Deductible Business Expenses: Which Are Recognised for Tax Purposes and Which Are Not

The General Rule: The Three Conditions

Under article 22 of the Income Tax Code, all business expenses that cumulatively meet three criteria are deductible from gross revenue:

• They are incurred in the interest of the business or in connection with its business activity
• They correspond to a real transaction and their value is neither lower nor higher than market value
• They are recorded in the business’s accounting books

If an expense meets all three criteria and is not included in the exhaustive list of non-deductible expenses in article 23, it is deductible. In other words, deduction is the rule and non-deduction is an exception expressly set out by law.

The €500 Rule: The Most Common Pitfall

Article 23 provides that any expense for the purchase of goods or receipt of services worth more than €500 is not deductible if payment, in full or in part, was not made by a banking means of payment. This means that a €1,200 supplier invoice paid in cash is not recognised as an expense, even if the purchase was entirely real and necessary for the business. Likewise, rent expenses are not deductible if they were not paid by electronic means of payment or through a payment service provider. In practice, paying through a bank account, card or other electronic means protects the deductibility of the expense.

Non-Deductible Expenses

The Income Tax Code lists exhaustively the expenses that are not deductible. Indicatively, these include:

• Monetary penalties for tax or social security breaches, such as interest and surcharges for late payment
• Income tax on the business’s profits, including the business levy
• VAT relating to non-deductible expenses
• Unpaid social security contributions
• Entertainment expenses
• Interest on loans from third parties, subject to the conditions and limits set by law

The exact conditions of each case differ, so each expense is worth checking before it is finally recorded.

Expenses Deductible Only Up to a Certain Limit

For certain expenses, the law does not prohibit deduction but subjects it to a limit. A typical example is expenditure on festive events, meals and accommodation for guests, as well as information days and meetings with meals and accommodation. These are not deductible to the extent that they exceed €300 per participant and, at the same time, total annual expenditure exceeds 0.5% of the business’s gross revenue. Expenses for corporate social responsibility activities are deductible only when the business shows an accounting profit for the year at the time of the expense.

Expenses with Enhanced Deduction

The law also provides for the opposite case: expenses deductible at a percentage higher than their actual amount. These include expenditure on scientific and technological research, for which an enhanced deduction applies, with additional formalities when the amount claimed exceeds €60,000. An enhanced deduction is also available, subject to conditions, for green economy, energy and digitalisation expenditure of small and medium-sized businesses. Businesses planning such investments can significantly reduce their taxable result.

A Calculation Example

Suppose a private company (IKE) shows an accounting profit of €50,000. The year’s expenses include two expenses that are not tax-deductible:

• A €1,200 supplier invoice paid in cash (over €500 without a banking means of payment)
• A €400 penalty for late filing of a VAT return

These two expenses are added back to the accounting profit to determine the taxable result:

The Most Common Mistakes

1. Paying suppliers or rent in cash above the legal limits
2. Recording an expense without a legal document or with a document that does not correspond to a real transaction
3. Assuming that all dining and hospitality expenses are deductible without limit
4. Recording penalties and surcharges as operating expenses
5. Failing to separate business and personal use for vehicles, phones and other expenses
6. Failing to use enhanced deductions for research, energy and digitalisation because the business does not know they exist

5 Practical Tips for Employers and Business Owners

1. Pay every supplier and every rent through a bank account or card, so you do not put the deduction at risk.
2. Always ask for a legal document and check that it shows your business’s correct details.
3. Record the business purpose of every non-standard expense (travel, event, hospitality), so it can be substantiated in an audit.
4. Monitor the €300 per participant limit and the 0.5% of revenue limit for event and hospitality expenses.
5. Inform your accountant before any major investment, so it can be checked whether you are entitled to an enhanced deduction.