Sponsorship versus Donations from a Tax Perspective

Key Tax Differences and Why Underestimating the Contract Doesn't Pay

Sponsorship and donations are treated differently for tax purposes. Sponsorship involves a reciprocal service (advertising, visibility), whereas a donation is made without consideration. For the sponsor, it is a tax-deductible expense for promotion. For the recipient, sponsorship is taxable income, while a donation can often be tax-exempt.

Without a clear written contract, there is a risk that the Tax Office will challenge the tax deductibility of the expense. In practice, it is therefore worthwhile to have the contract and the related tax assessment reviewed by specialists in tax law. This can lead to sanctions and penalties for failing to sufficiently prove the deductibility of the expense. The lawyers at the ARROWS law firm specialize in drafting and reviewing contracts to ensure that your support for sports or charity is on a solid tax foundation.

Insufficiently documented or contractually unclear sponsorship or donations can lead to the rejection of tax deductions, an increase in the tax base, and subsequent penalties. It is advisable to prevent these situations with quality legal preparation.

Legal Definition of Sponsorship and Donations under Czech Legislation

Sponsorship and donations are defined in several normative acts under Czech legislation. The basic concept comes from various legal and tax regulations. According to Act No. 40/1995 Coll., on the Regulation of Advertising, sponsorship is defined as a "contribution provided with the aim of promoting the production or sale of goods, the provision of services, or other activities of the sponsor."

This definition emphasizes that it is a contribution aimed at supporting the sponsor's own business or economic activities. If a sponsorship becomes a dispute over the deductibility of the expense or the nature of the consideration, it can be useful to also know the tax rules for problematic receivables (see Unpaid B2B Receivables: When a Loss from Invoices Can Be Claimed as a Tax Expense and Meet the Strict Conditions of the Tax Office). A sponsor is a legal entity or natural person who provides such a contribution for this purpose.

A donation, on the other hand, is regulated in the [Civil Code] and the tax act. According to the new Civil Code, a donation is understood as a situation where a donor gratuitously transfers ownership of an item through a donation agreement, or undertakes to gratuitously transfer an item into the donee's ownership. The donee then accepts the donation or the offer.

The key element is gratuitousness – a donation is not intended to bring any consideration or benefit to the donor in return. It is possible to donate funds, movable or immovable property, receivables, transferable property rights, or other assets.

From a tax perspective, the primary basis is the provisions of Act No. 586/1992 Coll., on Income Taxes (hereinafter the "ITA"). This act contains the key distinctions between a tax-deductible expense and the conditions for deducting donations from the tax base.

The practical distinction between sponsorship and a donation is not always entirely clear, which is why numerous mistakes and errors occur in practice. When a matter comes into conflict with the authorities due to the qualification of the transaction (donation vs. sponsorship) or due to evidence of advertising, it typically falls into the area of commercial and court disputes. Although the law does not contain an explicit definition of sponsorship as a tax expense, its assessment is based on the general provision of Section 24(1) of the ITA, which we will discuss in the following section.

Tax Deductibility of Expenses: General Framework and Application to Sponsorship

For an expense to be tax-deductible, it must be demonstrably incurred to generate, secure, or maintain taxable income. This rule is established by Section 24(1) of the ITA and represents the basic filter for assessing all business expenses.

Sponsorship expenses are not explicitly listed in the act, and therefore the sponsor must prove a causal link between these expenses and the generation of income. An important factor is the sponsor's ability to prove that these are expenses incurred to generate, secure, or maintain taxable income and that the relevant sponsorship activity, including the reciprocal service, actually took place.

Advertising and promotion are generally tax-deductible expenses, although they are not explicitly listed in Section 24(1) of the ITA. In the case of sponsorship, it is an expense for promotion and advertising, which must be supported by evidence of its actual implementation.

Here we encounter the first risk area: if the sponsorship agreement does not clearly define the specific advertising or visibility, the Tax Office will likely conclude that it is a donation, not a sponsorship. Other "borderline" situations in contractual relationships where tax risks are addressed are often assessed just as strictly (cf. External Contractors versus Employees: How to Correctly Set Up Contractual Relationships and Eliminate the Tax Risks of Hidden Employment). A donation is, in many cases, a non-tax-deductible expense.

