Representation expenses are costs incurred from hosting clients in the context of client acquisition. A typical example of a representation expense is taking a potential client out to dinner.
Representation expenses differ from other deductible business expenses in that only 50% of them can be deducted. There are also many other restrictions concerning representation expenses. The most important is that the target of the representation expenses must be an external party to the company. For instance, the company cannot classify the entertainment of its own employees or a recreation day as representation expenses.
A good example is that meals and refreshments provided outside the company premises are typically intended to promote business partnerships, which can then be classified as representation expenses.
However, representation expenses can become marketing expenses if the company organizes a business event for its partners to showcase its operations, where facilities and refreshments are provided for the event.
Expenses for internal catering within the company are generally classified as meeting expenses, for which the VAT portion can be fully deducted. Meeting expenses also include negotiations with auditors and authorities that involve catering, even though these individuals are external to the company.
Below are a couple of examples of how gifts are interpreted:
- If a personalized gift is purchased for a business partner, it is generally considered a representation gift.
- If it is a cheap gift sent in bulk or distributed widely, it is usually considered a promotional gift.
Both representation and marketing expenses are directed at external entities, but the content of the expenses determines how they are classified in bookkeeping.
According to the Tax Administration, alcohol gifts are almost always considered representation expenses for tax purposes. An exception might be when a company distributes its own alcoholic product as a promotional gift.
Example of a Typical Representation Expense and Its Tax Treatment:
Tmi Pertin raksa- ja purku hosts a dinner for Isännöinti Oy to discuss potential business. The total bill for the dinner is 145 € (including VAT). Pertti records the dinner as a representation expense worth €145 in the UKKO Entrepreneur service. The UKKO Entrepreneur service automatically handles the rest.
NOTE: VAT cannot be deducted for representation expenses.