Sponsorship for sports clubs – tax consequences

The sports industry is constantly growing year on year, and its development is closely linked to the increasing level of sponsorship. Sponsors are a kind of stimulus for the development and expansion of Polish sports clubs, both in the domestic and international sports world. However, sponsorship payments also entail a number of income tax consequences from the sponsors’ perspective.

Sponsorship agreement as the basis for cooperation between the parties

Polish legislation does not contain any specific provisions regulating ‘sponsorship agreements’. Therefore, it is classified as a so-called unnamed agreement, the basis for its conclusion being the principle of freedom of contract resulting from Article 353¹ of the Civil Code. Thus, the factors limiting the parties are: legal provisions, the nature of the contractual relationship and the principles of social coexistence.

The parties to a sponsorship agreement are the sponsor and the sponsored party. The relationship itself should, in principle, be based on the principle of equivalence of contractual performance. The essence of sponsorship boils down to a financial or material gain made by the sponsor for the sponsored party (e.g. a sports club), which, in connection with this gain, is obliged to perform certain activities specified in the agreement, the main purpose of which is to:

• increase the recognition of the sponsor’s logo/brand,
• consolidating, improving or enhancing the sponsor’s reputation,
• raising the sponsor’s recognition,
• strengthening the sponsor’s position in the public perception, especially with regard to the local community relevant to the sports club in the region.

The main purpose of a sponsorship agreement is to bring measurable benefits to the sponsor, primarily in the form of increased future revenues.

Types of sponsorship

In the case of sponsorship, tax practice has developed three basic models of sponsorship that are used in business and have different tax consequences.

Proper sponsorship

Under this model, the sponsor’s and the sponsored party’s contributions are equivalent. The agreement between the parties provides that in exchange for the transfer of certain resources (e.g. cash, goods), the sponsor will receive from the sponsored party an equivalent consideration that is functionally similar to an advertising service. Under this model, therefore, the sponsorship (advertising) service is purchased for consideration from the sponsor’s perspective.

Expenses incurred by the sponsor under a (proper) sponsorship agreement may be classified in their entirety as tax-deductible costs when using the proper sponsorship model.

Improper sponsorship

This is the opposite of proper sponsorship; in this model, there is no equivalence between the mutual benefits of the sponsor and the sponsored party. Instead, the main emphasis is on the services provided by the sponsor to the sponsored party. In the absence of a mutual (advertising) benefit, the sponsor essentially makes a donation to the sponsored party.

A donation made by the sponsor means that it cannot be classified as a tax-deductible expense from the sponsor’s perspective.

Mixed sponsorship

This is a specific combination of proper and improper sponsorship. In cases where a sponsorship agreement provides for reciprocal benefits, but these are not equivalent, the sponsorship takes on a mixed character, combining elements of proper and improper sponsorship.

Expenditure incurred under mixed sponsorship means that the sponsor may include the expenditure in its tax-deductible costs up to the value of the services provided by the sponsored party. The remainder should be excluded from tax-deductible costs as donations made to the sponsored party.

Forms of sponsorship

The law does not specify what kind of benefits may constitute sponsorship benefits. In this respect, tax practice provides numerous examples of the forms of sponsorship benefits provided by both sponsors and sponsored parties.

Examples of benefits provided by a sponsor to a sponsored party include, among others:

• transfer of a specific amount of money, which is one of the most popular sponsorship benefits in practice,
• provision of specialised equipment (e.g. sports, medical, organisational, administrative),
• release of the sponsor’s goods (which are the subject of the sponsor’s core business) as prizes in games, tournaments, competitions organised by the sponsor,
• provision of the sponsor’s services (which are the subject of the sponsor’s core business) in connection with the current needs of the sponsored party,
• transfer of know-how in the field of sports event organisation, marketing or advertising,
• provision of services related to the organisation of sports events.

However, the above list is only an example, and the sponsor’s services may also take a different form depending on the content of the agreement between the parties.

