Hospitality costs can arise in different situations. The classic is hosting business partners at a business dinner. But there are also costs in the catering of own employees. But are these also catering costs in the sense of tax law? When exactly are catering costs deductible and which tax peculiarities must be observed in each case? We answer these and many other questions about hospitality costs in this article.

1st Tax Treatment of Catering Costs – Introduction

Anyone who negotiates with important business partners today is also happy to invite them to dinner. Because a business dinner offers a relaxed framework to initiate and conclude a business deal or other contractual agreements. The secret here is that a business dinner provides a framework in which you open up to the other person in a very intimate act, food intake. In this way, an appropriation of the guest takes place, which in the optimal case leads to the assertion of one's own interests. This is particularly related to a neuropsychological property of our brains, the mirror neurons. If, for example, we simultaneously reach for the glass to enjoy a delicate late Burgundy, then these mirror neurons fire in the brains of the people involved in this quasi-joint act. In this way, we develop mutual empathy and thus a kind of connection, which can then be used in the negotiations to better convey one’s own position.

But one should also pay attention to the profane things related to a business dinner, namely the tax treatment of catering costs. When are they deductible? How much can be allocated? What about VAT? Can you draw the input tax for catering costs? If you are interested in these and many other questions about the hospitality costs, the following reading is particularly recommended.

2. differentiation of hospitality costs

Before we look at the different aspects of hospitality costs, we should make some distinctions. What exactly are hospitality costs in the tax sense?

For this purpose, § 4 (5) sentence 1 number 2 EStG informs us that catering costs within the meaning of the law are only tax relevant for catering to persons on business occasions. This means that the catering of the own employees at a company event does not cause any catering costs within the meaning of the law. This applies, for example, to Christmas parties and summer parties. In addition, as hospitality costs in this regard, such costs incurred in connection with a usual friendliness are excluded. If you offer guests, for example, a cup of coffee or tea with a little pastry, then this is only a polite gesture, for which there are no hospitality costs. Fortunately, such costs are tax deductible as operating expenses, albeit in a completely different way.

Tax regulations on hospitality costs

3.1.What hospitality costs are recognized?

Catering costs in the narrower sense are therefore incurred if a joint consumption or enjoyment takes place on an operational occasion. This therefore includes both drinks and food as well as other pleasure products, for example cigars. But also costs for participation in sporting events or entertainments of another kind as well as any tips flowing therein are permissible as catering costs. Both the costs that you spend on the business partner and those that you can assign to the group of participants of your own company are taken into account.

3.2. To what extent are hospitality costs recognized?

However, you can only set catering costs if they are appropriate. What is considered appropriate depends on the accompanying circumstances in individual cases. For example, if you participate as a retail merchant in the pet industry as part of a business dinner, the limit of adequacy in the catering costs must be significantly lower than a comparable person who trades in luxury goods. But it also depends on the living conditions of the person you are hosting. In particular, the adequacy of catering costs is linked to the turnover and profit of the respective company that arranges the catering, as well as to the financial or economic significance of the expected result.

In any case, there is no legal requirement that determines the amount of appropriate catering costs. However, it can be assumed that hospitality costs per participant between EUR 100 and EUR 200 are reasonable. However, if the level of catering costs is actually considered unreasonable – In case of doubt, this is decided by the tax office, so that you can only take action against it by lodging legal remedies – you can deduct only the part of the catering costs that is within the range of reasonable.

But even of the appropriate catering costs, a part is always excluded from the tax deduction as non-deductible operating expenses. The legislator sets a quota of 30% of the appropriate catering costs for this reduction. Thus § 4 paragraph 5 sentence 1 no. 2 in conjunction with paragraph 7 EStG flat-rates costs that one spends as a host basically for private living (R 4.10 EStR). However, such costs are generally excluded from the tax deduction (H 12.1-H 12.2 EStH). Therefore, they are regularly cut out of the hospitality costs.

3.3 Requirements for recognising hospitality costs

Another important aspect when considering hospitality costs is related to their documentation. Thus, the financial administration only accepts catering costs as operating expenses if you can show catering receipts. Each catering service must be listed, described and priced separately on the catering document. Flat-rate information on an invoice is therefore a reason for exclusion. Furthermore, the information on a hospitality receipt must include the names of the participants, the purpose of the hospitality and the date and place of the meeting. The reason for the catering must be described as precisely as possible. Flat-rate rewrites such as “business dinner” or “information interview” are insufficient. Therefore, the occasion should be specified, for example, with “business dinners in the context of the negotiations of a GmbH sale”. The invoice must also have been automatically registered and created.

3.4. hospitality costs in special situations

Restrictions apply to hospitality costs incurred through private hospitality. For example, there must be particular reasons in favour of this form of catering. Such a reason exists in particular in the case of a personal restriction of one of the participants, which makes it necessary to let the catering take place in private premises.

3.5. When there are no hospitality costs despite hospitality

In addition, costs incurred during an event on a private occasion are excluded in principle as catering costs for tax purposes. Here, the private event character is clearly in the foreground, regardless of whether in fact also business aspects were valid.

4th VAT aspects of catering costs

Although only 70% of the actual expenses are tax deductible as operating expenses, the entire VAT amount can still be claimed as input tax. However, this only applies if the catering costs are considered appropriate overall. Otherwise, the sales tax consideration of catering costs is completely excluded. In addition, all necessary supporting documents must be available and the expenses must be correctly broken down in the accounts.

5th Business Lunch as Operating Expense – Conclusion

After discussing the various peculiarities surrounding the topic of hospitality costs, it is now time to also point out important external factors. We have already referred to the assessment of the tax offices, which ensure that only reasonable catering costs are deducted. It must be added here that such an assessment usually only takes place within the framework of an audit. In fact, the review of hospitality receipts is one of the standard practices of financial officials in an external audit. For example, tax officials like to check whether the number of ordered meals corresponds to the number of participants listed on the catering receipt at a business dinner. If, for example, significantly more meals have been charged, the suspicion is that further participants were fed, for which an approach of catering costs should have been excluded, such as family members. In any case, such discrepancies arouse demands from the tax office.

There will certainly be further inquiries if the bill seems unreasonably high. Here, as a taxpayer, one should be able to prove that the circumstances justify such an approach. Such inquiries can also occur in a sales tax audit or sales tax review. And of course, the hospitality receipts are also checked on the date. If an alleged business dinner took place on a high holiday, it is reasonable to assume that the private occasion was decisive here. The same applies to obvious anniversaries, such as birthdays.