Expenses for Entertaining Colleagues of an Employed Director

You will be taxed the world over on your income - which is the difference between your income and your income related expenses. Nothing else is more true than in Germany. A director of a company, Alec, invited all his colleagues from the company to celebrate his 25th working anniversary. He wanted to deduct these costs as income-related expenses but his tax office refused. The Supreme Tax Court's judgment of February 1, 2007, re VI R 25/03 (published on March 21, 2007) finally agreed with the director.

Alec hosted a garden party costing DM 7,614 to celebrate his 25^th anniversary in the company. His own income varied upon the success of his team. He wanted to deduct these expenses as income-related costs for employment. The tax office considered these expenditures as nondeductible, because following §12 no. 1 cl. 2 EStG, all private costs are generally nondeductible.

Money spent on parties is usually considered as private amusement – but not without an exception. Ruling case law of the Federal Tax Court determines whether the reason for the party was private or of professional nature by considering all incidents of the individual case. First of all, the reason for the celebration is to be considered. Anniversaries, such as round birthdays (i.e. 50, 60. 70. 80) or anniversaries with a company are usually related to the private sphere of life.

In accordance with the BFH, only one incident is to be considered. In the case discussed, the persuading incident for professional expenses was that Alec exclusively invited colleagues from the company to his party. Alec’s motive was not only out of generosity, but rather to motivate his colleagues as his income was dependent on their achievements. Had he invited private friends, the party would not have reduced his taxable profit.

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