Sports sponsorship deductibility: advertising and entertainment expenses
In Italy, tax deductions for sports sponsorship expenses and the deductibility of those expenses are a very important issue when it comes to sports marketing. The subject matter is delicate and full of details (VAT on sports sponsorship, tax relief, advertising expenses, and so on) and must be approached methodically, as the rule is very important for both the big team and the Amateur Sports Association and must be handled with familiarity by anyone who wants to deal with sponsorship. That’s why we talk about it today with Riccardo Maria Ceresi, a Certified Public Accountant who helps us shed light on the topic.
Deductibility and deductions for sports sponsorships
To try to find one’s way through the welter of fiscal matters, it is good to start with the definitions contained in two rather dated Ministerial Resolutions (R.M. 2/1016/1974 and R.M. 9/204/1992) which state that the
are characterized by the existence of a synallagmatic relationship (or, to put it more simply, a contract between two parties for consideration) under which the sponsor agrees to a performance in cash or in kind and the sponsored party agrees to advertise and propagandize the product, services, brand, and activity carried out by the sponsor.
And it is precisely because of this synallagmatic relationship that these expenses have been brought under the umbrella of advertising expenses; in this sense, Article 90 paragraph 8 of Law 289/2002 was diriment, in which it is stated that “the consideration in cash or in kind in favor of companies, amateur sports associations, etc., constitutes for the disbursing entity up to a total annual amount not exceeding 200,000 € advertising expenditure.”
From a tax point of view, this is very important: up to 200,000 € annually such costs are fully deductible (ex art. 108 TUIR) from business income as well as the deductibility of the relevant VAT for 2021/2022 sports sponsorship is known.
Sponsorship: Advertising and entertainment expenditure
Sponsorship expenditure, like any other business expense, must then be subject to the general principles of inherence and appropriateness; from an operational point of view, it is advisable for the taxpayer to possess the necessary documentation to prove the actuality of the sponsorship relationship and thus:
- The sponsorship contract with a certain date;
- A file demonstrating the actual execution of the contract (photographs, publicity materials, newspaper articles, etc.);
- traceability of payments.
Where, on the other hand, some of the above conditions are lacking, the IRS could trace sponsorships back to entertainment expenses the deductibility of which is reduced; in fact, Article 108 of the Tuir states that the limit of tax deductibility is 1.5 percent of revenues up to €10 million, 0.6 percent of revenues for the excess and up to €50 million, 0.4 percent for the excess… and keep in mind that within the scope of entertainment expenses also flow other costs that businesses typically incur (hotel and restaurant expenses, gift expenses, etc.) that should be counted to calculate the limits.
Deductibility of sponsorship expenses over €200,000
What about expenditures over €200,000? Again, nothing is absolute: if the Taxpayer is able to demonstrate the relevance and appropriateness of these increased costs Can choose to deduct such expenses at 100 percent (he will then have to be able to show that these costs not only led to exponentially higher revenues but that there is a direct correlation between these costs and the higher revenues)*; alternatively, he may choose a more prudent route and trace this higher expense back to an entertainment expense.
One had begun that article by talking about the marasmus of the tax matter… Well, the reader who after this article wants to delve further knows that the law reserves for him the possibility of Submit formal Interpello to the Ag. Revenue (ex paragraph 4a of Art. 108 TUIR) in which he can present his case and request that the Ag. Revenue make a ruling clarifying under which category (advertising or entertainment expenses) one’s sponsorship expenditure should be traced.
The Supreme Court on the deduction of sponsorship costs and inherency
An important concept in sports sponsorship and the deductibility of sponsorship expenses is that of “inherence.” In short, the rule intends that sponsorship, in order to be deductible from business income, must be a specific activity aimed at the growth, proliferation and life of the business and enterprise.
This has also been reiterated by the Supreme Court in recent times, with the ordinance no. 30024 of October 26, 2021, regarding a transaction that the IRS had found “not inherent” because it was in “with the normal economic criteria of business activity.”
Clearly, the reasoning on inherency calls for a reflection that is much more qualitative than quantitative and that returns the focus to the relevance and importance of sports sponsorship within a company’s marketing strategies as an effective promotion and communication tool. It is the Supreme Court itself to reiterate: “On the subject of business income tax, the principle of inherency expresses the referability of costs incurred to the business activity, even indirectly, potentially or in future projection, excluding costs that are in a sphere extraneous to it, and, in fact, as a constraint on the deductibility of costs, it does not derive from Art. 75, paragraph 5 (current Art. 109, paragraph 5), of Presidential Decree No. 917 of 1986, which concerns the different principle of the non-deductibility of costs related to exempt revenues (subject to inherency), that is, the correlation between deductible costs and taxable revenues. From this it follows that inherence must be appreciated through a qualitative judgment, unencumbered by references to the concepts of utility or advantage, pertaining to a quantitative judgment, and must also be distinguished from the notion of the congruity of the cost, although the uneconomicalness and incongruity of the expense may be revealing indices of the defect of inherence.”
Inherence is a general, common-sense criterion that has a lot to do with how well a sponsorship program fits within the company’s logic, image, and trajectories of business growth.
in Italy, sports sponsorship expenses are fully deductible up to €200,000 as advertising expenses. For amounts above this amount, sponsorship can still be deducted at 100 percent as long as it is framed as advertising and entertainment expenses. The absolute presumption is that of inherence, but in this regard this blog has on several occasions covered the topic of the benefits of sports sponsorship in terms of marketing and communication.
The suggestion, of course, is to turn to the many law firms or accountants who are familiar with the subject in our country, to be sure of making the right choice at the right time at all times.
* This gives us the right to introduce a topic, that of ROI “Return on investment” which should be inescapable exercise of every sponsoring company and which, in addition to measuring the effectiveness of the sponsorship being implemented, is a useful tool in case there is a challenge from the IRS.