The Hamburg-based startup Lemonaid has spent about EUR 7.000.000 on social projects in recent years. This is based on a commitment to the buyers of the drinks they produce that they will use EUR 0,05 per bottle sold for the promotion of non-profit purposes. The tax office has noticed, however, that Lemonaid is taxing more expenses than is provided for by the law. As a result, the Treasury wants to correct the donation deductions. In addition, the tax authority also argues that the exceeding amounts should be counted as hidden profit distributions to the shareholders. This would result in millions in back taxes being paid to them. Lemonaid, on the other hand, speaks of sponsorship, which is also tax deductible, and thus tries to avoid the tax restrictions that accompany donations. Can this succeed?

Beverage manufacturer Lemonaid from Hamburg is a startup that wants to become more socially engaged. So they decided to use part of the turnover for charitable projects. Of course, one is aware that companies that assign funds to charitable purposes can tax these grants. However, this can only be done within the framework of tax laws. And these set certain limits that limit the amount of tax-effective donations.

Nevertheless, Lemonaid tried to do just that: provide more money for social projects than the law stipulates, but at the same time tax the full amount. Therefore, it has been decided to speak instead of charitable donations of a sponsorship. Because even with a sponsorship, companies can deduct these expenses tax.

Not surprisingly, the responsible tax office came to a different assessment. What this is and what consequences this case could entail, we discuss in this article.

To understand the whole story, it is appropriate to look at the origins of Lemonaid. A brief digression on that.

Paul Bethke and Jakob Berndt founded Lemonaid in Hamburg in 2009 under the company LemonAid Beverages GmbH. They intended to run the company as a social business, which from the outset was to promote the social, financial and environmental situation, especially in the countries from which they source the raw materials for the production of their drinks.

In order to fulfill this purpose, it was decided at the beginning that one uses a fixed share of the sales for charitable purposes per bottle sold. Since 2010, the amount has been EUR 0.05 per bottle sold (and EUR 0.10 per pack of tea, but for the sake of simplicity we only assume the drinks). Lemonaid has stated this exactly on their bottles. In this way, Lemonaid has already spent more than EUR 7,000,000 of its previous turnover for social purposes.

Lemonaid must have been clear from the beginning that such an amount can under no circumstances be used as a tax donation in its entirety. For this purpose, § 9 (1) no. 2 KStG stipulates that the deduction of donations, which a corporation may deduct annually for tax purposes, may amount to either a maximum of 2 % of profit or 4 ‰ of turnover. Anything else you donate is therefore not taken into account for tax purposes and must be taxed, no matter how charitable the purpose of the payment may be.

Now one would actually have to determine for each assessment period individually whether these limits were exceeded. But because the financial administration has already doubted that these limits have been respected, we can assume that this is true. Therefore, it is sufficient for our purposes to deal with the total amount of social payments made by Lemonaid.

Since Lemonaid offers a gross price of EUR 20.00 for 12 bottles of their drink, it follows that a bottle costs about EUR 1.66 including sales tax. Net sales of EUR 1.40 per bottle of Lemonaid. So EUR 0.05 of this is for social purposes. Consequently, we now have to check whether this share of the turnover harmonizes with the legal requirements. However, we note that 4‰ of sales is only EUR 0.0056 per bottle of Lemonaid sold. This is significantly less than what Lemonaid spends on social projects. In other words, Lemonaid spends about ten times more on social welfare, and also claims this tax than the law allows for donations.

That is why Lemonaid prefers to talk about sponsorship instead of donations. In the case of sponsorship, unlike donations, no legal restrictions apply with regard to the amount of the tax-deductible deduction.

But the tax office probably also addressed this aspect. So Lemonaid rejects the approach of sponsoring, because as a sponsor you can always expect a return, usually in the form of advertising. In the opinion of the responsible financial administration, however, this is precisely what is lacking when Lemonaid makes payments in the said amount to the non-profit association Lemonaid & ChariTea e.V. For the financial officials it is therefore clear: instead of sponsoring, you have to do here with classic charitable donations.

So we calculate again: of the EUR 7,000,000, only about EUR 700,000 are taxable as donations. According to the Financial Administration, Lemonaid must regularly tax the amount exceeding EUR 6,300,000.

Lemonaid finds this unfair. After all, the usual sponsorship would be treated more tax-advantageously than charitable donations. In view of the fact that the federal government – the old, CDU-led as well as the new, social entrepreneurship wanted and wants to promote, the real situation for such companies is exactly the opposite. Nevertheless, the current legal situation is quite clear.

But the above finding of the tax office that Lemonaid has set too high a donation deduction, is only the beginning of their assessments. The tax office assigns the excess amount to the shareholders of LemonAid Beverages GmbH as a hidden profit distribution. In other words, instead of Lemonaid as a company on its own responsibility, the shareholders have donated part of the dividend actually due to them via the company. The charitable grants are therefore only disguised private donations, paid from the dividends due to the shareholders. This constitutes a hidden distribution of profits. The result is that the shareholders have to tax the EUR 6,300,000. This creates two separate tax claims, one to Lemonaid and one to their shareholders.

No wonder, then, that Lemonaid is extremely critical of this in public and even submitted a petition to the Bundestag. In this way, Lemonaid tries to ensure that social entrepreneurship receives the same tax benefits that purely professional companies can claim when sponsoring. However, this would indirectly be tantamount to an admission that they have not set up sponsorship but donations.

Lemonaid has tried to promote social causes through the sale of their drinks and to claim this for tax purposes without making donations. Their strategy, however, to speak of sponsorship, doubts the financial administration. But the consequence will only lead to significantly higher taxes for Lemonaid and its shareholders. Morally, this may seem highly dubious, but that is the law. And laws, especially tax laws, arise anyway without any moral approach. Only very rarely does the implementation of tax laws meet morally anchored limits, for example when considering the companies that have become victims of the extreme flooding in West Germany in 2021.

Instead of referring to the argument of the charitable payments in the form of sponsorship, Lemonaid has another option to set the payments fully taxable. Because if Lemonaid represents the payment of EUR 0.05 per bottle sold as an obligation to their customers, then they only fulfill a legal obligation, which in turn relativizes the donations as such.

But it would be easier if Lemonaid could clearly prove that it is actually doing social sponsorship with its payments. For this Lemonaid would have to sign a sponsorship contract with the sponsored club. In this, the contractual partners would also have to explicitly clarify what consideration Lemonaid receives for the sponsorship, but this should probably not mean much effort. Nevertheless, the consideration for sponsorship must also be sufficiently large to dispel the suspicion of disguised donations. Fortunately, the consideration does not have to reach the same value in order to meet this condition. It is sufficient if the sponsorship is conducive to the reputation of the company or its products; This was already stated by the Bundesfinanzhof in an earlier judgment (BFH judgment of 3 February 1993, I R 37/91). Because then the grants are deductible in full as operating expenses.