Sponsoring & Tax Law

TAX TREATMENT OF SPONSORSHIP UNDER GERMAN LAW

Regardless of the sponsored area (sports, cultural, social, environmental and scientific sponsoring), the following principles apply to the income tax treatment of sponsoring:

Sponsorship is usually understood to mean the granting of monetary or monetary benefits by companies to individuals, groups and / or organizations in sporting, cultural, religious, scientific, social, environmental or similar socio-political areas, with their own corporate objectives for advertising or public relations. Benefits of a sponsor are often based on a contractual agreement between the sponsor and the recipient of the benefits (sponsorship agreement), which governs the nature and extent of the sponsor’s and the recipient’s benefits.

The Federal Ministry of Finance (BMF) published in 1997 the principles for the “income tax treatment of sponsorship”. In February 1998 and in January 2001, this decree was supplemented.

TAX TREATMENT AT THE SPONSOR

The expenses incurred in connection with the sponsorship may be

• Operating expenses i.S. of Section 4 (4) EStG,

• Donations which may be deducted under the conditions of §§ 10 b EStG, 9 Abs. 1 Nr. 2 KStG, 9 Nr. 5 GewStG, or

• non-deductible living costs (section 12 no. 1 EStG), hidden profit distributions in corporations (section 8 (3) sentence 2 KStG)

CONSIDERATION AS BUSINESS EXPENSES

Expenses of the sponsor are business expenses, if the sponsor economic advantages, which can lie in particular in the protection or increase of its entrepreneurial reputation (see BFH of 3 February 1993, IR 37/91, BStBl 1993 II P. 441, 445), or the promotion of his company or his company’s products. This is particularly the case if the recipient of the benefits or services advertises the sponsor i.e the corporation and its products on billboards, event announcements, in exhibition catalogs, on the vehicles used by him or other objects on the enterprise or its products. Reporting in newspapers, radio or television may give rise to an economic advantage the sponsor seeks to gain, in particular if involved in its publicity work, or if the sponsor participates in press conferences or other public events of the recipient and gets the opportunity for his own statements about his company or his products.

Economic benefits to the sponsor’s business may also be obtained by the sponsor drawing public attention to its performance by using the recipient’s name, emblems or logos or otherwise.

For the purposes of business expenses, it is irrelevant whether the services or benefits are necessary, usual or appropriate; Expenses may be deducted as operating expenses even if the sponsor’s cash or in kind and the advertising goals sought by the enterprise are not equivalent. In the case of a gross mismatch between the benefits or services of the sponsor and the desired economic advantage, however, the deduction of the business expenses is to be refused (§ 4 (5) sentence 1 no. 7 EStG).

Benefits of the sponsor under the sponsoring contract, which fulfill the requirements of the RdNrn. 3, 4 and 5 for the business deduction are not gifts i. S. of § 4 para. 5 sentence 1 no. 1 EStG. [8]

TAX TREATMENT FOR TAX-PRIVILEGED RECIPIENTS

The benefits received in connection with the sponsorship can, if the recipient is a tax-privileged entity (= charitable or public), be tax-free income in the immaterial sphere, tax-exempt income from asset management or taxable income from business operations. The tax treatment of benefits paid to the beneficiary does not in principle depend on how the corresponding expenses are treated at the supplying company. For the demarcation the general principles apply (see in particular application decree to the tax code, to § 67 a, Tz I / 9). Accordingly, there is no commercial operation if the tax-privileged entity only allows the sponsor to use its name for advertising purposes in such a way that the sponsor himself refers to his services to the corporation for advertising or image-building purposes. An economic business operation does not exist even if the recipient of the services merely points out the support of a sponsor on posters, event announcements, in exhibition catalogs or in any other way. This notice may be made using the sponsor’s name, emblem or logo, but without special emphasis. In contrast, an economic business operation exists if the corporation participates in the advertising measures. The economical business enterprise can not be a purpose enterprise (§§ 65 to 68 AO).

The Sponsors’ Decree regulates exclusively questions of income tax law (corporation tax, income tax and trade tax). Questions of value added tax are not addressed. This creates a high tax risk for many corporations that enter sponsorship partnerships. Pursuant to § 64 (6) AO, the corporation concerned may opt for a flat-rate taxation method and thus ideally reduce the tax burden to approx. 6%. However, in this case too, the value added tax issue has to be considered.