How to distinguish advertising from representation?

Service-Tax

Representation and advertising

The issue of advertising and representation costs often raises many doubts, because many entrepreneurs have always had a problem with assessing which category to include the expenses incurred in this category. Often there are even disputes between taxpayers and tax authorities, as the provisions define different regulations as to the costs of advertising and representation.

Representation is not a cost

The Income Tax Act clearly stipulates that expenses incurred in order to generate revenues, preserve or secure the source of these revenues may be classified as tax deductible costs. The only exception are the costs contained in Art. 23 above acts, including only representation expenses. Advertising, as it does not belong to this category, is considered a tax expense if it is related to the conducted activity and the expenditure is rational and documented. Representation costs include, in particular, expenses incurred for catering services, purchase of food and beverages, including alcoholic drinks.

Unambiguous tax classification of an event

Due to income tax, it is very important to assess whether a given expense is an advertising or representation cost. However, neither statutes nor any legal provisions define these two terms. Therefore, it is worth getting acquainted with the definitions contained in the dictionary of the Polish language. According to them, advertising is "an activity aimed at encouraging potential customers to buy specific goods or to use certain services", as well as "a poster, text, advertisement, short film, etc. serving this purpose." Thus, the purpose of advertising is primarily to persuade a potential customer to buy products or use services.

Representation, on the other hand, is a kind of representation on behalf of the company, associated with lavishness and splendor, in order to evoke the best opinion in the circle of potential contractors in the company's image. The aim of these activities is to facilitate the acquisition of new customers by enhancing the image or presenting the company's reputation.

Taking into account the above considerations, it can be concluded that the recognition of expenses as advertising or representation costs depends on the given situation, the size of the company and the type of business. The specified expense for one company will be the cost of advertising, and for the other company it will be the cost of representation. As stated in the judgment of 3 December 2002 by the Supreme Administrative Court, each case requires a separate analysis.