Gifts tax treatment
When companies provide Christmas gifts or dinners to customers, suppliers and employees, it is important, from a fiscal point of view, to take into account the cost deductibility limits and the related VAT deductibility.
In particular, it is essential to distinguish whether the gifts are purchased to be donated or if they are directly produced by the company and, in addition, if the beneficiary of the gift is an employee or an external person.
According to Legislative Decree 175/2014, assets not related to the business activity given as free gifts to third parties are fully deductible in the period, if the unit value does not exceed € 50. In the event that this threshold is exceeded the cost would fall within the discipline of entertainment expenses (art. 108, paragraph. 2, Presidential Decree 917/1986).
If goods produced and/or sold by the company are given as gifts to third parties, the related costs will be considered as entertainment expenses. Once reclassified, they will therefore comply with the rules of deduction already mentioned above. With regard to VAT, the free transfer must be subjected to tax on the basis of the purchase price or, if not available, the goods cost price applicable when the sale took place.
When gifts are given to employees, regardless of whether or not they’re subjected to production and/or sale by the company, the purchase cost should to be considered as “employment expense” as established by art. 95 of the Presidential Decree 917/1986 and not as entertainment expenses. The negative income component will therefore be fully deductible according to the specific rules. For VAT purposes, it is necessary to distinguish whether the gift is an asset that is not part of the business activity or if it is self-produced: only in the first case the tax is non-deductible and their free transfer is excluded from the scope of VAT.
Lastly, professionals who buy goods to sell them for free must consider the different tax treatment related to the fact that they are donated to customers or employees.
In the first case, the cost in considered as entertainment expense and it will be considered deductible within the limit of 1% of the compensation received in the tax period in which the gift is given. Expenses are admitted as a deduction for cash, whereas for VAT purposes, the amount is deductible if the unit value of the gift does not exceed € 50.
If the free assignment is made to employees, the purchase cost must be classified as “employment expenses”, as a result these costs will be fully deductible while the VAT will be non-deductible.