According to Section 3. point 27. of the PIT Act, promotional gift is defined as gifts given in connection with the provider’s activities within business, official, trade, diplomatic or religious circles (gratuitous or preferential goods or services, and certificates denominated exclusively for this purpose). It does not necessarily relate to a specific event or a purchase of product/service.
Small value gifts
Unlike entertainment which the employees of the provider firm can be entitled to on a promotional event, business gifts cannot be given to employees. Although, small value gifts can be still given them three times a year, value of which is not exceeding 10% of the minimum wage (HUF 10,150 in 2014), and a register is kept on them.
In case of the above gifts, the tax base is the gross value of the benefit multiplied by 1.19, and then tax is calculated on this grossed-up tax base at a nominal 16% personal income tax rate and at 27 % health tax rate (i.e. 51.17% effective tax rate).
Specific tax-exempt benefits
On further conditions, the following benefits provided on certain events can be fully tax-exempt:
Services provided by a payer at a sports event held in a facility maintained by same payer;
Any individual or season ticket for a sports event provided free of charge or discounted by a body engaged in the organization of sports events;
Voucher used for cultural events;
Amounts paid to private individuals by nonprofit companies, value of prizes received on a charity event, or from associations or churches once a year
Benefits for business policy purposes
Benefits provided in the frame of a promotional public campaign for business policy purposes (tied to purchase of goods/ services).
The most relevant tax-exempt benefit is the last one in the list, which can be given on the below conditions:
Needs to be tied to purchase of goods/ services by the individuals;
Organized for real business and marketing purposes;
Given within the frame of public campaign conducted among the general public to private individuals (advertised on the webpage of the company);
Given in the form of voucher, discounts, rebate or other similar benefits;
Other than awards and prizes of quiz games, and from gift drawings on promotional contests.
Taxable gift drawings
Gift drawings on promotional contests, which are subject to reporting based on the Gambling Act, can qualify with the below conditions:
The organizer of the contest is selling the goods/services;
Participation is tied to purchase of the goods/services;
The customer can only participate with a ticket received upon the purchase;
The winners are drawn on a public event.
In case of gift drawings, Section 76 of the PIT Act is applicable, i.e. the personal income tax is 16% calculated on the tax base multiplied by 1.19, although, 27% health tax is not payable.
If a code needs to be sent in the contest, there is an important difference: in case the code is to be submitted by post with the personal data, it qualify as a gift drawing and becomes taxable; however, if the code needs to be uploaded via Internet or in text message, it can qualify for the tax-exempt benefit.
CIT and VAT consequences of free gifts
Based on general rules of the VAT Act, if a company provide a product as a gift in the frame of a contest/promotional game, and the input VAT was deducted upon the purchase of the product, then VAT is payable on the free transfer (exceptional case is when the product qualifies for the low-value product with a value not exceeding HUF 5,000). From a CIT view, the Act particularly describes the costs of business gifts, products, services discounts and reimbursements given free with the purpose of advertising as deductible expense.
Advertising tax on business gifts
According to the new Advertising Tax Act, in case of publication of advertisement for own purposes, the tax base is the cost incurred directly in relation to the publication of the advertisement. This direct cost does not necessarily coincide with the definition in the Accounting Act, but includes also all the costs directly incurred at the advertiser, e.g. costs of the advertising material, and costs of the making of the advertisement.
According to the official standpoint of the Hungarian Tax Authority, the following business gifts are subject to advertising tax:
Every paper printed marketing material : brochure, leaflet, poster etc.;
Every other material printed with advertisement/logo: T-shirt, Molino, pen, notebooks, pins, wristbands etc.
Nevertheless, if the company uses its logo rather to be identified by its customer, and less for advertising purposes (e.g. logo on the envelope, work-clothes, on the company car without further branding) , it will not be subject to advertising tax.
In any case, up to HUF 500 million tax base, there is no tax paying and reporting liability for the taxable company at all.
If your company spends considerable amount on gifts and other benefits as described in this newsletter, we suggest that the practice should be revised from a tax point of view. Professional tax advisor of Accace is pleased to help you with such an overview.