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01 October 2019

Design your sponsoring activities in the interest of both parties and keep an eye on the value added tax (VAT).

"Do something good and talk about it." Georg-Volkmar Graf Zedtwitz-Arnim already used this principle for public relations work in the middle of the last century. Over time, it became "Do something good and let others talk about it." Sponsorship meets the core of this principle.

Many institutions and events cannot exist without financial support of third parties. Not only sports and cultural events but also local festivals, NGOs etc. need this support. For the assessment of the tax consequences of sponsoring, however, the "neediness" of the recipient is not important.

Swiss companies are mainly involved in sports and culture. Compared to the past, when sponsoring was often based on a CEO being enthusiastic about a sport, in our days many companies have defined goals. Credibility and sustainability are usually central to support corporate values. Most of the money is still spend in sports.

Local sport events in mass sports often depend not only on financial support but also on volunteers and material. The tax consequences vary depending on the arrangement between the parties.

Service and remuneration as the basis for value-added tax

VAT is, in principle, levied on services supplied by taxable persons for remuneration. For the following assessment, it is therefore important whether and who provides a service.

What is a donation?

A donation within the meaning of VAT practice is a voluntary contribution to a person not closely related without any expected return. Donations can be in cash or in kind. The latter is the provision of material and equipment, the operation of timekeeping, the operation of a website with ranking lists, etc. The same rule applies if drinks or food are provided free of charge for participants and visitors.

Counter performance turns the donation into a sponsorship

If the donor receives a return for his payment, an exchange of services results. According to the "Do something good and let others talk about it" mentioned at the beginning, the return in sponsoring is marketing. The recipient of the sponsoring provides marketing. If the sponsor organizes all communication activities and pays for them (additionally/directly), the recipient's agreement to use the sponsoring (and the recipient's name) for marketing purposes is a counter performance.

Neutral naming is not sponsoring

A contribution mentioned neutrally in a publication of the recipient remains a donation. Both the sponsor's name/company and the logo may be used. "Neutral" in this context means that no reference may be made to the Sponsor's products and/or services. Publications can be, for example, in classical printing such as program books, newspapers, magazines and posters. Publication may also take place on the Internet. However, a link to the sponsor's homepage is always a marketing service.

Gross principle in VAT

Two parties rendering deliveries and/or services vice-versa between each other must invoice their respective services in full. In particular, it is not permitted to settle a net amount in favor of one party. Such offsetting is contrary to the principles of proper accounting (Art. 958c OR [1]).

With this gross principle, the valuation issues are of considerable importance. As far as sponsorship in the form of a financial contribution is concerned, the valuation questions - at least due to many years of practice - are quickly answered. The value of the marketing always corresponds to the amount of contribution. The amount can not be split into a sponsoring and a donation part. This even applies if another sponsor receives the same presence for a lower contribution.

Support via benefits in kind

Goods/services in kind, which are provided as a donation (without marketing services) may lead to an adjustment of the input tax deduction or charge for own use if the limit of CHF 500 per year and recipient is exceeded.
Sponsoring with benefits in kind must be billed to each other. The company or sponsor invoices the goods/services and the recipient invoices the marketing service. VAT will be added according to standard rules.

Sponsoring a charitable recipient

If the recipient of the sponsoring is a non-profit sports or cultural association or a another non-profit organization, the VAT obligations remain the same as for other recipients. However, the tax liability only starts with an annual turnover of CHF 150,000.

What should you take into account when drafting contracts?

Of course, the contract is always a result of negotiations and rarely a bowl of cherries. A clear and complete contract is extremely helpful for the handling and a successful cooperation. Therefore, please collect all necessary information and avoid drafting a contract that covers only partial aspects of the actual agreement. The whole agreement will determine the VAT consequences.

Even if you receive no return for a donation, a contractual agreement is still highly recommended, as the following points may raise questions later on.

  • You have to show the agreement, in order to make the qualification as a donation under VAT.
  • Differentiate the donation from other service relationships between the parties (e.g. as supplier or customer).
  • Recognize and avoid problematic agreements beforehand (e.g. limitations on other sponsoring agreements with competitors/companies/industries, etc.).

With regard to sponsoring, the contractual agreement should cover the following points from a VAT perspective:

  • Which financial and other services does the sponsor provide?
  • Which services does the recipient provide?
  • Which rights (e.g. advertising rights) does the sponsor have?
  • Which services will the recipient provide under the sponsoring? Which services (e.g. customer tickets for events) will he bill separately?
  • Who bears the VAT economically? Are the agreed sponsorship payments inclusive of VAT or exclusive of VAT?
  • Does a future change in the VAT rate change the sponsoring amount for long-term contracts?

The tax team will be happy to answer any questions and provide further information.

Author: Marc-Antoine Bree

[1] Federal Act on the Supplement to the Swiss Civil Code (Part Five: Code of Obligations)

Topics: TaxSponsoringCultureDonationsTaxes Value AddedFoundations

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