It is very important to distinguish between sponsorship and representation. Representation expenses, which the law defines as expenses for "hospitality, refreshments, and gifts," are not tax-deductible expenses according to Section 25(1)(t) of the ITA.

Sponsorship should be established as an expense for advertising and promotion, not as representation. If the contract is vague, or if it implies that it is more of a contribution without a link to promotion, there is a risk that the Tax Office will reclassify it into the category of representation and refuse to recognize it as a tax-deductible expense.

Donations as a Tax Expense and the Possibility of Deducting Them from the Tax Base

A donation is, in principle, a non-tax-deductible expense. This means that it cannot be included in tax expenses that reduce the income tax base. However, the legal framework provides one important option: while a donation is not a tax expense, under certain conditions, it can be deducted from the tax base as a so-called "deductible item."

This distinction is significant and often misunderstood. A donation does not reduce the tax directly but rather reduces the base from which the tax is calculated. In practical terms, this means that if an individual in the 15% tax bracket makes a donation of CZK 10,000, they will save CZK 1,500 on their taxes. At a 23% rate, they would save CZK 2,300. This difference is important for entrepreneurs to understand the actual amount of the tax benefit.

Conditions for Deducting Donations from the Tax Base for Individuals

Individuals, including self-employed persons, can deduct the value of donations from their tax base if certain conditions are met. The first criterion is the minimum amount.

The total value of donations must exceed 2% of the tax base or amount to at least CZK 1,000 per year. If an individual donates less than CZK 1,000 per year, or less than 2% of their tax base, they cannot deduct the donation at all.

The second criterion is the maximum limit. Although the standard limit is 15% of the tax base, thanks to a recent extension of legislative exceptions, an increased ceiling continues to apply. This means that an individual can deduct up to 30% of their tax base for donations for the year 2026 as well — provided the minimum amount criteria are met.

The third criterion is the purpose of the donation. The donation must be provided to an entity and for purposes listed in the act. Typically, these are donations for education, culture, ecology, charity, and sports, a list of which can be found in Section 15(1) of the Income Tax Act.

Support for sports is one of the purposes explicitly recognized by the law. A donation to a sports club that meets the tax conditions can thus become a tax-recognized contribution, albeit limited to the aforementioned percentage limits.

Conditions for Deducting Donations from the Tax Base for Legal Entities

Legal entities are governed by different rules than individuals. For legal entities, the minimum value of a single gratuitous transfer is CZK 2,000.

The upper limit for deducting donations for legal entities is normally 10% of the tax base. Here too, however, the exception has been extended by the legislature, and therefore companies can deduct up to 30% of their tax base in 2026. Thus, while a company cannot deduct a donation of less than CZK 2,000, the maximum possible tax saving for donations in 2026 is three times the standard amount.

For legal entities, there are also restrictions regarding the recipient. They can only make donations to certain entities: municipalities, regions, organizational units of the state, organizers of public collections, or legal entities with their registered office in the Czech Republic (foundations, institutes, associations, or non-profit organizations).

A sports club that has the legal form of a business corporation established for the purpose of doing business may not automatically meet these conditions – it depends on its legal structure and the purpose for which it was founded.

It is crucial to emphasize that [a donation may ultimately not be taxed at all for the recipient if it is a gratuitous monetary contribution and the recipient is a non-profit organization]. This is precisely why donations differ from sponsorship from a tax perspective, as with sponsorship, the recipient taxes the received amount as income from business activities.

Sponsorship and Its Tax Status for the Sponsor

When it is clearly stipulated in the contract between the parties that it is a sponsorship with a specific reciprocal service (advertising, visibility, promotion), it is considered a tax-deductible expense from the sponsor's perspective. The essence of sponsorship is to support a non-profit event, person, or organization through financial or material support, but in exchange for promotion.

If a sponsor provides CZK 50,000 to support a sports tournament and in return receives placement of its logo on all promotional materials, jerseys, websites, and posters, this is an expense for advertising and promotion, which is a tax-deductible expense. The key rule is: the mere publication of the donor's name, title, or logo is not considered consideration, even if the value of the contribution is explicitly stated.

