Gifts of an insignificant value and samples – about “donations” which you will not pay VAT on

On the VAT ground, if someone passes on some goods to another person for free, (i) sometimes VAT has to be paid in result of this activity (the so-called “free of charge supply”) and (ii) sometimes it is not subject to VAT. The second ones, which will be discussed in this article, include gifts of insignificant value (Article 7(3) and (4) of the Polish VAT Act) and samples (Article 7(7) of the VAT Act), provided that they are given for purposes connected with a VAT taxpayer’s business activity.

Gifts of insignificant value – what are they?

According to the regulations of the Polish VAT Act, gifts of insignificant value are understood as goods given by a VAT taxpayer to one person:

• of a total value not exceeding the amount of PLN 100 (excluding VAT) in a tax year, if the VAT taxpayer keeps records that allow identifying the beneficiaries,
• the transfer of which is not included in the above-mentioned records, if the unit purchase price of the goods (excluding VAT), and when there is no purchase price – the unit production cost, determined at the time of transfer of the goods, does not exceed PLN 20 (excluding VAT).

Therefore, the limit of PLN 100 or PLN 20 relates to the net amount. So if the given gift was previously purchased from another entity, the net purchase price from the invoice should be included in the calculation of the gift amount. On the other hand, in a situation where a VAT taxpayer manufactures goods that he/she later gives as gifts, e.g. to his//her contractors, the calculation of the gift’s amount should take into account the cost of production of such a gift – it does not have to be the price at which VAT taxpayer sells the goods. It is about the production costs that he/she incurs in producing it.

What if from the time the goods were purchased (or manufactured) to the time they were given as a gift, some time has passed and the value of the goods has decreased? The legislator has made it clear that the unit purchase price or manufacturing cost is to be determined at the time the goods are transferred, not at the time they are acquired. So, if a VAT taxpayer passes on goods free of charge, the value of which has fallen in the meantime, he will be obliged to take into account the current value of the goods.

And does a gift of insignificant value actually have to be a gift in the literal sense? The answer may surprise you, because since the regulations explicitly do not require that the goods in question actually be given as a kind of a gift, it is acceptable to treat as a gift of insignificant value also prizes, bonuses or various kinds of gadgets and advertising materials. However, it is important that such given goods fall within the amount limits set forth in the Polish VAT Act and that their give-away is related to the business activity.

Keep an eye on the limits!

The legislator has provided two “types” of limits when it comes to gifts of insignificant value:

• PLN 100 (net)/one gifted person/year, when keeping records of gifted persons,
• 20 PLN (net)/one gifted person, when the taxpayer does not keep the aforementioned records.

From a practical point of view, a VAT taxpayer may therefore give a gift of up to PLN 20 (net) to anyone, provided that such a give-away is related to his/her business activity.

Example: A VAT taxpayer organizes a conference, at which he gives participants notebooks and pens with his company’s logo. A total value of the set (notebook + pen) is PLN 20 (net), but he does not keep records of the gifted persons. No VAT will have to be paid on such a handover.

What if a VAT taxpayer would like to give a gift more expensive than with a value of PLN 20 (net)? Of course, this is possible, and the free of charge transfer of such goods will not incur VAT to be paid, provided that (the following conditions must be met jointly):

• the total value of goods given to one person in a given tax year does not exceed PLN 100 (net) – by “tax year” it shall be understood a calendar year, which means that the limit of PLN 100 (net) applies in each year and at the beginning of a new year the limit is newly counted. The limit applies to one specific recipient, not to the company in which the recipient work;
• the VAT taxpayer keeps records of the gifted persons that allow identification of these persons – so if the VAT taxpayer gives gifts with a value higher than PLN 20 (net) and the records are not kept, such free-of-charge giving must be subject to VAT. When it comes to the requirements for the records, the records must allow the identification of the gifted persons. Since the regulations do not specify the form of the records and their contents, it should be assumed that such records should contain at least the name, surname of the gifted person and the type of goods he/she received along with the net amount of the goods. The records can be kept in a paper form, but also in an electronic form (e.g. a table in Excel or Word);
• the giveaway has to be connected with a VAT taxpayer’s business activity.

What if the limit of PLN 100 is/was exceeded?

If the limit of PLN 100 (net), described above, is exceeded, such free of charge supply will be subject to VAT. However, the regulations are not clear in this regard.

It seems that VAT settlement should take place as from the first good with which the amount of PLN 100 (net) is exceeded. Nevertheless, there is no need to correct VAT settlements for already made give-aways, not exceeding PLN 100 (net). All goods that fell within the statutory limit of PLN 100 (net)/one recipient/tax year remain untaxed.

On the other hand, if a VAT taxpayer would like to give – e.g. – a contractor a gift worth more than PLN 100 (net), for example a pen worth PLN 1,000, then such a free-of-charge giveaway will be subject to VAT.

What about samples?

The Polish VAT Act defines a sample as an item of a good or its insignificant quantity identified as a sample which enables features and properties of said good to be assessed in its final form. The transfer of a sample will not be subject to VAT if it is done for promotional and advertising purposes and allows customers (or potential customers) to get to know the features and effects of the goods offered by the VAT taxpayer.

The transfer of a sample is intended to encourage the recipient to purchase the offered goods. Importantly, in addition to the statutory conditions, the recognition of a given good as a sample is determined by the lack of commercial nature of the transfer, assessed by the quantity or value of the samples transferred by the VAT taxpayer.

In a situation where the quantity or value of the goods transferred free of charge covers (or can cover) the demand (or part of the demand) of the “recipient” for the goods in question, eliminating or reducing the need to make purchases of the goods, it should be considered that the goods will certainly not meet the statutory definition of a sample. Consequently, such free of charge supply will be subject to VAT.

So, depending on the given circumstances, 10ml of perfume, creams, a chair or a box with a mix of various food products of a given company can be considered a sample. However, tax authorities stubbornly hold the standpoint that Ferrari or Lamborghini certainly cannot be regarded as a sample 😉.