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Deductible expenses: 5 rules on the difference between corporate tax and VAT
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1. They are two different questions
Corporate tax (IRC): was the expense incurred for the company’s business and is it documented in the company’s name? If so, it is an expense and reduces taxable profit.
VAT (IVA): can the VAT on this expense be deducted? Here the rule is stricter: even business expenses carry VAT that the law does not allow to be deducted. When the VAT cannot be deducted, it becomes part of the cost and counts as an expense for IRC.
2. Meals, accommodation and travel: expense yes, VAT no
On a business trip, the hotel, meals, plane or train tickets and tolls are company expenses for IRC. But the VAT on these expenses is, as a rule, not deductible.
There are two exceptions linked to events: whoever organises a congress, trade fair or similar event deducts 50% of the VAT on those costs; and travel, accommodation and meals to attend an event, booked directly with the organiser, give a 25% deduction.
Example
A night in a hotel in Porto for a client meeting costs €159, with €9 of VAT. The company books the €159 as an expense for IRC; the €9 of VAT is not deducted.
3. Entertainment expenses: an expense, with an extra 10%
Lunches and dinners with clients or suppliers, receptions and shows offered to third parties are entertainment expenses (despesas de representação). They are an expense for IRC, but they pay 10% autonomous taxation, and the VAT is not deductible.
Leisure and luxury expenses also give no VAT deduction. And a personal meal for the partner, unrelated to the business, is not a company expense.
Example
A €200 dinner with a client, invoiced in the company’s name: it counts as €200 of expense for IRC and pays €20 of autonomous taxation (10%). The VAT on the invoice is not recovered.
4. Equipment, communications and cars
What the company buys to work with usually counts on both fronts:
- Computer, software and office supplies: an expense for IRC (the computer over a few years) and VAT deductible.
- Company phone and internet: an expense for IRC and VAT deductible, if the contract is in the company’s name.
- Cars and fuel: an expense for IRC, with autonomous taxation that depends on the car. VAT follows its own rules, by type of car and fuel (see the article on VAT on company cars).
5. Home, mixed and personal expenses
If the company’s registered office is at the partner’s home, household costs only count for the part used by the company, with an invoice in the company’s name and a reasonable way of calculating that part. If in doubt, talk to us before paying household bills through the company.
Personal expenses paid by the company count for nothing, neither IRC nor VAT, and may be treated as the partner’s profits (see the article on the company’s money). Expenses with no document at all also pay 50% autonomous taxation.
Team tip
Before any expense, ask two questions: is it for the company, with an invoice in its name? And can the VAT be recovered? If the answer to the first is no, the expense should not go through the company.
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This article is for information only and does not replace professional advice. Figures and rules are those in force at the date of publication and may change.
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