Contest marketing and income tax: what to watch out for
When preparing marketing contests, it is important that organisers bear in mind possible tax implications. The taxation of winnings, VAT deductions, or the tax deductibility of costs – all these affect the financial efficiency of contest marketing. Incorrect contest setups may lead to additional costs or penalties.
Contest marketing is an effective tool that businesses use to build brand awareness, increase customer engagement and boost sales. The contests attract the attention of potential customers and create opportunities for interaction with existing clients. What to watch out for from an income tax perspective?
Corporate income tax
When organising marketing contests, businesses incur costs for various activities: from the organisation and promotion of the contest to the provision of winnings and refreshments at the prize award ceremony. However, there are no specific income tax rules for the treatment of these costs as a whole, so each must be assessed on an individual basis.
If the Income Tax Act contains a specific provision regulating a specific type of cost/expense, then it must be treated in accordance with that provision. For example, the costs of refreshments are not tax deductible, even though they may have been incurred in connection with the organisation of a marketing contest. If the act does not specifically regulate the cost/expense in question, then it must be treated according to the general rules. The key factor then is whether the expense was incurred for the purpose of generating, securing, and maintaining taxable income. If this is the case, the costs of marketing contests may be regarded as advertising and promotion cost/expense that can be tax deductible.
Contest organisers must also consider the withholding personal income tax that they pay on behalf of the winners of non-monetary prizes. This tax, same as VAT, can be regarded as a tax deductible cost/expense. Proper tax treatment always requires careful record-keeping and documentation of all related costs and taxes.
Personal income tax
Winnings from contests can also be a tax pitfall for the winners. The person of the winner is crucial, as it determines the tax treatment.
For individuals, winnings up to the value of CZK 50,000 are exempt from tax. If the value of the winning exceeds this amount, the entire amount of the winning is subject to a withholding tax of 15 percent. Where a prize was won in connection with a business or employment (i.e. an employee could not have won the prize if they had not worked for the relevant employer), the exemption limit of CZK 50,000 does not apply. Entrepreneurs (self-employed individuals) shall tax their winnings as income from business activities and employees as income from employment.
Entrepreneurs should pay increased attention to contests with an international element. Here, the rules of the double taxation treaty between the Czech Republic and the winner's country must be considered. Prizes are usually regarded as other income and are subject to taxation in the country of residence of the winner.