When a company gives products free of charge or with special discounts to its employees, the question arises as to whether this constitutes remuneration in kind for personal income tax purposes.
The tax regulations establish clear rules for valuing these benefits and determining when they can be considered part of the employee’s salary.
1. General rule: retail selling price (RRP)
The delivery of products or services marketed by the company to its employees constitutes remuneration in kind, valued as the difference between the retail selling price (RRP) and the price actually paid by the employee. This applies whether the product is delivered free of charge or sold at a discount.
The valuation of the RRP is not always the general price; there are special rules that allow its value to be reduced in certain cases.
2. Calculation of the discounted remuneration in kind
In order to determine the valuation of the remuneration in kind, the following reductions are applied:
- Discounts apply to other similar groups: If the company offers discounts to other groups (e.g., preferred customers), this discount can also be applied to employees.
- General promotions in force: The final price is considered with any general offers or promotions existing at the time of delivery.
- Maximum discount allowed: If there are no promotions, the company may apply a maximum discount of 15% off the RRP and up to an annual limit of 1,000 euros.
If the applicable general discount is less than 15%, the company may still apply 15% within the annual limit.
3. Recommended policy to avoid remuneration in kind
In order to minimize or prevent the delivery of products or discounts to employees from constituting remuneration in kind, the company may adopt the following measures:
- Apply a maximum discount of 15% on the non-discounted RRP.
- Limit the volume of annual purchases to avoid exceeding the 1,000 euro discount ceiling.
For example:
- If the discount is 15%, the maximum annual purchases without generating remuneration in kind would be €6,666 (€6,666 x 15% = €1,000).
4. Free deliveries: what happens?
Free deliveries are also subject to the same rules:
- The valuation of the payment in kind is calculated by applying the 15% discount on the RRP or by applying the general promotions if they exist.
Therefore, in the absence of promotions, the employee must charge as remuneration the RRP with the maximum discount allowed.
In short, the delivery of free or discounted products to employees may constitute remuneration in kind, and must be correctly valued in accordance with the tax rules in force:
- Application of maximum discounts of 15% or up to 1,000 euros per year.
- Inclusion of current general promotions.
- Avoid exceeding these limits through a clear company discount policy.
By adopting these measures, your company will be able to minimize the tax risk and offer benefits to employees in an efficient way.
5. Corporate income tax treatment
When a company delivers products to its employees free of charge or at a discount, tax effects are generated both in the determination of income and in the deductible expenses for corporate income tax purposes:
(a) Recording of income from deliveries to employees.
IS regulations establish that the delivery of products to employees must be considered as a sale for tax purposes, even if it is made free of charge or at a discounted price. Consequently:
- The company must record an income equivalent to the normal market value of the product delivered, i.e. the Retail Price (RRP).
- If there is a discount applied (up to the limit of 15% or 1,000 euros in Personal Income Tax), this should be considered as a deductible expense, provided that it meets the requirements of correlation with income and has documentary justification.
b) Deductibility of expenses
The expenses derived from these deliveries (e.g. the cost of the product) will be deductible in the IS if they comply with the following requirements established in Article 15 of the LIS (Corporate Income Tax Law):
- Correlation with income: the expense must be linked to the economic activity of the company and be necessary to obtain future income (e.g., employee loyalty, motivation or improvement of the working environment).
- Documentary justification: Adequate documentation (invoices, pay slips, etc.) must be available to support the delivery and its valuation.
- Accounting record: The expense must be correctly accounted for in the company’s income statement.
6. Input and output VAT
The free supply of goods also has an impact on VAT, since, for tax purposes, it is considered a supply of goods made for consideration.
- Free supply: The company must self-regulate VAT, i.e. charge and declare the tax corresponding to the market value of the product supplied.
- Discounted supply: If a discounted amount is charged to the employee, VAT will be calculated on the price actually paid by the employee.
7. Effect on the company's income statement
The accounting and tax treatment for corporate income tax purposes has a direct impact on the income statement:
- Revenues: the PVP of the product delivered is recorded as sales revenue.
- Expenses:
- The cost of the product delivered is recorded as a deductible expense.
- The discount applied (if it meets the requirements) can be considered a personnel expense, which reduces the IS taxable base.
- VAT: The tax corresponding to the value of the product is charged.
As we can see, the free or discounted delivery of products to employees generates imputed income and, in turn, deductible expenses for corporate income tax purposes. It is essential that companies properly document these operations and consider the VAT impact to avoid tax risks.
The correct planning and application of discounts allows us to take advantage of the benefits of employee loyalty and motivation without incurring in tax contingencies.
You can contact this professional firm for any questions or clarification you may have in this regard.
For further information, please contact Tax consulting
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