When you say promotional events, people will most frequently recall some event, where a company presents itself, its products or services with the aim of appealing to the buyer sufficiently, so that his other steps would lead to using the services of this particular company. A promotional event, in other words, is a marketing event or publicity, the aim of which should be an increase of the profit of a company, the sale of its products or services, for example. Nowadays, when there is much competition on the market, where even a large distance between the seat of the promoting company and its potential client is no obstacle, well-accomplished or targeted promotion becomes the basic stepping stone for the right building of “awareness” among clients.

In a situation, where a company decides to hold a promotional/marketing event, it is important to specify, what the company would like to achieve with this even, what it would like to gain. This question is usually in the charge of employees from the PR (public relations) department, who will also see to the entire course of this event. After the completion of the event (and sometimes even before its beginning), the company will either begin making the respective contracts or invoices for the work performed will start coming to the company. Sometimes the company buys the necessary material for the promotional event itself. This is often the first moment that the accounting department finds out about such an event and will start discussing with their tax adviser what to do with such a document. Can he put it into taxes? What needs to be substantiated? What should he request from the PR staff? They frequently receive the following answer: “From the perspective of the income tax, you can only enter the expenditure on promotional/marketing services as tax eligible costs if you prove that these are costs spent on achieving, ensuring and maintaining income.” The answer sounds very simple, but is it really so simple? What can be considered marketing expenditure then?

Let us take a look at what we would include under the term marketing costs. These can be for example:

• Product samples
  • Tasting events, provision of samples in small promotional packaging, provision of a sample in original packaging
• Provision of promotional objects
• The purchase of various services and their use within marketing services and promotion
• The purchase of equipment needed during a promotional event, such as for example a bar, sunshades, glasses

The list of marketing expenditure could continue for a very long time and still we would find further and further types of marketing expenditure.

As for promotional objects, we dedicated an entire article to them in issue no. 11 of this newsletter and to freshen up this issue, we recommend rereading this article (it is available on the website www.fucik.cz). In connection with a promotional event, though, we add that in case of expending a promotional object within for example a distributor contract, based on which the company has committed to holding a promotional event, it would not be necessary to observe the value of CZK 500 without VAT, because tax eligibility is not being assessed according to article 25 paragraph 1 letter t) of the income tax act (hereinafter ITA), but a connection or sufficiently strong ling to taxable income from marketing services based on the general stipulation of article 24 paragraph 1 of the ITA is being substantiated. If this connection is not duly substantiated, promotional products will be assessed according to article 25 paragraph 1 letter t) of the ITA and will most probably be tax inefficient. To assess tax eligibility, the most important thing is to substantiate the records of promotional objects provided during a marketing event for the purpose of supporting sales. You will not find a manual anywhere, though, which would provide detailed instructions for how to substantiate this. The basic rule, which we would like to mention here, therefore says: “Substantiate the spending of the expenditure, so that it would be sufficiently verifiable in case of an audit by the tax administrator.” We would therefore recommend having the information available as to when, what, to whom and why was provided and to have it backed up by photodocumentation, delivery protocols, video recordings, records about events with signatures of multiple attending persons, workers and last but not least also by a carefully prepared guideline, which would specify the procedure for various categories (separated in terms of purpose and value). If the company will hold a promotion event itself, though, it probably will not be possible to prove direct relation to taxable income for promotional objects and most of such expenditure will be assessed according to article 25 paragraph 1 letter t) of the ITA.

For samples provided during a promotional event, it is also important to substantiate everything necessary for providing the expenditure of costs for achieving, ensuring and maintaining income and thus defending article 24 paragraph 1 of the ITA, that is verifiable records. Here, again, the existence of an internal guideline should not be underestimated and records should be made from events, where samples were used, and everything should also be duly documented by photodocumentation. You will often come across the question, is it is possible to only consider miniature packaging a sample, or if original packaging can be considered a sample as well. There is a simple answer: “Both are possible.” When expending samples during a promotional event, it is important to prove, though, that the provided samples were expended with the aim of better assessment of the product (its function, taste, smell…) and at the same time to the extent, which corresponds to the expected benefit.

In practice, you will also come across a situation, when it is necessary to “supply something” as part of promotion, for example. The most frequent situation is, for example, a restaurant facility or a bar, where its keeper commits to buying products of a company (for a specific period of time, for example), but the company must supply for example sun shades with its logo or other necessary equipment. For the company, this is a promotion event, from which it expects an increase of revenues from the sale of its products by this keeper of a restaurant facility. If the company were bound by contract to supply for example some equipment of higher value, it would be suitable to set up for example a contract on borrowing in this case, whereby right of ownership would not be transferred to the keeper of the facility. It would then be a question, though, how to register this equipment at the company, further. This would, of course, depend on the value of the equipment as well as on internal rules of the company.

In case of a purchase of services for the purposes of a marketing event, it is again important to document and substantiate the expenditure for the purposes of achieving, ensuring and maintaining income in keeping with article 24 paragraph 1 of the ITA. For these services, only the contract and the related invoice are often substantiated. This would most likely be considered insufficient substantiation by the tax administrator, however. It is therefore important to have duly registered delivery protocols of various kinds, correspondence, orders. And further also for example photodocumentation, from which it will be positively provable that this truly is one specific event, which cannot be confused with a different promotion event organised at a different time. The same should also be true of video-recordings and records from organised events. It is no less important to also substantiate the calculation of a service thus purchased, and possibly its update, and last but not least the invoices and entries in the accounting of the company.

It follows from the above that that substantiating the expenditure on a specific marketing event and the purpose of this event should not be underestimated by any company and companies should see to it that all evidential means are, ideally, accumulated in one place, so that for example a year later (for example at the time of drawing up the income tax declaration for the past taxable period) it would not be necessary to track down in a complicated way, what promotional event this was and if documents proving the costs according to 24 paragraph 1 of the ITA are available. To make the picture complete, we would like to mention that the aspect of VAT should not be forgotten in the case of promotion costs. Due to the fact that the issue of VAT represents a very complex and extensive topic, we will focus on it in one of the following issues of this newsletter.

The topic of marketing costs has also been numerously discussed in law courts, in municipal or district courts, but also before the Supreme Administration Court, and the opinion frequently coming from the judges said: “The taxpayer failed to substantiate.” In the table below, we mention examples of an additionally assessed tax in case of failure to substantiate the cost expended on marketing events.

If this topic concerns you and you do not know, how to assess, how to substantiate and prove some costs and how to subsequently assess them from the perspective of the income tax, do not hesitate to contact our company Fučík & partneři.