Are the costs for introductory and farewell meetings deductible?
With a larger or smaller reception, drinks, or snacks, significant personal events are often celebrated, such as work anniversaries, promotions, birthdays - but also welcome and farewell gatherings. The tax offices believe that in such cases, the entertainment costs serve personal representation and therefore refuse to recognise the costs for tax purposes.
However, the Federal Fiscal Court and several tax courts have now clarified that entertainment costs on the occasion of welcome and farewell gatherings are professionally motivated and can therefore be deducted as business expenses. Welcome and farewell gatherings are - unlike birthdays or other celebrations in the private sphere - not highly personal private events. Retirement is - despite the personal event - the last act of active service and is therefore still part of the professional activity (BFH ruling of 11.1.2007, VI R 52/03).
For example, the Hessian Fiscal Court recognised the costs of the farewell party for a tax official on the occasion of his departure from office and civil service as business expenses. (Hessian FG of 23.4.2013, 3 K 11/10). The piquant aspect of the matter is that the tax official did not retire but "switched sides" and became a tax advisor. However, this does not matter, as the case is no different from the termination of employment due to reaching retirement age.
The costs for entertaining colleagues and employees are not only 70% deductible, as is the case with entertaining business partners, but in the actual amount incurred. This involves entertaining internal company personnel, i.e., entertainment for a "professional" occasion (R 4.10 paras. 6 and 7 EStR).
This also means that the strict proof requirements using formal entertainment receipts do not apply. The invoice from the catering service or corresponding purchase receipts are sufficient.
(2023): Are the costs for introductory and farewell meetings deductible?
Costs for birthday celebration with colleagues tax deductible
Entertainment expenses are deductible as business expenses if they are work-related. However, entertainment for personal events, such as birthdays, weddings, etc., has not been recognised for tax purposes, as these serve personal representation and are therefore privately motivated. These are "expenses for lifestyle that arise from one's economic or social status, even if they promote the profession or activity" (§ 12 No. 1 EStG).
The Rhineland-Palatinate tax court has recently caused a sensation: Contrary to the prevailing legal opinion, the court ruled that the costs of a birthday party to which only colleagues are invited can be deducted as business expenses (FG Rheinland-Pfalz of 12.11.2015, 6 K 1868/13, the appeal was dismissed, BFH 10.11.2016, VI R 7/16 BStBl 2017 II p. 409).
The case: The managing director of a GmbH invited around 70 people to a birthday party on the occasion of his 60th birthday. These were exclusively colleagues or employees, some retirees, and the chairman of the supervisory board. The party took place on company premises. The costs of 2.470 Euro were not recognised as business expenses by the tax office, but the tax court did.
The court stated that the entertainment costs could be deducted as business expenses because the birthday party was professionally motivated. Although a birthday is a private event, the managing director had not invited any private friends or relatives, only people from the professional environment. The event took place on the employer's premises (workshop hall) and – at least partially – during working hours.
Some guests were even still wearing their work clothes. The cost per person (35 Euro) was also significantly lower than the amount the managing director spent on parties with private friends and family members. Therefore, a comprehensive assessment indicated that the expenses were professionally motivated.
Expenses for employee entertainment are not limited to 70%, as is the case with employer entertainment, but are fully deductible as business expenses. This involves entertaining internal company personnel, i.e., entertainment for a "professional" occasion (R 4.10 paras. 6 and 7 EStR). This also means that the strict proof requirements with formal entertainment receipts do not apply. The catering service invoice or corresponding purchase receipts are sufficient.
(2023): Costs for birthday celebration with colleagues tax deductible
Can the costs for the postdoctoral qualification celebration be deducted as business expenses?
Expenditure on hospitality for personal events is generally not tax-deductible. Such events include work anniversaries, promotions, birthdays, and also the awarding of an honorary doctorate or a habilitation celebration. In these cases, the hospitality costs serve personal representation and are therefore privately motivated and not deductible as business expenses. They are considered "expenses for lifestyle that arise from one's economic or social status, even if they promote one's profession or activity" (Section 12 No. 1 EStG).
Recently, the Saxony Finance Court ruled that a doctor's hospitality expenses for his habilitation were not deductible as business expenses. The judges did not consider the event to be professionally motivated based on the overall circumstances. The decisive factors were that the event was not held on the employer's premises, had no impact on the doctor's fixed salary, and was organised privately with a guest list chosen by him (FG Sachsen, 15.4.2015, 2 K 542/11).
Currently, the Federal Finance Court has overturned the Saxony Finance Court's decision and emphasised that hospitality expenses for a habilitation can indeed be business expenses. It is incorrect to view the habilitation as more of a private than a professional event. The habilitation is a university examination that recognises a special aptitude for research and teaching in a specific professional field.
The habilitation thus demonstrates a special scientific qualification in a specific professional area, which includes the right to teach. Regardless of the fact that the habilitation is also a personal event in the claimant's life, its predominantly professional character cannot be denied (BFH ruling of 18.8.2016, VI R 52/15).
- Whether the hospitality expenses are professionally or privately motivated primarily depends on the occasion of the event. However, the occasion is only a significant indication. Despite a prominent personal event, other circumstances of the individual case may indicate that the expenses for the event are professionally motivated. Conversely, an event in the professional sphere alone does not justify the assumption that the expenses for an event are almost exclusively professionally motivated.
- Whether the hospitality expenses are professionally or privately motivated also depends on the group of invited colleagues: If colleagues are invited because of their affiliation to a specific company unit (e.g. all employees of a department) or based on their function within the company (e.g. all sales staff or trainees), this indicates a professional motivation. However, if only selected colleagues are invited, this may suggest a significant private motivation, and a deduction as business expenses may therefore be excluded.
- Whether the hospitality expenses are actually business expenses must also be assessed based on further criteria: It is important who acts as the host, who determines the guest list, whether the guests are colleagues, business associates, or employees (of the employee or employer), public figures, press representatives, association representatives, or private acquaintances or relatives of the host. It is also important to consider where the event takes place, whether the financial expenses are in line with comparable company events, and whether the event has the character of a private celebration or not.
If expenses for the event are of mixed motivation, because both private and professional guests attended, the total costs must be apportioned according to the guests. The costs attributable to each guest must be fully allocated to either the professional or private sphere.
The expenses for snacks, champagne, wine, etc. are fully deductible as business expenses. They are not limited to 70% as is the case for self-employed individuals (according to Section 9 Para. 5 EStG in conjunction with Section 4 Para. 5 No. 2 EStG). This also means that the strict proof requirements with formal hospitality receipts do not apply. The catering service invoice or corresponding purchase receipts are sufficient (BFH ruling of 20.1.2016, VI R 24/15).
(2023): Can the costs for the postdoctoral qualification celebration be deducted as business expenses?