As regards reciprocal sponsorship services provided by the sponsored party to the sponsor, based on current practice, a whole range of activities undertaken by the sponsored party for the sponsor can be identified.

These activities include, for example:

• displaying boards, banners, roll-ups or other advertising media with the sponsor’s logo during sporting events,
• displaying the sponsor’s logo during sporting events, e.g. at sports facilities, on athletes’ sportswear or on club means of transport,
• allowing the sponsor to use the terms ‘main sponsor’, ‘strategic sponsor’ or ‘title sponsor’ and to publicise this fact, together with the right to use the name and logo of the sports club in the sponsor’s materials,
• placing the sponsor’s logo, e.g.:
  • in the team name,
  • in the sports club’s logo (coat of arms),
  • in the name of the sports facility,
  • on promotional items of the sports club, e.g. pens, caps, T-shirts, key rings, lanyards, USB sticks,
  • on posters, leaflets, banners, tickets, website, social media (Facebook, Instagram, X, Tik-Tok),
  • on company documents,
• providing the sponsor, including guests invited by them, with access to the VIP box, offices, skyboxes or other spaces within the sports facility,
• providing the sponsor, including guests invited by them, with a specified number of tickets, VIP passes, honorary admission cards to sporting events;
• organising business meetings for sponsors,
• setting up a sponsor information point during sporting events,
• publishing acknowledgements to the sponsor during sporting events,
• providing links to the sponsor’s website in its own media,
• adding the sponsor’s fan page to the favourites on official fan pages on social media,
• disseminating information about goods sold or services provided by the sponsor,
• using equipment, uniforms or other items with the sponsor’s logo,
• not using equipment, clothing or other items from entities competing with the sponsor,
• the right to use the image of the team, selected players or other representatives of the sports club in promotional and marketing campaigns,
• preparing, implementing and broadcasting a spot prepared by the sponsor with the participation of players from the sports club.

The above list is an example and has been reconstructed based on current tax practice. However, the sponsored party may also undertake other activities as part of the sponsorship.

Documenting sponsorship expenses

From the perspective of the sponsor as an income tax payer, the possibility of classifying certain sponsorship expenses as tax-deductible costs is one of the most important tax aspects related to sponsoring a sports club.

It should be noted that in order for an expense incurred by the taxpayer to constitute a tax-deductible cost, the following conditions must be met:

• it was incurred by the taxpayer,
• it is definitive (actual),
• it is related to the taxpayer’s business activity,
• it was incurred in order to obtain, maintain or secure income or may affect the amount of income earned,
• it was properly documented,
• they cannot be included in the group of expenses excluded from tax-deductible costs.

In the case of sponsorship benefits, the requirement to properly document the expense causes the most problems for taxpayers in practice. Unfortunately, tax regulations in this area do not contain detailed conditions or guidelines, which makes this area vulnerable to significant tax risk.

In tax practice, apart from having an invoice, it is usually necessary to have other documents confirming the performance of contractual services or allowing the level of equivalence of services to be determined. From the sponsor’s perspective, this is particularly important, as it is the sponsor who is responsible for properly documenting the expense, including verifying the sponsorship model under which the expenses are incurred. This, in turn, affects the correct classification of the expense as a tax-deductible cost. Failure to properly document the expense may result in the tax authorities questioning the recognition of the expense as a tax-deductible cost.

Tax risk

Therefore, the main tax risk from the sponsor’s perspective is that the possibility of recognising sponsorship expenses as tax-deductible costs and deducting VAT from them may be questioned.

In our experience, tax authorities primarily:

• examine the equivalence of mutual benefits under sponsorship agreements,
• verify the correctness of sponsorship expense documentation,
• analyse the methodology used to determine the value of mutual benefits under a given sponsorship agreement.

Comprehensive MDDP support for sponsors

MDDP experts support sponsors in settling expenses related to sponsorship of sports clubs. They verify the correct tax classification of sponsorship expenses, analyse cooperation models with sports clubs in terms of an identifiable sponsorship model, and assist in the development of procedures and internal documentation in the context of the eligibility of expenses for tax deduction.