extent of the work carried out and the state before and after the work. In the case at hand, the company failed to prove the condition of the warehouses before the work was initiated, therefore the court excluded the costs from the tax base.
Royalties paid
The SAC also commented on the tax deductibility of royalties paid for the use of trademarks. At the heart of the dispute was whether a company was using two trademarks – the old and the new, or only one of them. Tax administrator’s doubts were triggered by partial transactions in the trademarks, subsequently produced amendments to contracts, and other circumstances. In the end, the court agreed with the tax administrator and the regional court and did not accept the royalties as a tax-deductible expense. This part of the judgment reminds us how crucial it is to have high-quality documentation and a comprehensive and stable (not changing over time) explanation of various transactions and their circumstances.