Background: Since 2004, entertainment expenses have been deductible for income tax purposes at only 70%, down from the previous 80%. The remaining 30% is treated by the tax office as non-deductible business expenses for income tax purposes (input VAT, by contrast, can be claimed in full). The Finanzgericht Baden-Württemberg, Az. 10 K 2983/11, judgment of 26 April 2013, has doubts as to whether this reduction is constitutional. This applies in particular against the background of the 2004 reduction from 80% to 70%. Given that the matter has now been referred to the Bundesverfassungsgericht for a decision, we recommend filing objections against all assessments still open since 2004, requesting that proceedings be suspended pending the decision. Please refer to file reference Az. 2 BvL 4/13. For existing clients, we will of course handle this for you.
Frequently asked questions
Frequently asked questions
What is the income tax deduction rate for entertainment expenses?
Since 2004, entertainment expenses are only 70% deductible as business expenses. The remaining 30% are treated as non-deductible business expenses for income tax purposes. Prior to 2004, the deductible portion was 80%.
Can input VAT from hospitality invoices be fully deducted?
Yes, for VAT purposes, input VAT on hospitality expenses is 100% deductible, even though only 70% of the costs are recognized as business expenses for income tax purposes. The reduction therefore applies exclusively to income tax.
Is the 30% reduction of business entertainment expenses constitutional?
The Finanzgericht Baden-Württemberg expressed doubts about the constitutionality of this reduction in its ruling of 26 April 2013 (Az. 10 K 2983/11), particularly regarding the decrease from 80% to 70% in 2004. The matter was referred to the Bundesverfassungsgericht for a decision (Az. 2 BvL 4/13).
How should taxpayers respond to the pending proceedings on the deduction limitation for hospitality expenses?
An appeal should be filed against all tax assessments still open since 2004, together with a request to suspend the proceedings pending the decision of the Bundesverfassungsgericht. Reference should be made to case number 2 BvL 4/13 in order to benefit from the outcome of the model proceedings.