When is coffee in the office a justifiable expense?

Up until now, the State Revenue Service (SRS) has regarded tea and coffee provided to employees in the office as expenses unrelated to economic activity. However, a question arises in the context of collective agreements: if such an agreement stipulates that employees are offered tea and coffee daily (during coffee breaks), are these expenses considered business-related, or are they subject to corporate income tax? Read the article by Baker Tilly Baltics leading tax advisory expert, Anna Vilka, on this matter.

To answer the question about providing tea and coffee to employees in the office, it's important to consider both the norms of the Corporate Income Tax Law (CIT Law) and the explanations from the State Revenue Service (VID).

If a collective agreement has not been concluded

First, let's look at why such expenses are considered unrelated to business activity when there is no collective agreement.

Most often, the justification for companies to treat these costs as business-related expenses was Subparagraph 66.4 of the Cabinet of Ministers (CM) Regulations No. 677, "Regulations for the Application of Corporate Income Tax Law Norms". It states that expenses related to economic activity include costs incurred to provide drinking water to employees at their workplace, as well as equipping and maintaining rest areas for employees (for example, to make coffee or tea or have a meal at the workplace), if the equipment in these rooms is considered to be in line with the general modern understanding of good working conditions.

Does providing coffee and tea to employees fall under the equipping and maintenance of rest areas in accordance with good working conditions? The short answer is no, but let's examine the reasoning.

• Subparagraph a) of Section 2, Part 2, Article 4 of the CIT Law states that the corporate income tax base includes expenses unrelated to economic activity, which are calculated in accordance with Article 8 of this law.
• In the context of Article 1, Paragraph 20 of the CIT Law, economic activity is an activity aimed at the production of goods, the execution of work, trade, the provision of services, or another type of activity for a fee.
• According to Part 1 of Article 8 of the CIT Law, when identifying expenses unrelated to economic activity, they are assessed not only according to their legal form but also to the economic substance of the transaction.
• According to Article 8, Part 2, Paragraph 1 of the UIN Law, all expenses that are not directly related to the taxpayer's economic activity are considered expenses unrelated to economic activity. This includes the taxpayer's expenses for recreation, entertainment events, and other benefits for shareholders or employees, if these benefits have not been included in the income of the individual subject to personal income tax, except in cases where the law "On Personal Income Tax" provides an exemption for this type of income.
• Notwithstanding Part 4 of Article 8 of the UIN Law, expenses that are considered related to economic activity are those mentioned in Subparagraph 66.4 of CM Regulations No. 677.

Therefore, expenses incurred by an employer for the purchase of drinking water, as well as for equipping rest areas at workplaces, are considered, in the context of the UIN Law, to be expenses directly related to the taxpayer's economic activity if the equipment of these rooms is in line with the modern understanding of good working conditions. Consequently, the corporate income tax base does not need to be increased by the amount of these expenses.

The maintenance of rest areas does not give the employer the right to pay for employee drinks and snacks

Paragraph 25 of CM Regulations No. 359, "Work Protection Requirements at Workplaces" stipulates that rest areas are designed, equipped, and maintained, observing the following requirements (which may not apply to offices and similar workplaces if equivalent rest is possible during work breaks):

1. they correspond to the nature of the work and the number of employees, and are comfortable and accessible;
2. they are sufficiently spacious and have a sufficient number of tables and chairs with backrests;
3. if frequent and regular breaks are necessary due to the nature of the work, but no rest areas are provided, there are other rooms where employees can stay during breaks.

Therefore, within the context of CM Regulations No. 359, a rest area is part of the workplace equipment that serves to ensure good working conditions for employees.

Based on the above, the expenses stipulated in Subparagraph 66.4 of CM Regulations No. 677, which are incurred by the employer for equipping and maintaining workrooms for employees, do not mean that the employer can provide employees with drinks and products that are prepared or consumed in these rest areas, and attribute the respective costs to economic activity expenses.

Thus, expenses related to the purchase of coffee, tea, and sugar for employees, if these benefits have not been included in the employee's income subject to personal income tax, are considered expenses that are not directly related to economic activity and must be included in the corporate income tax base.

In addition, the VID has expressed a similar opinion: daily expenses for tea, coffee, milk, fruits, and small snacks for company employees are not included in personnel sustainability expenses if they are not stipulated in the collective labor agreement.

If a collective agreement is concluded

The situation changes significantly if a collective agreement is concluded. The VID analyzed a similar case in its opinion dated December 7, 2018. According to the requirements of Article 8 of the CIT Law, personnel sustainability expenses do not form a taxable object for corporate income tax if they, together with representation expenses, do not exceed 5% of the total gross remuneration calculated for employees in the previous reporting year, for which state social insurance contributions have been paid.

Personnel sustainability expenses also include the costs of events provided for in the collective labor agreement that cannot be personalized. A collective labor agreement is a written agreement between an employer and employee representatives that defines labor relations and social cooperation in a company or industry, and it is regulated by the Labor Law (LL).

Therefore, to comply with the requirements of the CIT Law, especially with regard to expenses that are not included in the corporate income tax base (including coffee and tea for employees), the conditions of the Labor Law for concluding a collective labor agreement must be observed.

As for the nature of the events, the CIT Law does not specify what events are considered collective motivation or team-building events. It also does not regulate whether such events are one-time or regular, or what percentage of employees must participate. However, the goal is crucial: motivating or team-building the collective.

A company independently decides whether to implement personnel sustainability measures and what type of measures are suitable for its employees. For the purposes of applying corporate income tax, those representation and personnel sustainability expenses that do not exceed the amount specified in Article 8, Part 2, Paragraph 7 of the UIN Law are not included in the corporate income tax base. This means expenses that, together in the reporting year, do not exceed 5% of the total gross remuneration calculated for employees in the previous reporting year, for which state social insurance contributions have been paid, if the aforementioned expenses are accounted for separately from other expenses.

In a situation where a company cannot personalize personnel sustainability expenses, as is the case when a company buys tea and coffee for all employees, the specific benefit gained by each employee is not determined.

The regulations governing corporate income tax do not require the personalization of the benefit gained by employees from each specific sustainability event, given that personnel sustainability events are not aimed at a specific individual but are organized with a specific goal - to motivate or build the solidarity of the entire team of employees.

The SRS opinion states: if the mentioned expenses are stipulated in the collective labor agreement and cannot be personalized, they are considered personnel sustainability expenses. By observing the limitation set by the CIT Law, such expenses may not be included in the corporate income tax base.

SUMMARY

If the purchase of drinks (tea and coffee) is stipulated in a collective agreement

• If the drinks are not included in the employee's income subject to Personal Income Tax, they are considered expenses not related to business activity, and they form the corporate income tax base - 25%.
• If the expenses are not personalized, they may be considered personnel sustainability expenses and do not form the corporate income tax base if they do not exceed 5% of the gross wage fund.

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