No VAT deduction when expenses co-financed by the employer serve to meet the social needs of employees

No VAT deduction when expenses co-financed by the employer serve to meet the social needs of employees (judgment of the Supreme Administrative Court of June 22, 2023, I FSK 1182/19)

• A furniture production company built a kindergarten and outsourced its management to a separate entity.
• The kindergarten offers services to employees of the company and related companies, with tuition fees partly covered by the employees and partly by subsidies from the Social Fund.
• The company believed it had the right to deduct VAT charged on invoices for the construction and equipment of the kindergarten, but the tax authority disagreed, stating that the kindergarten served non-taxable social needs of the company’s employees.
• The Supreme Administrative Court upheld the tax authority’s decision, emphasizing that the purpose of expenses, not their financing, determines VAT deduction eligibility.
• Taxpayers should be aware that spending on social programs for employees may not qualify for VAT deduction.

Source Deloitte

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