In business activities, gifting to clients is a common marketing practice, especially during traditional festivals like the Dragon Boat Festival. However, when engaging in such activities, companies must pay close attention to related financial and tax treatments to ensure compliance. This article will explore how companies should handle Value Added Tax (VAT), Corporate Income Tax (CIT), and Individual Income Tax (IIT) issues when gifting gift cards to clients.

VAT Treatment

When a company purchases gift cards as giveaways, the first consideration is VAT treatment. According to current Chinese VAT regulations, if a company purchases gift cards for non-sales purposes (such as promotions or gifts), the input VAT cannot be credited. Therefore, when purchasing gift cards, companies should confirm that the supplier issues a general VAT invoice (普通发票) rather than a special VAT invoice (专用发票). Furthermore, this expenditure can be included in business entertainment expenses for clients, which is subject to a 60% deduction limit or 0.5% of annual sales limit.

Accounting Treatment

Purchasing Gift Cards:

Debit: Prepaid Accounts - Gift Cards

Credit: Other Payables, Bank Deposits

Gifting to Clients:

Debit: Sales Expenses - Business Entertainment Expenses

Credit: Prepaid Accounts - Gift Cards

Corporate Income Tax Treatment

For Corporate Income Tax purposes, companies need to treat the gifting of gift cards as an expense. According to the 'Enterprise Income Tax Law of the People's Republic of China,' reasonable business entertainment expenses can be deducted before calculating taxable income, within a certain proportion, which is subject to a 60% deduction limit or 0.5% of annual sales limit.

However, it is important to note that this part of the expenditure must be supported by legitimate and valid vouchers, meaning the company is required to provide formal invoices and detailed expense descriptions. At the same time, to prove its reasonableness, the company should also keep relevant contracts, agreements, and other supporting documents for future review.

Individual Income Tax Treatment

Regarding Individual Income Tax, since gift cards directly benefit specific individual clients, the issue of IIT payment arises. However, in general, clients will not provide their ID information to the company for receiving a gift card. In this situation, when the company declares the income under the "Incidental Income" (偶然所得) category in the Natural Person Electronic Tax Bureau system, it will be impossible to fill in the recipient's identity information as required by the tax bureau. A second-best approach is to choose "Aggregate Declaration" (汇总申报) when declaring incidental income. This way, the company fulfills its IIT declaration obligations without the awkwardness of requesting ID information from clients. It is worth noting that the original intention of aggregate declaration is to provide a declaration function for situations where companies distribute gifts or giveaways to a large number of people and cannot obtain their identity information. If the company has not yet activated the "Aggregate Declaration" function, it needs to go to the local tax service hall to complete the activation procedures.

Conclusion

In summary, when companies give gift cards to clients, in addition to focusing on the selection of gifts and expressing goodwill, they must not overlook the underlying financial and tax compliance. By accurately understanding and following the above regulations, companies can not only effectively avoid potential risks but also lay a solid foundation for maintaining good customer relationships. At the same time, it is recommended that companies seek the help of professional accountants in actual operations to ensure that all processes comply with the latest legal and regulatory requirements.

At PHC Advisory, we can offer you full support on matters regarding doing business in China, or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com.  

PHC Advisory is a company of  DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance. 

Would you like to learn more about the business environment in China? Click the link and download our Practical Guides on Amazon! 

The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way. 

•     China's Financial Policy Boosts Liquidity and Market Confidence-NEWS-PHC ADVISORY

•     China's Real Estate Market Recovery-NEWS-PHC ADVISORY