Tax treatment of Christmas gifts and Christmas dinners – caution with the new rules for employees

The provisions in the field of income taxes and value added tax concerning Christmas gifts have not changed fundamentally compared with previous years, with one exception, however: the exemption threshold for gratuitous benefits granted to employees and to persons treated as such was raised on a one-off basis in the previous year from 258,23 Euro to 3.000 Euro; by Law Decree No. 48/2023 this relief was extended last May to the year 2023 as well, but limited to employees who have dependent children. Accordingly, a laborious differentiation between employees will have to be made here. Law Decree No. 5/2023 also extended the possibility of granting employees fuel vouchers up to an amount of 200,00 Euro, whereby the two reliefs are not mutually exclusive. Here is an overview:

1. Christmas gifts to employees and to persons treated as such

On the basis of the special rules referred to above (Law Decree 48/2023), expenditure in 2023 on gifts and benefits in kind to employees is deductible and constitutes

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• What matters is that the supplies of goods and services are made free of charge. - The expenditure must be incurred for promotional purposes or sales promotion purposes, or for public relations purposes.
• In addition, it must reasonably be expected to generate – at least potential – economic benefits for the undertaking, or be in line with the customary practice in the relevant business sector.
• Finally, from a formal point of view, it is required that the costs have actually been incurred and are documented.

Conversely: expenditure which cannot be attributed to the business or which is in fact not deductible, such as expenditure in the interest of the shareholders or of their family members, is not recognised as entertainment expenses.

2.1. Treatment for value added tax purposes

Principle For VAT purposes a distinction must be drawn between third-party goods, which are not the subject of the company’s own production or of its own trading activity, and, conversely, goods which are the subject of the company’s own manufacture or of its own trade.

2.1.1 Third-party goods

is to be subjected to VAT; rather, the VAT is to be calculated on the basis of the acquisition cost of the goods given away.

2. Waiver of the input VAT deduction: alternatively, in the case of goods of its own manufacture or of its own trading goods, the entrepreneur may also waive the deduction of input VAT upon purchase, and in this case the gratuitous supply of the goods is irrelevant for VAT purposes (i.e. no invoice, no self-invoice and no gift register), just as in the case of third-party goods.

2.2. Treatment for income tax purposes

Pursuant to Art. 108 para. of the Income Tax Code (TUIR), gifts are, as shown at the outset, as a

Income rule regarded as entertainment expenses and are deductible in compliance with the corresponding taxes provisions. It follows that:

• Christmas gifts with a unit value of not more than 50,00 Euro are fully deductible and they do not count towards the calculation of the thresholds for entertainment expenses.

- If this unit value of 50.00 Euro is exceeded, deductibility is available only within the thresholds for entertainment expenses. In this connection it should be recalled that, pursuant to Art. 9 of Legislative Decree 147/2015, the following ceilings apply to the deductibility of entertainment expenses, in each case by reference to sales revenues (items A.1 and A.5 of the profit and loss account):

• 1,5 per cent for turnover up to 10 million Euro,
• 0,6 per cent for turnover up to 50 million Euro and
• 0,4 per cent for turnover of more than 50 million Euro.

For the purpose of determining the unit value of 50,00 Euro, the ancillary costs must be taken into account; this concerns in particular non-deductible VAT, but also any transport and packaging costs. Moreover, in the case of gift baskets, for example, the costs of the individual items (bottle of wine, packet of coffee, etc.) may not be used, but the gift must be viewed as a whole; this principle incidentally also applies for VAT purposes.

IRAP For IRAP purposes, entertainment expenses have been fully deductible since 2008, at least for corporations, since reference is now made only to the values in the profit and loss account, i.e. without regard to the tax reconciliation of increases and decreases. The same rule applies to partnerships and sole traders, provided that