In Brief
10. Jan 2025

Gifts to customers - Avoid the tax pitfalls

Christmas time, which has just recently come to an end, is the high season for gifts and nearly all companies organise a range of activities not only during that time but also in the further course of the year; in doing so, they aim to strengthen relations with customers and business partners. The tax treatment of gifts, in particular, plays a decisive role here.

In this respect, three aspects are especially important, namely, the business expense deduction, the rules on VAT and input tax and the taxation of the benefit for the recipient.

1. With regard to the business expense deductions, caution is advised with respect to the €50 tax-exemption limit. 
Gifts to customers and business partners may indeed, in principle, be deducted as business expenses, although only under certain circumstances:


  • Commercial reason - the benefit has to be provided in a business context.
  • Value limit of €50 per year and recipient -  the amount will be deductible only if the total value of all the gifts for the year does not exceed €50. If this exemption limit is breached then the deduction ceases to apply entirely.
  • Record-keeping obligations - all gifts have to be separately documented.
  • Packaging and shipping costs are not included in the value of the gift, whereas customised lettering or printing of the gift has to be taken into account.

Furthermore, it has to be considered whether or not, from a tax point of view, the criteria for a gift have at all been satisfied. Free benefits with nothing provided in return fall under the aforementioned rules. However, if these are add-ons to purchased products or referral rewards then the €50 limit would not apply because, in this case, the ‘no consideration’ criterion could not be satisfied.

Please note

Low value promotional items - usually wroth below €10 - can also be deducted even without providing details of the recipients.  Gifts for personal reasons (e.g., birthday or wedding) that are worth up to €60 are not included in the €50 tax-exemption limit.

2. The €50 exemption limit is deemed to be a net value insofar as the giver of the gift has the right to deduct input tax. 
If this is not the case then the gross value would be used. If the exemption limit is breached then not only would it be no longer be possible to claim the business deduction, but the input tax deduction would likewise be excluded (Section 15(1a) of the German VAT Act). If however the value of the gift remains below the limit then no VAT would be payable on a benefit for no consideration.

Please note

Even if the business expenses deduction is not recognised for tax purposes because of shortcomings with regard to record-keeping, the input tax deduction would nevertheless still be possible.

3. Gifts may be considered as benefits-in-kind for the recipients and would thus constitute operating income. 
This could lead to tax consequences already if the value of these gifts is €10 or more.   Companies can however prevent the beneficiary from incurring tax disadvantages by assuming the flat tax charge under Section 37b of the German Income Tax Act. The flat tax is charged at a rate of 30% of the gross value plus the solidarity surcharge and church tax and is voluntary for the company giving the gift. However, if the company opts to do so then this decision will apply consistently for all the gifts over the course of the year. The beneficiary has to be informed that the tax charge has been assumed by the giver of the gift.

Please note

Whether or not the flat tax that has been assumed may be deducted as a business expense will depend on whether or not the gift itself has satisfied the criteria for a business deduction.

Conclusion

Gifts are an effective means for showing appreciation to customers and business partners - however, from a tax perspective, they can trip you up. Companies should pay attention to the exemption limits, correct record-keeping and the potential VAT consequences. Assuming the flat tax charge could be an elegant solution to saving the beneficiary from incurring tax disadvantages. Careful planning will ensure success - from a tax perspective, too.


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