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| | December 19, 2023

Social events from the income tax perspective

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In today’s article we would like to focus on the topic of social events from the perspective of income tax, in connection with the Advent time, which is usually a period of client and employee Christmas parties.

As a general rule, costs related to the organisation of such events can be considered tax deductible, if they are incurred to achieve, secure and maintain the taxable income of the organising company. However, these costs clearly do not include expenses for refreshments and gifts (except for advertising or promotional items as defined by law).

When considering other related costs, it is necessary to distinguish for what purpose and for whom the corporate event took place.  First, let us take a look at events organised for employees. In the case of strictly cultural events (e.g. a Christmas party, where no training or team building takes place), the associated costs will not be tax deductible for the employer. However, if an employer organises training or teambuilding with the intention of deepening interpersonal ties between employees and improving their ability to cooperate with each other, according to case law, participation in it can be considered as participation in training (i.e. professional development of employees). The costs associated with such an event, such as room rental, projection equipment rental, etc. may then be considered tax deductible by the employer. Employees do not receive any taxable income in connection with participation in such cultural events or training (or such income is exempt from tax for employees). If a member of the employee’s family attends the Christmas party (which is only a cultural event) as a companion, no taxable income will arise for them either.

In this context, the consolidation package introduces a new provision into the Income Tax Act from 2024, according to which income from the participation of an employee or his/her family member in a sports or cultural event organised by the employer for a limited number of participants in a reasonable form and scope will be exempt. According to the explanatory memorandum, the events must be of a non-public nature organised on an occasional basis (e.g. Christmas party, celebration of the company’s anniversary, Children’s Day, St. Nicolas Day party, celebration of the end of the financial year, etc.). On the employer’s side, the costs of organising such events will not be tax deductible (if the employee’s income is exempt). According to our information, the General Financial Directorate is preparing a methodological guidance on this issue, which is intended to help taxpayers with the application of the new provisions. As regards the cost of training and team building (i.e. professional development of staff), the Consolidation Package does not introduce any major changes, and therefore the above conclusions will probably continue to apply.

As with employee events, it is necessary to assess what the main objective of client events is. Current case law shows that if the organizing company is able to prove that such an event is held for the purpose of establishing business relations, promoting specific products or services, or is a training event, the related costs (in addition to the aforementioned costs of refreshments and gifts and other representation costs) may be considered tax deductible. If case it is more of a representative social event, the main purpose of which is to entertain guests, the associated costs will be tax ineffective. However, case law emphasises that each case must be considered individually, taking into account the specific circumstances.

Please do not hesitate to contact your Grant Thornton contact person if you have any questions about hosting social events and the related tax implications.