Taxation of entertaining and guests related costs

The Income Tax Act defines ‘costs of entertaining guests’ as expenses incurred in connection with the provision of catering, accommodation, transportation, or entertainment to guests and co-operation partners. Costs of entertaining guests may also be called ‘representation expenses’.

Within certain limits a company may cover expenses connected with entertaining business partners without incurring any tax obligations.

A reception is a recreational event – a Christmas party, a business lunch, a visit to the theatre.

The tax exempt limit of such representation expenses is 32 EUR per month + 2% of the salary paid. In this context ‘salary’ means remuneration subject to social tax.

Generally, the company’s own employees and members of the management or control bodies are not regarded as guests, and any expenses connected with providing them catering or entertainment etc. are subject to taxation as fringe benefits.

If a reception is intended for business partners, and is attended by the company’s own employees who perform their work duties, then such costs are deemed normal business-related costs.

In case an expense is subject to taxation as a fringe benefit, such expenses are subject to both income tax, and social tax; furthermore, no VAT can be recovered from such expenses. Therefore, if a company intends to make such expenses, it is advisable to check and consult with the accountant first, in order to ensure that everything is arranged properly. When such costs are reported it is necessary to provide clear explanations of what was done and why should such costs be subject to taxation as costs of entertaining guests under § 49 of the Income Tax Act.