The state should allow businesses to make donations without additional taxation

Barbora Palenikova

Humanitarian donations or gratuitous provision of services in an effort to help are tax non- exempt in Slovakia. However, in the context of the unprecedented situation in Ukraine, Slovakia has an opportunity to support freelancers and companies willing to provide humanitarian aid to refugees and exempt them from mandatory taxation of donated goods and services. The tax expert proposes to introduce tax deductibility not only in times of war for refugees, but to extend it more broadly to universal aid to people in need. Such a solution can be set up in a way that is targeted and cannot be abused.

Donations to people in need should generally be tax deductible

Businesses are not allowed to include the costs on provided material assistance or services free of charge into their tax expenditure and, in addition, they must still pay VAT on these goods and services. Silvia Hallová, partner at Grant Thornton, sees a relatively simple way to make donations for humanitarian aid tax deductible. "It would be enough to add a provision to the Income Tax Act allowing tax deductibility of donations made for humanitarian aid. In doing so, it is for the government to consider whether it will be tax-deductible donations only in the case of humanitarian aid in times of war for refugees, or whether it will define humanitarian aid much more broadly as any aid to people in need."

The term humanitarian aid is quite general, but it makes sense, as the scope of activities for refugees and those in need must be broad enough to include anything that will provide refugees fleeing their home country with at least a basic standard of living, from clothing and food to services such as temporary accommodation and transport. The same applies to other destitute persons in need of assistance. As the current crisis has shown, companies and individuals are able to react quickly to the situation, unlike the state, which lacks the necessary flexibility when it comes to providing assistance. "This is also why it is important for the state to encourage the provision of assistance through tax law."

How to set the tax deductibility of donations: with a maximum limit and through designated organisations

In doing so, it is important to set the conditions so that they are adequate. "I would set a maximum limit in the law on the costs that can be tax deductible, and it is also important to limit the tax deductibility only to donations and services from sole traders and companies that make a profit. Entrepreneurs who make a loss should first of all rehabilitate their business activities," says Silvia Hallová.

Similar to the situation with fundraisers, where the state allows specific types of non-profit organizations to raise funds for a generally beneficial purpose, it makes sense to tie non-humanitarian donations in times of war to tax-deductible donations made through the same organizations. "This means that in the case of providing humanitarian aid to people in need, donations would only be tax-deductible if they are made to specific institutions, primarily civic associations, non-profit organisations and foundations that are professionally and long-term dedicated to this form of aid and have experience with it," Silvia Hallová recommends.

Zero VAT rate for humanitarian aid in times of war. Outside of wartime, the possibility to include humanitarian aid expenses in tax costs.

The second area that requires change is the VAT law. The VAT Act does not recognise the gratuitous supply of a service and assumes that any service is supplied for consideration and is therefore taxable for VAT payers. Therefore, if a business has claimed a VAT deduction on a purchase as it did not know at the time that it was being donated, then it is liable to pay VAT at the time of the donation, on the purchase price or on the cost if it has created the stock itself. This applies both to gifts and to the cost of accommodation.

"In parallel with the amendment of the Income Tax Act, the VAT Act needs to be amended so that the gratuitous supply of services or goods for humanitarian purposes, particularly in times of war, is treated as a zero-rated supply. This would resolve the current situation where the expenditure on aid to a business is increased by the VAT paid," Silvia Hallová proposes.

For general humanitarian aid (outside war), zero-rating VAT does not make sense as it would burden the state budget. Applying a zero rate is also not possible in accordance with EU directives. "On the other hand, the non-deducted VAT would be considered a tax expense if the state allows the inclusion of these expenses into tax expenses through an amendment to the Income Tax Act."