Entrepreneurs are generally entitled to deduct input tax from legally owed VAT if they purchase the services in question from another entrepreneur and use them for their business. However, the input tax deduction still requires that the purchased services are not used for output transactions that exclude the input tax deduction.
With regard to the case in question, the plaintiff's input tax deduction from the services for a Christmas party held for business purposes in December 2015 is disputed. The event consisted of a so-called "cooking event", which was actually attended by 31 of 32 registered persons from the executive board as well as the tax and legal department and the internal staff of the audit department. Among other things, the plaintiff rented a cooking studio, including staff, to hold the party. As part of the event, under the guidance of two chefs, the participants prepared dinner together, which was also consumed together. In an invoice dated 21 December 2015, the plaintiff was invoiced for expenses for the "cooking event for 32 people" (personnel, rent and beverages) in the gross amount of EUR 4,664.68 (EUR 3,919.90 plus EUR 744.78 VAT).
Neither the responsible tax office nor the tax court allow the input tax deduction from the expenses for the company event (Christmas party). In their opinion, the services were (predominantly) provided for the private needs of the staff, and there is no discernible business reason in this context, nor is this the main reason (e.g. improvement of the work atmosphere). Furthermore, there is also no evidence of gifts of small value (“Aufmerksamkeiten”).
Pursuant to the BFH's ruling, both the tax office and the tax court were right to deny the input tax deduction from the input services for the Christmas party. The BFH substantiates its ruling as follows:
The entrepreneur may deduct as input tax the tax legally owed for services performed by another entrepreneur for his business. The input tax deduction is excluded (pursuant to § 15 para. 2 sentence 1 No. 1 of the German Turnover Tax Act (Umsatzsteuergesetz, UStG)) for services which the entrepreneur uses for tax-exempt transactions.
Nonetheless, in order to be able to deduct input tax, there must be a direct and immediate connection between the input transaction and the output transaction, whereby the BFH differentiates as follows: If the required connection exists to individual output transactions of the entrepreneur's economic activity that are subject to tax or at least do not exclude the deduction of input tax, the entrepreneur is entitled to deduct input tax.
There is, however, no input tax deduction if this connection leads exclusively and directly to a gratuitous withdrawal pursuant to § 3 (9a) UStG (or § 3 (1b) UStG), provided that there is no so-called gift of small value from the employer to the employee. If, on the other hand, the withdrawal tax is not levied with regard to a gift of small value, there is no direct and immediate connection with a specific output turnover (withdrawal), so that the input tax deduction is based on the overall economic activity of the entrepreneur.
The basic rule for company events is that input tax can be deducted if the event is held predominantly in the interest of the company. Therefore, it has to be examined whether the services are (exclusively) purchased for the private needs of the staff or whether they are caused by special circumstances of the economic activity of the company (e.g. obligatory participation in a work meeting which is not to be interrupted by private breaks (ECJ judgment in the Danfoss and AstraZeneca case, EU:C:2008:711).
If a company event merely serves to improve the working atmosphere by joint leisure activities, the benefits received for the company outing are exclusively related to the private needs of the staff. If this is not a matter of courtesy gifts of small value, an input tax deduction is excluded.
In this context, the BFH further states that, in order to "maintain a uniform application of the law", it adheres to the fact that the amount of EUR 110 (gross) per person, which originates from income tax law, can be used as a guideline for VAT purposes to determine whether it constitutes a gift of small value. However, it clarifies that, in contrast to income tax law, this is an exemption limit and not an allowance for VAT purposes. If the exemption limit is exceeded, this does not constitute a gift of small value and there is no input tax deduction, provided that the services were purchased for the private use of the employees.
Furthermore, the BFH clarifies that the costs of the so-called external setting are also to be included in the calculation of the EUR 110 exemption limit. In particular, this is the case if the service received is a uniform service.
When assessing the right to deduct input tax from expenses for company events, companies/entrepreneurs are advised to check the following points:
- If the company event is justified by special circumstances of the company's economic activity (predominant company interest), the input tax deduction can be claimed.
- If this is not the case, the question arises as to whether a gift of small value ("Aufmerksamkeit") within the meaning of VAT law is involved. If this is the case and the overall economic activity permits the deduction of input tax, the corresponding input tax can also be claimed.