Are you interested to benefit from the deduction of sponsorship expenses from your company tax due to the state? Romanian tax legislation allows companies to deduct their sponsorship expenses (but also other similar expenses, such as expenses with patronage or private scholarships) when determining the profit tax due.
However, to make sure you avoid any subsequent potential issues with the tax inspectors, you must know there are certain rules that must be observed regarding the deduction of sponsorship expenses.
More exactly, certain conditions must be fulfilled, which regard: the person who can receive the sponsorship, the maximum amount that can be deducted from the company’s tax due, the differences that exist between sponsorships and other forms of transfer of goods or money (which are non-deductible), etc.
Thus, if you want to ensure you can correctly benefit from the deduction of sponsorship expenses, we explain below the basic rules that you should keep in mind.
1. Types of companies that can benefit from deduction of sponsorship expenses, and types of sponsorships can be deducted.
Any type of Romanian company that are required to pay profit tax (or, in the case of micro-enterprises, tax on revenue) can deduct expenses incurred with sponsorships from the tax calculation. But this does not mean it is sufficient for a company to show that it has sponsored someone or a cause, and then deduct those expenses. It is necessary to comply with a number of important rules, as established in the applicable laws.
First rule refers to the type of such acts of liberality that can be deducted. These can be, according to the Romanian Tax Code, the following types:
2. To which type of beneficiaries can sponsorships be granted?
The acts of sponsorship and patronage are two forms of financial aid that are subject to specific legal regulation in the Romanian law. More exactly, these are regulated by Law no. 32/1994 (Law on Sponsorship), and their essence resumes to the activity supported (financed) by the payer.
This is a very important aspect, as sponsorships and other similar acts need to be differentiated, for example, from donations – which are also acts of liberality, but are not allowed for tax deduction. Thus, according to Law no. 32/1994, an act of sponsorship refers to the transfer of goods or money to a beneficiary. But it is very important that the beneficiary always carries out a non-profit activity.
As potential beneficiaries, we are talking here about associations or foundations (NGOs) that support certain causes. But the act of sponsorship can also support an individual (for example, a student trying to obtain funding to participate in an international competition). On the other hand, a company will never be able to offer sponsorship to another company, because neither of them carries out a non-profit activity. Therefore, in such case the “sponsorship” expenses will never be deductible from tax.
As alternative, according to the same law, is the patronage. This type of financial aid assumes that a company transfers goods or money to a beneficiary (individual), as a philanthropic activity. The applicable law establishes, however, that such activities can take place only in the following fields: cultural, artistic, medical-sanitary or scientific – fundamental and applied research. Therefore, the patronage assumes that the beneficiary is active in one of these areas, which partially restricts their scope.
Unlike the act of sponsorship, where the beneficiary can be asked to promote the name of the sponsor, the act of patronage is made without any obligation on the part of the beneficiary toward the person or company who grants him money or other benefits.
Now, regarding the private scholarships, these are defined as per Law no. 376/2004 (Law on private scholarships) as: “study support granted, under a contract, by a legal person or by a natural person to a beneficiary who may be:
To qualify for the deduction, it is important that the scholarship is granted during the study program (the period in which the money is paid to the beneficiary may be even shorter, but not longer). Also, according to the same law, private scholarships cannot be granted to close family members (spouse, children) or to any relatives, up to the fourth degree (inclusive).
At the same time, it should be noted that there is a certain condition applicable for beneficiaries who are legal entities, so the deduction of sponsorship expenses (or other similar acts) is allowed. Those beneficiaries must appear registered in a special register of the Romanian Tax Office (ANAF). This condition applies only to the funding of non-profit legal entities (i.e., NGOs).
In addition, even if churches are not considered NGOs (according to the special rules applicable to associations and foundations, as per Government Ordinance no. 26/2000), they must also appear in the above register of ANAF, so that your company’s sponsorship expenses can be deducted for tax purposes (when you sponsor such entities).
3. How does sponsorship (and other similar acts that can be tax deduced) differ from expenses liberalities that cannot be deduced?
We refer here specifically to the donation, which is a contract concluded between a donor (the one who transfers the good or a sum of money) and the beneficiary (the one to whom it is transferred). We consider it important for companies to understand that donations are not deductible expenses from a company’s tax due. But what is the essential difference in nature between a donation and sponsorship or an act of patronage?
According to the Romanian Civil Code, “the donation is the contract by which, with the intention of gratifying someone, a party called donor, irrevocably disposes of an asset in favor of the other party, called a grantee” (Article 985).
The difference in nature becomes clearer now: the donation doesn’t take into account the beneficiary (or the activity carried out by the beneficiary), but the intention behind the donor’s act is the only one that counts. When it comes to sponsorship and patronage, we do not take into account (only) the intention of the transferor (the sponsor), but at the same time the beneficiary and the nature of his/her activity also matters. To a certain extent, it is the same with private scholarship.
4. Is there a threshold that limits the deduction of sponsorship expenses from a company’s tax?
Even if your company’s expenses fall under the conditions explained above, it is still important to know that the deduction of sponsorship expenses (and other forms of aid, like those described above) can only be applied within a certain limit, which is established by the Romanian Tax Code. Thus, as per the Romanian Tax Code, the amount of such expenditures may not exceed the lower of:
Therefore, it is very important for a company that wants to sponsor an entity and deduct the expenses to know that there is a maximum amount that can be deducted, as per the above. In other words, the company cannot grant an unlimited number of sponsorships or scholarships, possibly covering a considerable part of the profit tax due. Everything that exceeds the threshold described above is strictly recorded on the expense of the company, without benefiting from tax deduction, or getting other types of benefits.
5. What happens if the beneficiary of the sponsorship returns the amount received?
If your company has deducted from its due tax the amount spent on sponsorship, patronage or a private scholarship, but the beneficiary returns the money, two things can happen, depending on the time of refund, as per the Tax Code provisions.
First, if the refund takes place in a tax year other than the year in which the financing took place, the amount deducted from corporate income tax in the previous tax year will be added to the calculation of corporate income tax due in the quarter/year of the refund.
Second, if the refund takes place in the same tax year in which the financing took place, the taxpayer settles in the quarter/year of the refund the amounts that were deducted from the income tax in the previous quarters.
These rules regarding the refund of the amount granted as sponsorship/patronage/private scholarship apply as of December 24, 2020, being introduced by Law no. 296/2020 (which brought several amendments to the Romanian Tax Code).