Jak je to s uznatelností společenské akce?

What about the deductibility of a social event?

For your interest, we bring you an interesting view of the Supreme Administrative Court (SAC) on the question of deductibility of the costs of a "social event".

What was addressed?

• Company X held an event billed as a social gathering to celebrate its 20th anniversary. The title of the event was 'X - 20 years - client event - social gathering - priority is to relax, enjoy and try interesting activities (shooting, golf, etc.)'.
• The tax administrator found that the guests were greeted by hostesses at the event, and during the evening there were social activities such as billiards, bowling, laser shooting range, golf simulator, BINGO game, photo booth, sauna, jacuzzi. The course of the evening was moderated, a music band and DJ played for listening and dancing, a magician performed, accommodation was also provided. During the social evening, the new logo of the company was presented.
• The company treated the related costs as tax-effective costs under Section 24(1) of the Income Tax Act (ITA).

What did the tax authorities say?

On the contrary, the tax authority concluded that it was a representation within the meaning of section 25(1)(t) of the ITA and therefore a tax-ineffective expense.

What does the company say?

The company argued, inter alia, that

• it organised training sessions for its customers to present the company's history, achievements, new strategy and corporate style, new visions and directions for the company's further development, and newly introduced commodities;
• informal meetings at social events were held;
• it was a client event designed to build the company's brand position or name in the community against competitors, with participants taking away experiences that reinforce the company's future revenue potential;
• the appearances were intended to boost attendance at the promotional event, not to provide benefits to attendees.

What does the SAC say?

The SAC sided with the tax administrator - a selection of interesting arguments for this conclusion:

• There is a fine line between the concept of representation and advertising and the specific circumstances of each case must always be considered.
• Advertising has to be assessed in the light of the persuasion process, in which new users of goods and services are primarily sought. If training is to be included as a cost under section 24(1) of the ITA, only expenditure incurred on rentals for training purposes or for other purposes which, on a reasonable assumption at the time they were incurred, could have led, albeit indirectly, to an increase in income, may be tax deductible.
• The entire course of the event under examination indicates that it was a social representative event intended for the direct consumption of the company's business partners and was not a promotion of the company's specific products or services. All this supports the concept of the event, including its title and subtitle, which makes it clear that the purpose of the event was primarily to entertain guests and not to establish business relationships. The individual circumstances of this case therefore suggest that it was a representation expense under section 25(1)(t) of the ITA.
• The evidence submitted does not show that training or meetings with business partners took place at the event. If the company wished to prove that training and informal discussions with business partners took place at the event, on the basis of interviews with the guests, it should have suggested this to the tax authorities. Similarly, it should have provided the tax authorities with specific photographs from which it could have inferred that a presentation of its products took place at the event.
• There is a difference between a non-pompous event where there is a presentation of products followed by a business meeting and a pompous event with music, competitions, etc., the subtitle of which is that its purpose is to have fun and relax.

If you have any questions, please contact the author of this article or the EY tax team with whom you regularly work.

Author:

Radek Matuštík