Entertainment expenses are costs for meals and beverages incurred in connection with business activities, for example at business meals with clients, business partners or when entertaining guests. Special rules apply for tax recognition as a business expense with regard to deductibility, input VAT and documentation.
Tax treatment
Entertainment expenses are in principle business expenses under the Income Tax Act (EStG). However, the tax office does not always recognise the full amount as a deductible business expense. According to current case law and administrative guidance, a 30% non-deductibility usually applies for business entertainment of business associates: only 70% of the net costs may be claimed as a business expense for tax purposes. Input VAT can accordingly only be claimed proportionally, provided an invoice qualifying for input VAT deduction is available (§ 15 UStG, § 14 UStG).
Exceptions exist, among others, for entertainment that serves exclusively employees (e.g. employee meals on company premises, certain company events) or for cases where the entertainment is exclusively business-related and proven; here the tax deduction may differ or payroll tax aspects must be considered.
Documentation requirements and retention
The tax office requires strict evidence for the deduction of entertainment expenses. The entertainment receipt should contain at least the following:
- Date and location of the entertainment
- Name and company of the entertained persons (for business associates)
- specific business occasion or business purpose
- itemised invoice amount (net amount, VAT, gross amount)
- signature of the hosting business owner or holder of the receipt
Retain original receipts and, where applicable, supporting documents (invitations, meeting notes). The statutory retention period is governed by the Fiscal Code (Abgabenordnung, AO) and is generally 10 years for tax-relevant documents.
Accounting practice with concrete examples
Practical case: You pay for a business meal of 200.00 EUR (incl. 19% VAT).
| Item | Amount |
|---|---|
| Gross invoice | 200.00 EUR |
| Net amount (200/1.19) | 168.07 EUR |
| VAT (19%) | 31.93 EUR |
For tax purposes, 70% of the net amount is deductible: 0.70 × 168.07 EUR = 117.65 EUR. Accordingly, input VAT may be claimed at 70%: 0.70 × 31.93 EUR = 22.35 EUR. The non-deductible portion is 30% (net 50.42 EUR, VAT portion 9.58 EUR), i.e. gross 60.00 EUR.
Typical accounting entries (account names may vary depending on the chart of accounts):
- Entertainment expenses (deductible, net) 117.65 EUR to Bank/Cash 200.00 EUR
- Entertainment expenses (non-deductible, net) 50.42 EUR
- Input VAT 22.35 EUR
- Non-deductible input VAT 9.58 EUR
Alternatively, you can post the total amount initially to an entertainment expenses account and then record the non-deductible portion separately as a drawing (Privatentnahme) or as a separate non-deductible expense. It is important to keep a clear separation in the accounting so that tax advisors and the tax office can reconcile the portions.
Special cases and practical notes
- Invoice recipient: For input VAT deduction, a proper invoice pursuant to § 14 UStG is generally required; simplification rules apply to low-value invoices.
- Employee hospitality: Entertainment exclusively for employees is often treated differently; payroll tax consequences (taxable benefit) and special rules for company events must be observed.
- Digital receipts: Electronic invoices and digital storage are permitted but must comply with the GoBD.
- Entertaining international business partners: VAT treatment depends on the place-of-supply rules; in cross-border cases professional advice is advisable.
Practical tip
Use standardised entertainment receipts that include all required information, and store receipts in a structured way (date, occasion, participants). Clarify with your tax advisor the internal account structure for deductible and non-deductible portions as well as the treatment of input VAT so that you can provide consistent documentation in tax audits.