Input VAT deduction for company events - BFH ruling V R 16/21, published on 27 July 2023

Company events are only fun for the participants - whoever is responsible for the tax treatment must keep a few things in mind. Until 2014, there was a legally unregulated correlation to the wage tax: what was not a wage was also not a free of charge disposal. This meant that the employer was allowed to claim an input VAT deduction from the expenses. However, the wage tax law was changed in 2015, which requires a partial separation of the VAT treatment from the wage tax.

The facts

A company invited its employees to a Christmas party, which consisted of a cooking event. There, under the guidance of two chefs, the participants prepared a dinner and then ate it together. Dividing the organiser's bill by the number of participants resulted in costs of over 110 euros per person. A "no-show" fee was charged for an employee who had registered but did not participate.

The company requested an input VAT deduction from the Christmas party expenses, which the tax office rejected.

Legal background and assessment by the BFH (Federal Fiscal Court)

Entrepreneurs purchasing supplies for company events are only entitled to an input VAT deduction if the purchased services do not exclusively serve the private needs of the company employees but result from the special circumstances of business activity.

The Christmas party was also intended to improve the working atmosphere through shared leisure activities, and team-building events such as the one at issue here were known to increase employee commitment and performance. Nevertheless, the interests of the employees outweighed the overriding interests of the company. A Christmas party was not comparable to cases in which the employer, for example, provides food to its employees during a meeting so that the meeting can continue without interruptions for meals.

Accordingly, the cooking event was a free of charge disposal according to § 3 para. 9a no. 2 UStG (German VAT Code) which, in principle, does not entitle the company to an input VAT deduction. It would only be deemed otherwise if the Christmas party was “a small token of appreciation”. Since this term is defined neither in the UStG nor in the VAT Directive, the BFH (Federal Fiscal Court) and the tax authorities have so far followed the principles of wage tax in the interest of a uniform application of the law. That which does not constitute wages for wage tax purposes is therefore, for VAT purposes, a small token of appreciation that does not lead to a free of charge disposal and thereby the right to deduct input VAT.

According to the version of § 19 EStG valid until 2014, an exemption limit of 110 euros applied. In addition, according to older BFH case law, the costs for the overall framework of the company event were generally not to be taken into account.

Due to the new legal regulation of § 19 EStG, the exemption limit became an allowance, meaning that any amount exceeding 110 euros must be subject to wage tax. In this respect, according to the BFH, VAT law must be separated from wage tax law because, according to § 3 para. 9a no. 2 UStG, the taxation of free of charge disposals can be omitted if (not: "insofar as") this is merely a small token of appreciation, and an exemption limit must continue to be assumed under VAT law. This is supported by EU law, according to which gifts of minimal value are excluded from withdrawal taxation - and a gift can either have a minimal value or not. If the value exceeds 110 euros, this constitutes a free of charge disposal in the full amount for VAT purposes.

In addition, as of 2015, Section 19 (1) sentence 1 no. 1a of the German Income Tax Act (EStG) explicitly stipulates that expenses for the overall framework of company events must also be taken into account when determining the tax-free amount. In the opinion of the BFH, different criteria must also be applied in this area for VAT purposes. The cooking event was a uniform supply for which the costs of the overall framework could not be split off. Rather, the cooking event was a marketable overall package that was characterised by the interplay of the special location with its upscale ambience and the joint preparation and consumption of food and drinks. Therefore, the costs of the event as a whole had to be included.

As far as the "no-show" portion of the invoice amount is concerned, the BFH is of the opinion that the total costs including the "no-show" portion are to be distributed among all participants actually present so that the absent participant does not incur any expenses for which an input VAT deduction could be considered.

Practical implications

With regard to the question of the exemption limit, this decision is in line with the BMF letter of 14 October 2015, meaning that there is no change for companies in this respect. What is new is the approach to the costs of the overall framework. If one does not want to include these, one must now pay careful attention to the VAT criteria to determine whether a uniform supply exists. With regard to both aspects, wage tax and VAT can diverge, demanding more effort from companies.

Dated: 11 August 2023