Gifts purchased for advertising and promotion of the company

Service-Tax

One can notice an increasingly frequent phenomenon among entrepreneurs, consisting in giving their contractors gifts in the form of freebies. It is one of the possibilities of undertaking marketing activities in order to gain customers and strengthen the position on the market. However, when using this form of advertising, pay attention to the nature and value of the gifts. This is because the possibility of recognizing the expenses for their purchase as tax deductible costs may depend on this issue.

Pursuant to the applicable provisions of the Personal Income Tax Act, entrepreneurs have the right to include advertising expenses as tax deductible costs on general terms. However, it is important to distinguish whether the purchased gifts really only have a promotional function or whether they have a representative color. The importance of this issue stems from the fact that pursuant to Art. 23 sec. 1 paragraph 23 representation expenses may not constitute tax costs of the enterprise.

How to distinguish advertising from representation?

There is a belief among taxpayers that a good image is an important component of the company's success because it affects the amount of revenues. Hence, expenses incurred for this purpose should be included in company costs. However, many tax authorities, in the issued individual rulings, are of the opposite opinion, not allowing this type of expenditure to be recognized as costs. So how do we distinguish when we are dealing with advertising and when we are dealing with representation?

In practice, advertising activities are undertaking promotional activities in order to provide contractors with information about the company's available offer, thus encouraging them to purchase the presented goods or services. Representation, on the other hand, is a form of representation on behalf of the company, associated with grandeur and splendor, in order to evoke the best possible opinion among potential customers. The aim of these activities is to effectively acquire new customers by enhancing the image or presenting the company's reputation.

Evaluation of the nature of the gifts

An effective assessment of the nature of the gifts given should depend mainly on the type and scale of the business, because the same product in a larger enterprise may be a component of marketing activities, and to a lesser extent at the cost of representation. Factors such as the unit value of gifts, the overall value of the expenditure incurred, as well as the group of recipients are also important. Low-value gifts with permanent company logos that are distributed to contractors on a large scale (e.g. pens) will be recognized by the tax authorities as advertising costs, thus allowing the expenses to be recognized as tax deductible.

It will be different, however, when gifts of a much higher value will be given only to selected contractors. In such a case, the tax office may question the classification of such expenses as tax costs because they show the features of representation, influencing the image of the company in the eyes of the recipients.

A gift given as an entrepreneur's income?

Receipt of a gift by a natural person in connection with his / her business activity constitutes a benefit in kind under the applicable law. Pursuant to Art. 11 (2) of the PIT Act, the monetary value determined according to market prices represented by the donated item constitutes an increase in the entrepreneur's income.