Small gifts maintain friendship – and strengthen customer relationships. In the following blog, you will learn what you have to keep in mind regarding the tax aspect of gifting.
The deduction of expenditures from gifts is strictly regulated. First of all the reason for the gift has to be business matters, either to strengthen the relationship with a business partner or an employee. In addition to this, the yearly amount spend on gifts for non-employees shall not be greater than € 35.00 per donee. Even if these two criteria are fulfilled, the tax deduction often fails due to an incorrect documentation.
Gifts are all free contributions that are not intended as a form of payment for certain services of the recipient and are not directly or indirectly related to such services. Since the gift must constitute an economic advantage for the recipient, mere amenities that do not enrich the recipient are not subject to the deduction restriction.
The supply of free beverages such as coffee for example is an amenity that does not fall under the restriction for the deduction of gifts.
As stated above the fundamental requirement for the deduction of the expenses for gifts is that the cause of the gift is rooted in the operation of the business. Private gifts are therefore not deductible, even if the gift has been paid by the resources of the company. In practice, the tax authorities mostly verify the cause of the gift through the relationship of the recipient. For example the tax authorities rarely question the cause of the gift if the gifted is a business partner.
Limitation of the deduction
Even if the cause of the gift is an operational, the yearly sum of gifts for each donee must undercut € 35.00 to be deductible. The basis of the determination of this limit can be the gross or net amount of the gift, based on your entitlement of deduction of the input tax of the gift. If you are entitled to the deduction of VAT, the basis is generally the net amount of the gift. The only exemption to that rule are gifts that do not allow the deduction of input tax. This might be the case if the invoice does not meet the criteria of the German law on turnover tax. If you are not entitled to the deduction of the VAT the basis is always the gross amount. However, there are exemption for this rule. Gifts to employees are always deductible, regardless of the amount of the gift. Furthermore, gifts that can only be used for business purposes are always deductible. For example, if a pharmaceutical company gifts a several samples of a specific medication to a hospital, these medications are only usable for business purposes and are therefore always deductible.
The expenses for gifts have to be documented separated from other operating expenses. In practice this is done through the posting of said expenses on specific accounts. In addition to this it is important that the name of the person receiving the gift is noted. The generally accepted accounting principles have to be followed as well.