Office Christmas party – tax settlement

January 2, 2023

The end of the year is the time for organizing parties for employees and contractors. Often already at the stage of organizing such an event, the following question arises: how to settle the tax in case of costs of an office Christmas party?

Koszty podatkowe firmowego przyjęcia

Let’s start the analysis of the settlement of spendings on organizing a Christmas party with the issue of tax deductible costs.

Pursuant to the provisions of the Corporate Income Tax Act, to consider expenses incurred by the taxpayer as a tax cost, the following conditions must be met jointly:

1. the expenses were incurred by the taxpayer, i.e. in the final analysis it must be covered from the taxpayer’s assets
2. the value of the expenses incurred has not been reimbursed to the taxpayer in any way,
3. the expenses are related to the taxpayer’s business activity,
4. the expenses were incurred in order to obtain, maintain or secure revenues or may affect the amount of revenues achieved,
5. the expenses have been properly documented,
6. the expenses cannot be included in the group of expenses that are not considered tax deductible (Article 16 of the Corporate Income Tax Act).

For the purpose of settling the costs of a Christmas party for employees, analysis of the condition in point 4 is crucial. The connection with conducted business activity will be essential.

Initially, tax authorities were not very favorable towards the possibility of including such expenses in tax costs. In recent years, however, there has been a clear change in the attitude of tax authorities. They agree with the standpoint presented by taxpayers that the organization of such events positively affects the image of the employer among employees. Christmas parties have an integrative value and create a good atmosphere (for example, the Director of the National Tax Information in individual interpretation of the tax law of August 16, 2021, reference number 0111-KDIB2-1.4010.203.2021.1.AP).

Christmas party with contractors

Tax authorities take a slightly more restrictive approach to the possibility of settling as tax deductible costs events in which other people (than just employees – e.g. contractors or co-workers) participate. These types of costs are usually treated by as representation, which cannot be tax deductible costs (Art. 16 sec. 1 point 28 of UoCIT). This is what the Supreme Administrative Court claims in the judgment of October 19, 2022 (reference number II FSK 572/22).

What about the employee income?

When organizing a Christmas party, employers may wonder whether the fact of providing employees with food and drinks during such an event will generate tax revenue on their side. Such analyzes were justified especially after the judgment of the Constitutional Tribunal of 8 July 2014 (ref. no. K 7/13). It concerned the principles of determining the tax income of employees in connection with obtaining a gratuitous benefit from the employer. In the case of festive events (in the part concerning the provision of food and drinks to employees), the position of the tax office has been favorable for many year. The employee does not earn any income, and the employer is not burdened with obligations to settle the tax.

When one can deduct VAT from invoices?

The last key element to consider when settling expenses for a team-building event for employees is the issue of deducting VAT from invoices issued from suppliers/organizers. In this regard, the general principle of deducting input tax should be borne in mind. It means: the relationship with taxable activities. Based on the latest opinions of tax authorities, it can be assumed that they accept the right to deduct input tax on expenses related to a Christmas party for employees. It indicates that it is indirectly related to the taxable activity of the employer. However, attention should be paid to the absolute ban on deducting VAT on catering services (including alcohol) and hotel services (except for those whose costs are subject to further reinvoicing).

[1] Act of February 15, 1992 on Corporate Income Tax.