SOCIALLY RESPONSIBLE IS THE NEW NORMAL
Nowadays, everyone helps in their way, and showing social responsibility is becoming an increasingly important criterion for determining the value of the brand in the market, and in addition to economic, the social impact that companies achieve in their local communities and ways to contribute to the common good is also important.
Corporate social responsibility is a concept of activities by which companies align their business with the needs of society, and the practice began in multinational companies that have often been criticized for environmental policy, vulnerable groups, and/or employees. Issues such as the company’s attitude towards vulnerable groups, care for the environment, workers’ rights, and the socially disadvantaged are becoming increasingly important to new generations when making employment decisions, and it is not strange that investors are increasingly looking at this segment of business, and not just profit.
There are many activities that companies engage in to demonstrate social responsibility, and although socially responsible behavior cannot be reduced to donations alone, without diminishing the important role they play for society as a whole – we will look at tax reliefs related to donations from legal entities.
DONATIONS FOR LEGAL ENTITIES
Donations in money or goods and services, in regular conditions in the Republic of Croatia, and for general benefit purposes to associations performing cultural, health, humanitarian, sports, religious, educational, ecological, and other public benefit activities, and other persons * (* bodies state, local and regional self-government that perform the above activities according to special regulations) following special regulations, in the amount of up to 2% of the income generated in the previous year, represent a tax-deductible expense to corporate taxpayers. In that case, the tax base is reduced by the amount of the donation up to 2% of the income from the previous year.
Newly established companies cannot have a tax-deductible donation because they do not have income from the previous year, so the amount of tax-deductible expense cannot be determined.
If donations exceed 2% of the total income of the previous year, that amount of expenditure is classified as a non-tax-deductible expenditure. In that case, the tax base is increased by the amount of the donation above 2% of the income from the previous year.
Certain donations are considered as tax-deductible expenditures even in the amount of more than 2% of total revenues in the previous year by the decisions of the competent ministries on the implementation of financing special programs and actions, including food donations by food retailers and suppliers, provided that the same was done following special regulations of the Ministry of Agriculture.
DONATION IN MONEY AND IN-KIND
Donations can be in cash and in-kind. If it is a donation in cash, as such it is not subject to VAT, because payment in cash is not considered as delivery of goods or services. If the donation is in kind, then taxpayers who are in the VAT system are obliged to charge VAT on such donation, and under the VAT Act, according to which the provision of products, goods, or services free of charge is considered as a taxable supply.
A cash donation must be transferred to a giro account, and it is not subject to VAT obligation because a cash donation is not considered delivery of a product, goods, or service. The donation in kind and cash must be accompanied by documentation, depending on the form and purpose of the donation.
Income taxpayers can thus increase the personal deduction by the amount of donation expenditure, and thus reduce the tax base by submitting an annual income tax return.
FOOD DONATION, INCOME TAX AND VAT
Food donations by food producers and traders of corporate taxpayers can be considered a tax-deductible expense even above 2%, but only if the condition is met that the donation is made to prevent the destruction of large quantities of food, environmental protection, and assistance to final recipients following special regulations of the Ministry of Agriculture.
In addition, food donations must be made through non-profit organizations, i.e. all those who perform humanitarian activities in accordance with special regulations and all those who are registered in the Register of Intermediaries maintained by the Ministry of Agriculture.
In the event of a declaration of natural disasters and natural disasters, exceptionally, food may be donated directly to final recipients, but it also has equal tax treatment. For example, we can take the Tax treatment of donations to mitigate the effects of earthquakes in the Zagreb, Sisak-Moslavina, and Karlovac counties, which we have already written about, and you can read it HERE.
Food donation by food producers and traders is considered a tax-deductible expense regardless of the value of the food donated, under the above conditions. Also, food donations by food producers and traders are considered a tax-deductible shortage of goods and are not subject to VAT. If the food donor is in the register of VAT payers, he is entitled to deduct input tax for the same. To be considered a tax-deductible deficit of a good, the donation must be worth up to 2% of the total revenue generated in the previous year.
In order to determine the tax-deductible shortage of goods, the purchase value of the donated food is taken into account for the value of the delivery. The taxpayer who donates food is obliged to submit the DONH form to the Tax Administration within the same deadline as the submission of the VAT form.
A taxpayer who is in the register of VAT payers, and who donates food worth more than 2% of the total income in the previous year, is obliged to pay VAT, and the donation is seen as a tax-deductible expense.
If food is donated directly to end-users, without the intermediaries participating in the food donation chain and without declaring natural disasters, and for social, humanitarian, or other public benefit purposes, the donation is subject to VAT regardless of its value, while the value of the donation above 2% of the total realized revenues in the previous year is considered a non-tax-deductible expense.
Income taxpayers who donate food and did not operate in the previous year are required to correct in the last tax period of the current year if they exceeded 2% of income that year.
DONATION THROUGH PAID HEALTH EXPENSES
Paid expenses for the health needs of natural persons are also considered donations, provided they are not paid by any health insurance (basic, additional or private), nor at the expense of the funds of the natural person. Such donations must be paid to the giro account of the recipient of the donation or a health institution abroad or at home (where the treatment is performed).
Whether the donation consists of money or in kind, to recognize it as a non-taxable expense (for corporate taxpayers) it is necessary to have credible documentation.
Thus, donations for the health needs of natural persons are recognized as a tax-deductible expense in the amount of up to 2% of the total realized income in the previous year. The donor (respecting all the prescribed conditions) is obliged to keep records of donations in which it must be stated:
- Date of donation
- Personal data of the recipient of the donation
- Donation method
- Donation value
The same conditions apply to income taxpayers, who perform independent activities, and who can increase their deduction through such annual donations through the annual tax return.
WITHOUT COMPENSATION AND CONTEMPT
While most know what a donation implies, it is helpful to know how a donation implies that there is no compensation and no consideration. It should not be confused with sponsorship. Through sponsorship, the recipient of the donation is obliged to provide a promotional service in return, so the donation is not presented as a donation but as a sponsorship.
Donations to foreign non-profit purposes, associations, and organizations are considered as non-tax-deductible expenses, i.e., expenditures.
If the donation is not used in full, whether it is related to the health needs of the recipient of the donation, or for public benefit purposes, the unspent value is considered a taxable receipt. If, on the other hand, the unspent part of the donation is passed on, for the health needs of the recipient, for humanitarian purposes, or general benefit purposes – it is not considered a taxable receipt.
The article is written following the current legal regulations of the Republic of Croatia, so please read when reading about potential subsequent changes in legislation after the article is published.
