One of the main tools of “vying” for the favour for customers is offering promotional gifts linked to purchases. Various issues arise with several taxes in connection with these freebies, but it is how to treat the special offers in terms of personal income tax that probably causes the most headaches. Companies obviously prefer the tax-free treatment permitted by Hungarian law, but few special offers actually meet the conditions of tax exemption.
According to the Act on Personal Income Tax, the conditions for tax exemption are as follows (compliance with every single condition must be examined):
The special offer
- must be for business policy (advertising) purposes,
- must be within the framework of a public campaign conducted among the general public,
- must be specific to the purchase of a given product or service
- must be given as a benefit in the form of a price discount, rebate or other allowance,
- may not qualify as a game or contest, or a drawing that falls under the scope of the Act on Gambling Operations.
The tax authority adopts a strict approach to examining the conditions, and if there is even partial non-compliance the transaction will be reclassified as taxable and the entity running the campaign will incur a tax shortfall and tax penalty along with default interest. Thus it is advisable to plan individual marketing campaign offers carefully, and take the conditions of tax exemption into account before going public.
The following detailed presentation of the conditions is based on information provided by the tax authority in its publications (Tax World, April 2012 – analysis by Dr. Péter Honyek).
According to information from the tax authority, a business policy (advertising) aim is realised if the benefit is suitable for boosting the sales and turnover of the paying company. There is no indication about exactly how the tax authority intends to verify and prove this intention, but the essence of such programmes is obviously to increase sales.
Another condition is that the benefit must be organised within the framework of a public campaign conducted among the general public, where any private individual can participate under the same conditions. The terms and conditions of the special offer must be determined in advance. This means that the scope of those eligible to participate cannot be restricted citing various criteria; this cannot be used as an opportunity, for example, to provide some form of financial benefit only to existing business partners. The Act also states that the benefit is only considered tax free if the customer is a private individual. Consequently, a traditional promotional gift, which is designed to raise awareness about a product without requiring the purchase of a specific product that is commercially available, may not qualify as a benefit exempt from personal income tax (the exception to this rule is the handing out of product samples, which is also subject to strict terms and conditions).
Publicity can be achieved through the media as well (e.g. on the television or the radio). It is also possible to provide a benefit or discount by offering vouchers or card points, or credits for purchasing goods or services. According to the tax authority publication a private individual may also receive a high-value benefit after making a smaller-value purchase.
If a winner is chosen in a newspaper or in an online competition, for example, the terms and conditions for tax exemption do not apply at all. In these cases the paying entity has to take the payment liabilities for private individuals into consideration too. This applies to all competitions, and so when planning the campaign it is definitely worthwhile examining whether there is any part of the competition or contest that depends on the skills or knowledge of the participants.
Furthermore, a drawing which falls under the scope of the Act on Gambling Operations may not qualify as a tax-free sales incentive. According to current practice at the authorities and the courts, the following conditions must be met, amongst others, to qualify as a prize draw:
- the draw is organised by a taxpayer engaged in the sale of goods and services,
- only customers may take part,
- the game may not make use of telecommunication equipment (telephone, SMS, online registration cannot substitute for physical tickets),
- the tickets are drawn publicly, and the winner receives a prize in the form of goods or a service.
If all of the elements defined in the Act on Gambling Operations are complied with, the benefit qualifies as a taxable prize draw.
Based on the above it is clear that the authorities do not approve tax exemption easily; many conditions have to be examined, and reviewing compliance with the individual conditions requires precise knowledge of additional legislation.