As Christmas approaches, it is important to know the fiscal discipline of the expenses incurred for gifts and presents. As always, the Italian tax system here too has a multiplicity of possibilities, based on the value of the gift and also in relation to whether the asset is or is not relevant to the business. Let’s go in order and see the various cases and the relationship with the tax treatment for VAT and IRAP purposes.
Meanwhile, let’s start with a question: can gifts always be classified as entertainment expenses? The answer is NO as to be classified as such they must have the following characteristics:
- have promotional and public relations purposes;
- they are functional to produce future economic benefits;
- are consistent with the uses and commercial practices of the sector.
Let’s try some examples to understand better. In point one, objects aimed at promoting the company brand can be classified, for example a personalized calendar with the company brand; or a product sample, a perfume sample can be classified in this category. In point two all those gifts aimed at producing sales one day can be classified: giving a customer of one of my products by focusing on the fact that, if he appreciates it, he can then buy in quantity. Point three applies to all types: it does not owe something that is completely outside normal commercial practices. Obviously this does not want to clip the imagination (although perhaps it does a little) but it places stakes on practices that are absolutely outside the economic normality of supplier / customer relationships.
Having made these due premises, let’s now analyze the various cases in detail.
GIFT OF GOODS NOT SUBJECT TO BUSINESS ACTIVITY
This is the typical case of Christmas gifts, such as baskets, panettone, sparkling wines, branded calendars and agendas, etc. The goal can be both to bring new customers and to retain existing customers, with the economic purpose, by promoting their business, to improve future profits. The deductibility for IRPEF / IRES purposes of this type of expenses is substantially linked to the value of the gift: if less than € 50, total deductibility is allowed, if higher, partial deductibility is allowed on the basis of a table based on revenues.
|% of revenues||Revenue level|
|1.5%||Up to € 10,000|
|0.6%||Excess portion € 10,000 up to € 50,000|
|0.4%||Part exceeding € 50,000|
If expenses exceed these limits, the excess part is non-deductible. For VAT purposes, the transaction is not taxable for the sale and is deductible for the value of the gift below € 50 while it is non-deductible for the value of the gift above € 50.
GIFT OF GOODS SUBJECT TO BUSINESS ACTIVITY
Gifts to customers of goods that are part of the business activity are not always qualified as entertainment expenses: the value of the gift and the discriminating threshold are always € 50. The market value of the gift must be accurately assessed (not the production value but the real market value): if less than € 50 it can be classified as an entertainment expense, otherwise not. For the deductibility, on the other hand, the cost of production (or purchase) must be considered and the same rules of the previous case are followed, therefore with a cost of less than € 50, deductibility is total, partial deductibility according to the table if the cost is greater than € 50. The transfer of the gift in this case is taxable for VAT purposes and always deductible regardless of the cost.
HOW THE IRAP DEDUCTION WORKS
The deductibility of entertainment expenses for IRAP purposes depends on the method used to determine the tax base: if the budget method is used (the one for joint stock companies and partnerships and sole proprietorships under the ordinary regime that have opted for this method), entertainment expenses are fully deductible; if, on the other hand, the tax method is used (partnerships and sole proprietorships under a simplified regime or which have not exercised the option), entertainment expenses are not deductible.
In the case of self-employed workers, tax regulations allow for the deductibility of expenses for IRPEF / IRAP purposes within the limit of 1% of the remuneration received in the tax period without taking into account the unit value of the gift.
GIFTS TO EMPLOYEES
For employee gifts, the tax treatment is still different. These expenses are included among the expenses for work services and not among those of representation, therefore the expense can be totally deducted from the income (according to art.95 paragraph 1 TUIR with the exception of education, education costs etc.) while VAT is non-deductible. The IRAP is obviously non-deductible as it is part of personnel costs.
As you have noticed, this is a complex enough matter to require some attention both in the evaluation phase on the type of gifts to use, and in the operational phase to avoid errors that can then lead to incurring penalties. I hope I have enjoyed it during this time when many will face the problem of freebies.