Representation costs refer to the costs incurred in connection with the acquisition of customers. For example, taking a potential customer out to dinner is the most typical form of agency expenditure.
Representation expenses differ from other deductible business expenses in that they are only 50% deductible. Representation expenses are also subject to a number of other restrictions. The most important of these is that the object of the entertainment expenses must be a third party. A company cannot therefore include, for example, the entertainment of its own employees or a day of recreation.
As a good example, meals and refreshments provided outside the company usually tend to promote business partnerships and can therefore be interpreted as entertainment expenses.
However, representation costs can become marketing costs if a company organizes a business event for its business partners to showcase its activities and to provide facilities and refreshments for the event.
In the case of in-house catering, the costs are generally interpreted as negotiation expenses, from which the VAT portion can be fully deducted. Negotiations with the auditor and the authorities, which include catering even though they are external to the company, are also considered as negotiation expenses.
Below are a few examples of gift interpretations:
- If an individual gift is purchased for a partner, it is generally interpreted as a representative gift.
- If it is an inexpensive mass mailing or a gift to be distributed to the general public, it is usually considered a promotional gift.
Both entertainment and marketing expenses are therefore incurred by external parties, but the content of the expenses will affect how they are interpreted in the accounts.
According to the tax administration, gifts of alcohol have in practice always been interpreted as representation expenses for tax purposes. However, an exception may be a situation where a company distributes its own alcohol product as a promotional gift.
Example of a typical agency expense and its treatment for tax purposes
Tmi Pertin raksa ja purku offers a dinner to Isännöinti Oy to discuss a potential client. The total bill for the dinner is €145 (including VAT). Pertti records the representation costs of the dinner for €145 in the UKKO Light Business service. UKKO Light Business will automatically take care of the rest.
NOTE! VAT cannot be deducted from the expenses.