The end of the year is approaching, and many companies are planning various events, be it a Christmas party, a thank-you event for clients and partners, a team training, or a strategy day. And despite the fact that most entrepreneurs are generally aware that hospitality expenses, representation expenses, and in some cases even training expenses may, but do not necessarily, incur a tax liability, there is often still confusion about what is what, and when and for whom income tax or social tax must be declared and paid, and when not. An exception here are NGOs listed in the income tax incentive list, but we will not focus on them in this blog post.
Hospitality Expenses and Representation Expenses
Company hospitality expenses and representation expenses are similar in terms of taxation (income tax 22/78), but they should be recorded in different expense accounts in accounting. So, what is the difference between them?
Hospitality Expenses
Broadly speaking, hospitality expenses are directly related to hosting guests, such as clients or cooperation partners (e.g., business lunches, dinners with partners, client receptions). Thus, guests are those whose reception is related to business activities, but who do not have an employment contract with your company. In addition, if you organize an event, it must have a justifiable business purpose in any case. Hospitality expenses can broadly be considered as:
- catering for business partners in a restaurant
- client reception on company premises, including coffee and snacks
- transportation and accommodation for guests
- cultural services – e.g., performers, theatre, cinema, party tickets;
- gifts (excluding promotional gifts)
- rental of premises
- security service for the reception.
Representation Expenses
Representation expenses are related to the promotion of business activities and image building and include, among other things, events aimed at introducing the company or product, such as participating in trade fairs and conferences. Representation expenses may also include product presentations or demo events for potential clients. In other words, these are expenses directly related to the promotion of the company’s business activities and the acquisition of clients. Representation expenses are broadly therefore:
- business gifts (calendars, products with the company logo – NB! Under 21 euros)
- organizing promotional events, visiting trade fairs
- presentation materials
- expenses related to sponsorship
In the case of hospitality expenses, it is particularly important to document, in addition to expense invoices, who participated (at least the visiting company and the number of participants), what the purpose of the event was, and what expenses were incurred. For example, the lunch took place with representatives of this and that company, or the party had such a program and these people participated. In the case of representation expenses, invoices must also be kept and the connection with the company’s activities must be shown.
The main stumbling block is that hospitality expenses and representation expenses are often confused and not accounted for separately. For example, if you organize an end-of-year event for clients, the food and drinks offered there are hospitality expenses, but the company gifts given to the guests are representation expenses. Specific rules apply to gifts, an overview of the taxation of which we provided in the blog “Taxation of Gifts: What to Know When Giving Gifts to Employees or Clients”.
Training Expenses
Training expenses are an important investment for the company, related to the development of employees’ skills and knowledge and contributing to the increase of the company’s competitiveness. Training expenses are tax-free if they are directly related to professional development and the acquisition of occupational skills. For example, all expenses related to courses related to a specific job, raising professional qualifications, and acquiring professional education are tax-free. However, if you want to organize a fun sushi training for your employees and your company has nothing to do with the catering sector (meaning the skill of making sushi is not related to the job in any way), it is a benefit offered to employees that falls under fringe benefits. You can read more about this below.
Is there a limit to hospitality expenses?
But of course. This means you still need to think through when, on what, and for whom you spend. If the planned expenses are correctly classified as hospitality expenses, the limit is 50 euros per month (per company, regardless of the number of employees), plus 2% of the sum of personalized social tax-liable payments made in the same calendar month.
This is a cumulative amount over the calendar year, meaning that if you decide to organize a thank-you event for your clients in December, you can use the rate provided for the whole year. On the other hand, if you decide to use up the rate provided for the whole year already at the beginning of the year, you will still have to pay income tax on the amount exceeding the amount “accumulated” by that time, but you will get it back based on the monthly recalculation. How exactly this works, check with your accountant.
Whether in January or December, ultimately it is up to you to decide what budget you plan for hospitality expenses and which events and when you organize. Just be prepared that if you exceed the limit, i.e., 50 euros x 12 months + 2% of the sum of personalized social tax-liable payments made in the same calendar year.
Now, pay attention. Often, your own employees also participate in the described events. This means that if your own employee attends the event as a guest, a fringe benefit applies*. Therefore, taxes must be paid on the expenses associated with their participation, an additional 70.51% (first you add income tax and then social tax on the resulting amount).
* Fringe benefits are financially measurable benefits received in addition to salary that the company offers its employees. Here is a simple logic – if the item or benefit is necessary for work, it is not taxable with income tax and social tax and there is no “ceiling,” meaning you can buy an expensive computer or desk as you deem reasonable. However, if the item or benefit received from the employer is not directly necessary for work or related to professional development, such as an entertaining Christmas party or Christmas gifts, it is a fringe benefit. However, there is one more “but” – if your company’s employees perform work duties at the event, even if only related to the organization of the event, it is considered working and that is a completely different topic, not a fringe benefit.
We also point out here, who are classified as “employees” in the context of hospitality expenses, meaning not guests, and to whom a fringe benefit applies:
- members of the management board and the supervisory board;
- company employees,
- people working for the respective company under a contract for services or a contract of employment;
- their spouses or cohabitants, parents, children, siblings;
- in addition, the same list of persons if the employer is another Estonian company belonging to the same group; however, employees of a Latvian company in the same group ARE guests.
In Summary
Thus, the precise definition and correct documentation of various expenses will help you avoid unnecessary tax liabilities and unexpected costs. For example, in the case of hospitality and representation expenses, it is often the case that the documentation of events and meetings is incomplete, which means there is no basis for tax incentives, and you must declare and pay all taxes. Therefore, ensure that there is clear and understandable documentation for every expense, justifying how the expenditure was related to the company’s activities, and plan these expenses in advance throughout the year to maximize the benefits and keep your business activities in compliance with the law.
If you have any questions about hospitality or representation expenses or want to know more about taxation, contact us and we can discuss cooperation opportunities.
Recent Comments