Free Meals in the Hospitality Industry: What Are the Tax Implications?

VAT

As a general rule, the provision of free accommodation and meals to employees constitutes a deemed supply for VAT purposes (self-consumption), meaning that the employer must account for VAT on the benefit provided. However, a special rule applies to businesses in the hospitality sector: the free accommodation and catering of employees in hospitality businesses does not constitute a deemed supply. Consequently, free meals provided to employees in a hospitality business do not trigger VAT.

If, however, the employer requires the employee to make a contribution towards the costs, such contribution is subject to VAT at the employer's level regardless of the amount charged.

Where the entrepreneur personally withdraws food or beverages for private purposes, this constitutes a VATable deemed supply (self-consumption), provided that the goods withdrawn previously entitled the business to input VAT deduction. Such deemed supplies must be reported separately in the VAT return.

Income Tax

From a payroll tax perspective, free or discounted meals provided by employers to employees at the workplace in the restaurant, catering and lodging industries are exempt from income tax. The provision of the meal must constitute a voluntary benefit in kind granted by the employer. Cash allowances, on the other hand, constitute taxable employment income.

Outside the hospitality industry, such meals are generally subject to taxation as a benefit in kind where the applicable collective bargaining agreement grants employees a legal entitlement to the provision of meals.

Where the entrepreneur personally consumes food or beverages, or where such consumption is provided to family members within the hospitality business, this constitutes a withdrawal for income tax purposes. Such private use may not reduce taxable profits. Accordingly, the portion of the cost of goods sold attributable to the entrepreneur’s private consumption must be added back to taxable income. The value of the withdrawal must be determined at its fair market value at the time of withdrawal ("Teilwert"). For goods, this value generally corresponds to the replacement cost, i.e. essentially the purchase price rather than the selling price stated on the menu.

Record-Keeping Requirements

It should be noted that the tax authorities may estimate both private consumption and employee consumption if the entrepreneur fails to maintain adequate records.

For the private consumption of food and beverages by entrepreneurs operating restaurants, bars, or accommodation businesses, the estimation guidelines provide that, in the absence of proper records, the values used for income tax purposes under the benefit-in-kind regulations are to be applied. Where family members of the entrepreneur are also provided with meals, these values are increased by fixed percentage rates.

Of the resulting values, which are deemed to be VAT-inclusive, 85% is allocated to food and beverages subject to the reduced VAT rate, while 15% is allocated to beverages subject to the standard VAT rate.