Donations and sponsorship are two different things that are often confused. And even when it is clear that they are not one and the same, it is often difficult to identify the exact differences. It is actually clear: a donation is a voluntary contribution and therefore free of any consideration.
It supports a corporation recognized as a non-profit or a non-profit purpose in full. Sponsoring, on the other hand, is a special form of advertising service. Since the payee receives a fee for this from the sponsor and the funds are usually not granted unselfishly, there are also tax differences.
Table of Contents
What are donations exactly?
Donations are contributions that a company or person makes voluntarily and free of charge. Usually this has tax-privileged purposes within the meaning of the Income Tax Act (EStG) § 10b. The difference between a donation and the so-called service in the VAT sense is that it does not provide a consumable, economic value to a third party in anticipation of payment.
Anyone who donates therefore does not expect any consideration from the recipient in the sense of VAT. This means that the donation must not be matched by any specific service that can be compensated.
Since donations are voluntary, the donor may not be “forced” to make a donation, either legally or out of social obligations.
Donations are usually made to organizations that carry out charitable projects. Donations, for example for the promotion of scientific purposes or for political education, are not uncommon from companies, for example.
The most common form of support is probably monetary donations, but other forms of donation can also be made. Also common are:
- Donations in kind
- Voluntary work
The recipient of the donation has the option of announcing the donor in a neutral form to the public once or several times. It is important to keep a neutral form. This can no longer be given if the donor is listed with his logo. However, it is possible to mention a thank you stating your name. A further link, for example, in the case of an electronic publication, which leads to the company's website, is also no longer permitted. Particular care must be taken with donations in kind. If, for example, items of clothing contain the donor's company logo, this is considered sponsorship. Clothing without a logo is a donation in kind.
The donation contract
In the individually regulated donation contract or the donation agreement, details about donations in cash or in kind are regulated. The exact name of the donor including his full address should of course be noted in each case.
In the case of monetary donations, for example, different information is usually displayed than in the case of donations in kind. Something like this:
- The amount of the donation
- Notification of whether the donor would like a donation receipt
- A statement on the use of the donation for scientific purposes
In the case of donation contracts for monetary donations, the intended use also plays a not insignificant role. The two parties to the contract will use the contract to state in writing that the sum made available is to be used for a specific purpose. There are decisive differences in donations compared to, for example, the intended use for transfers or loans.
For example, while the purpose of the loan affects the likelihood of lending, the donor has the right to reclaim his money if the donation-receiving organization does not use it for the purpose explicitly stated as the purpose.
The following information is useful in donation contracts for donations in kind:
- The description of the donation in kind including information about the manufacturing or year of construction, the condition and the warranty
- The value of the donation in kind
- Documents that serve this valuation, such as the invoice, a delivery note, an expert opinion and the like)
- The day on which the donation in kind was handed over.
Furthermore, regardless of the type of donation, the recipient of the donation issues the donor with a donation receipt (donation receipt) for donations according to the officially prescribed form.
This is usually done when the following requirements are met:
- The donation was made voluntarily and free of charge without any consideration
- The donation has demonstrably been received by the recipient or the donation in kind has become the property of the recipient
- The amount of the donation value for donations in kind has been verifiably documented
- The donation must be used to promote charitable purposes and as soon as possible.
The donor can present the donation receipt to the tax office in order to deduct it from tax as special expenses. More about donations and tax law in one older post.
Sponsoring is all donations for which a consideration is desired. This consideration often takes the form of printing a company logo. Or in the case of electronic publications also in the form of a report on the website of the organization or the foundation with a link to the sponsor.
Sponsoring is therefore a special form of advertising that is used specifically in marketing. For example, commercially oriented companies often sponsor various events in the form of money, material or services. However, it is also common to support organizations in sporting, cultural, church, scientific, social, ecological or similarly important socio-political areas. In contrast to a donation, the donor expects something in return for his support. This is stipulated in the contract.
The principle of performance and consideration thus distinguishes sponsoring not only from donations, but also from other forms of support. As a rule, however, the performance and the consideration are not of equal value. So it's primarily about promoting. This means that the intention to sponsor outweighs more than the precise measurement of an advertising service. From the point of view of a company, sponsorship in the non-profit sector therefore has an ideal component, even if the particularly prominent mentioning of the sponsor pursues the goal of increasing awareness and enhancing the image.
Active and passive sponsorship
Sponsoring can be divided into two types: active and passive sponsoring. The distinction between active and passive sponsoring is quite difficult, as the allocation always depends on the specific individual case. The correct assignment is therefore often made in advance with a tax officer.
However, one usually speaks of active sponsoring when, for example, the sponsored organization is actively involved in the advertising measures. In doing so, it actively provides something in return for the sponsor. The sponsor is therefore not referred to simply by using its logo or by means of a link.
Instead, if so regulated, the sponsor has other options to advertise his services, whereby active sponsoring is also subject to sales and income taxation. For example, the sponsor is given the opportunity to present himself and his range of services on posters, in brochures or catalogs. He can also be given the opportunity to set up an exhibition stand at an event and thus present his services.
Income from passive sponsorship is not subject to sales and income taxation. Passive sponsoring occurs when the sponsor refers to its services to an organization in order to cultivate its image or for advertising purposes, but the organization does not participate in the advertising measures in any way. The same applies if the organization only refers to the sponsor's support, for example on posters or brochures. The reference can be made using the sponsor's logo, but without any special emphasis.
The sponsorship agreement
The type and scope of the sponsor's and the recipient's services are usually recorded in a sponsorship contract. For example, companies also have the opportunity to promote certain projects or organizations in the long term and possibly over several years and thus obtain a kind of advertising right. Every sponsorship contract should contain at least the following in addition to the usual contract components:
- The purpose of sponsorship
- The description of the sponsor's performance, i.e. the amount of the sponsorship amount
- A definitive description of the consideration
- The performance dates and a procedural regulation
The sponsorship agreement is also relevant for a tax review. It simply makes it easier to prove that all processes have been carried out properly. It is important to ensure that the service and the consideration set out in the contract largely correspond to market conditions. If the relationship is too skewed, the company may withdraw the payment as a business expense. On the club side, a bad relationship can in turn lead to inadmissible funds being tied up due to unpaid services.
A donation receipt is not issued for sponsorship. Instead, an invoice is issued to settle the sponsor's service. Any taxes that may apply will be shown on this invoice. Sponsoring is particularly interesting for companies because they can deduct the sponsored sum from taxes as operating costs without a maximum limit. More about sponsoring and tax law in one older post.