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German tax law limits or denies the deductibility of various types of expenses. It also provides that certain expenses, while deductible in whole or in part, must be separately recorded on the company's books (section 4 par. 7 EStG).

The cost of food and drink for third persons for business reasons (in German: "Bewirtungsaufwendungen", loosely "restaurant expense") must be separately recorded. 80 % of such expense is deductible to the extent reasonable in amount. Pure entertainment (theater etc.) is covered by a general clause denying the deductibility of such items despite their business context to the extent they are considered unreasonably high. Such pure entertainment expense should be recorded separately from food and drink expense (restaurant expense).

The formal requirements for deductibility of restaurant expense have recently been tightened. A summary is as follows:

1. Written record is required of the place, date, participants, and reason for the expenses and of their amount.

2. All restaurant bills must be machine generated and machine registered. Machine registration means that the bill is recorded automatically, not manually, in the books of the restaurant. The bill must include the name and address of the restaurant and the date of the meal. The date on the bill must also be machine generated.

3. For restaurant expenses, it is best to record the names of the participants and the occasion of or reason for the expense on the reverse side of the restaurant bill or on a form which is attached to it.

The information on the reason for or occasion of the expense must be sufficient to justify the business (as opposed to personal) motivation of the expense. It is not adequate merely to note "contact meeting", "developing client relationship" or the like. The capacities/functions of the participants should be noted to document the business purpose of the meal.

4. If the restaurant bill exceeds DM 200, it must be made out in the name of the taxpayer (the name of the company). It is, however, sufficient if authorized restaurant personnel note the name of the taxpayer on the bill by hand.

5. If the required information as to participants and reason for the expense is not recorded on the restaurant bill itself, such information should be attached to it.

6. If any required information is missing, no deduction will be allowed.

7. The required written information must be recorded at the time of the expense or shortly thereafter.

8. The restaurant bill must contain all the information required for VAT purposes (section 14 UStG). This is as follows:

a. Name and address of the restaurant
b. Name and address of the recipient (see however no. 4 above)
c. Specification of the goods delivered/services rendered (see also no. 9 below)
d. Date of the goods delivered/services rendered
e. The payment made for the goods delivered/services rendered
f. The VAT amount, separately stated (or VAT rate on payments up to DM 200)

9. Each of the various dishes and beverages consumed must be separately stated in the restaurant bill. The price of each item must be separately shown. A bill stating "food and drink - DM ______" is no longer acceptable. Instead, the restaurant bill must in principle list each item separately with its price. If several identical items are consumed, it would appear sufficient to group these together (e.g. "4 Bier/Export DM ______, 3 Bier/Pils DM ______"). It is not necessary for tips and coat check expenses to appear on the restaurant bill. A directive which the tax authorities have issued suggests, however, that the recipient of tips confirm receipt in writing on the restaurant bill and note his or her name in readable form in so doing. Otherwise, there may be difficulty in proving such expense.

10. The limited deductibility of food and drink expense applies only to expenses for third persons, not to expenses for a company's own employees. The part of a restaurant bill which relates to the company's own employees is, however, generally not separated from the amounts relating to guests. Food and drink supplied to employees can constitute an in-kind benefit subject to wage tax withholding. This is not the case when employees take part in a meal with guests provided there is a clear business reason why the employees were included. Employees of related companies are third persons for purposes of the deduction limitation.

11. Coffee, tea, cookies and the like served at business meetings are not subject to the limitation.

12. Food and drink expenses in other countries are also in principle subject to the above rules. If, however, the taxpayer makes a credible showing that it was not possible to obtain the required machine generated and recorded bill, the new directive states that an exception may be made.

Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.