In the field of sports, attracting funding is essential for increasing performance and even for the survival of organizations. Among the funding sources of sports organizations, the revenues from sponsorship occupy an important share.
In the economic field of gambling and not only, the sponsorship of sports organizations is a common phenomenon.
In essence, sponsorship means an economic partnership through which the sports organization (beneficiary) obtains funds for its own activity, and the sponsor (economic agent) promotes its image in large-scale competitions with high public exposure. And last but not least, the economic agent can show his concern for the good of society through the contributions he makes to the development of sport.
The agreement on sponsorship is completed in the form of a written contract, drawn up under Law no. 32/1994 on Sponsorship, respectively with the specification of the object, the value and duration of the sponsorship, as well as the rights and obligations of the parties. Not every entity can benefit from sponsorship, it is reserved only for non-profit legal entities that carry out activities in areas such as cultural, artistic, educational, humanitarian, and of course sports (such as clubs, associations and sports federations established as such).
From a fiscal point of view, the classification in the form of sponsorship is important as the sponsor can take advantage of a preferential treatment over the one applicable to other types of expenses. Thus, in comparison with other expenses incurred for the purpose of economic activity and which are deductible in the calculation of the taxable base for determining the profit tax, the sponsorship expenses are deductible directly from the calculated tax, within certain limits. In other words, the sponsor makes a full deduction of the expenses with the sponsorship from its fiscal burden, the sponsorship practically not representing a cost for the economic agent as long as the limit allowed by law is not exceeded. In essence, given that the cost of sponsorship is deducted from the tax payable to the state, it could be said that through sponsorship the company can obtain a free form of promotion / advertising.
The limits allowed by the fiscal legislator for deducting the sponsorship from the profit tax at the level of the sponsor are quite permissive, respectively the minimum between 0.75% of the turnover and 20% of the calculated profit tax. In the case of microenterprises, the limit is set at 20% of the income tax due within the quarter in which the sponsorship expenditure is recorded. The amount that cannot be deducted from the tax is carried forward to the next 7 years. At the same time, at the level of the beneficiary organization, the sponsorship income is non-taxable.
Therefore, the tax advantages offered by the sponsorship are obvious, but as usual the devil hides in details, and a seemingly beneficial approach for all parties such as sponsorship can attract a number of tax risks and negative consequences that we will talk about further.
An important distinction, which is often too easily overlooked in practice by economic operators, is the one between (i) making the sponsorship public, and (ii) commercial advertising and publicity. Thus, although the legislator allows the parties in a sponsorship action to make the sponsorship known to the public by promoting the name, brand or image of the sponsor (in a way that does not harm, directly or indirectly, the sponsored activity, good morals or public order and peace), the same legislator categorically prohibits the beneficiary from making prior, concomitant, or subsequent commercial advertising or publicity in favor of the sponsor.
Unfortunately, one of the shortcomings of the sponsorship legislation is that the distinction between the two is not clearly regulated, and from the apparent overlap of the two concepts problems may arise in practice when applying sponsorship deductions, as in the event of a reconsideration of sponsorship into advertising or publicity the sponsor would lose the benefit of the tax deduction and could at most apply a deduction from the taxable base. In other words, in the case of a corporate taxpayer, the deduction would change from 100% into 16%. Also, while a sponsorship activity does not fall within the scope of VAT, the provision by the beneficiary of an advertising and publicity service would normally entail the application of VAT on the price of this service, which would implicitly represent an additional cost for the sponsor if the latter is a gambling operator who does not have the right to deduct VAT.
In this sense, the fiscal authorities have at hand, and apply more and more often in practice, the instrument of reclassifying the transactions offered by Art. 11 of the Fiscal Code. In a nutshell, this allows tax authorities to disregard a transaction when assessing taxes, or to reclassify the form of a transaction / activity to reflect its economic content. And given that, as we said above, the legislation does not provide a clear distinction between „permitted” advertising – by making the public aware of sponsorship by promoting the name, brand or image of the sponsor – and the „prohibited” ones – namely publicity or commercial advertising, tax inspectors are tempted to consider that in fact the provision of an advertising or publicity service takes place when the beneficiary of the sponsorship offers to the sponsor something more than the nomination as a sponsor in the information materials and the display of company signs.
Such „benefits” granted to the sponsor that could exceed the scope of the sponsorship and generate the risk of a tax reclassification could be those such as the display on banners or in audio-visual materials of the sponsor’s products and not only the logo or name, the organized participation of the athletes of the sports organization at events to promote the activity of the sponsor, granting the right to broadcast sports events on the sponsor’s website, or granting the right to use images or signs of the sports organization on the sponsor’s promotional materials.
In this context, the parties intending to conclude a sponsorship contract must carry out a careful analysis of the activities and clauses they wish to implement, in order to have a correct fiscal qualification and reduce the related risks. Undoubtedly, a correct classification from the beginning protects against the interest and penalties that could be established later by the fiscal controls.
Last but not least, attention must be paid to the supporting documentation regarding the performance of the activities, given that in practice the tax authorities exploit any ambiguities in the sponsorship contracts or any inconsistencies between the contractual clauses and the „field” reality. For example, it is advisable that the contracts stipulate as clearly as possible the object of the sponsorship, respectively the destination for which the respective amounts will be used, in order to document the correlation with the non-patrimonial activity carried out in the fields provided by the sponsorship law; not only once the tax authorities removed the right to apply the tax deduction on the grounds that it has not been proven that the respective amounts were actually used for the purposes allowed by the Sponsorship Law. Also, where the contract provides for certain obligations to be fulfilled by the beneficiary, the parties should prepare in detail the supporting documentation showing the actual fulfillment of those obligations.