Everyone knows it: there is the birthday, farewell or anniversary party to which you, as a managing director or executive, invite business friends and employees. Of course, you want the state to contribute to the costs and claim business expenses or income-related expenses as part of your tax return. In the past, however, the courts have been critical and dismissive of this approach. This tendency is continued by a legally binding ruling of the Nuremberg Fiscal Court (ruling of 19 October 2022 - 3 K 51/22).
Facts of the case
The plaintiff worked for more than 35 years, first as branch manager and then as managing director of a limited liability company (GmbH). Subsequently, he also held a ¼ share in the company as a shareholder. As of 31 December 2014, the shareholder position ended and the office of managing director was relinquished as of 11 February 2015. When submitting his income tax return for 2015, the plaintiff claimed, among other things, expenses for a farewell party for his former employees and business partners of the GmbH. The party in question took place on 19 June 2015, at a country estate. The costs of the farewell party amounted to €94,980 net. A total of 162 guests were entertained, including 88 employees with 37 spouses, two retirees with partners, three former employees, three business partners with one spouse, eight employees of the main shareholder, eleven family members and six other guests.
The tax office and ultimately the tax court only took into account €17,160 as income-related expenses (156 guests multiplied by €110; allowance pursuant to § 19 (1) sentence 1 no. 1a sentence 2 EStG).
The rationale for denying the deduction of income-related expenses
In principle, a retirement ceremony can have a predominantly professional character as the last act of active service within the overall consideration of all circumstances of the individual case (BFH ruling of January 11, 2007, VI R 52/03). Therefore, in theory, the deduction as income-related expenses or business expenses is possible.
However, the Fiscal Court takes a look at the provisions of § 4 para. 5 no. 4 EStG. Pursuant to this provision, "expenses for hunting or fishing, for sailing yachts or motor yachts as well as for similar purposes and for the hospitality connected therewith" shall not be permitted to decrease the profit. Under § 9 (5) EStG, this applies analogously to the deduction of income-related expenses.
The prohibition of deductions was created because the legislator considered the expenses specified in the provision "by their nature to be superfluous and inappropriate representation." It considered it necessary "in the interest of tax justice and the social peace" that the expenses "can no longer be passed on to the general public by deducting them as business expenses from the taxable profit" (citation: explanatory memorandum to the government draft of the Tax Amendment Act 1960).
In the opinion of the court, "inappropriate expenses" require that special circumstances are recognizable with regard to the location of the event or the manner in which the guests are entertained, which set the event apart from an ordinary celebration. From the court's point of view, special circumstances were in the case in dispute:
- The country estate, as a luxurious establishment, fulfilled the requirement of unusual expenses. It was comparable to a sailing yacht.
- The former managing director determined the guest list, the former employer was not involved in the planning (logical: whoever orders the music pays for the band).
- The expenditures per person amounted to €586,30.
Conclusion
The ruling once again demonstrates that business expense or income-related expense deductions can depend on the subjective discretion of civil servants and judges. A jubilarian ought to therefore keep the €110 limit in mind. If the expenses per participant cannot be limited to €110, the event should, if possible, take place on the employer's premises in order to save the deduction if necessary.
However, in the environment of the current inflationary situation, the €110.00 no longer appear to be in line with the times. That an adjustment will be made by the legislator is currently rather unlikely.