It would only be a tax expense if, along with this publication, there is also promotion of products or support for the sale of goods or services. Merely mentioning the company's name as a sponsor is not enough – it must be actual promotion aimed at supporting sales or increasing brand awareness.

It is very important for the sponsor to have written documentation proving that the reciprocal service actually took place. If a company provides CZK 100,000 for a sports event but cannot provide photographs of its logo on a banner or the content of a media partner on the event's website, there is a risk that the Tax Office will assume it is a donation without consideration.

Such an undocumented donation could later be classified as a non-tax-deductible expense. One of the most common practical risks is therefore insufficient documentation of the reciprocal service that was actually provided.

Sponsorship Expense versus Donation for the Recipient

From the recipient's perspective, sponsorship and donations are taxed completely differently. If the recipient receives a sponsorship contribution under a contract that clearly specifies a reciprocal service (advertising, visibility), it is taxable income that the recipient must declare for income tax. In practice, the same tax rule applies to a recipient that is a non-profit organization as to other services it provides.

Income from providing advertising services is always taxable income, even for non-profit organizations. This means that when a sports club receives CZK 50,000 for placing a company's logo on jerseys and promotional materials, it must tax this income. Conversely, expenses for these services are tax-effective from the sponsor's point of view and can be deducted from the tax base.

In contrast, if it is a donation, it is not taxable income from business for the recipient, but rather a gratuitous income, which is, however, in many cases exempt from income tax. A sports club that receives a donation of CZK 50,000 without any reciprocal service does not have to tax the donation if it uses the money in accordance with the legal conditions for exemption (typically for its main sporting activities).

Key Risks and Errors in Contractual Arrangements

Practical reality shows that the difference between sponsorship and a donation very often becomes blurred in practice, sometimes intentionally, sometimes through carelessness. Lawyers from the ARROWS law firm repeatedly see cases where entrepreneurs are surprised by the Tax Office's demands for retroactive adjustments to tax returns because the sponsorship was not properly documented or was not clearly defined as an advertising expense.

The Most Common Errors in Sponsorship Contractual Arrangements

The first common error is a lack of specificity in the contract. The contract states a "sponsorship contribution of CZK 100,000 to support the tournament," but does not contain a detailed list of specific reciprocal services. This means it is later unclear what exactly the recipient was supposed to provide. There is then a risk that the Tax Office or a judge will conclude that it is a donation, especially if the reciprocal service did not actually take place or was not sufficiently apparent.

The second error is the use of vague terms like "sponsorship donation." The combination of the words "sponsor" and "donation" is a contradictio in adiecto – sponsorship is by definition an exchange with a reciprocal service, while a donation is without a reciprocal service. Therefore, it is recommended to use terminology in the contract text that is consistent with tax categories. If it is an exchange involving advertising, the contract should be called a "sponsorship agreement" or "advertising agreement," not a "donation."

The third error is the complete absence of a written contract. Although the law does not require a written form for a sponsorship agreement to be created, from a tax perspective, the absence of a contract is a major risk. Without a written contract, it is very difficult to prove what the mutual obligations of the parties were, and therefore the Tax Office can easily deny that it was a sponsorship at all.

The fourth error is insufficient documentation of the reciprocal service actually provided. Although the contract stipulates the placement of a logo on the tournament's websites and jerseys, there are no photographs, website screenshots, or other evidence. In such a case, the Tax Office will justifiably question whether the reciprocal service actually took place.

Documentation and Proof: What the Sponsor and Recipient Must Keep

Proper documentation is key to ensuring the tax acceptability of sponsorship. The law requires the taxpayer to be able to prove every expense they claim was incurred in connection with taxable income. This means that the sponsor should keep the following documents:

The first and most important document is the contractual documentation. The contract should contain a clear definition of both parties, the subject of the performance, the scope of the reciprocal service, and dates with signatures. The second document is the payment receipt — an invoice, bank statement, or transfer confirmation. The payment document must clearly document that the funds were actually transferred.

The third and very important document is documentation of the reciprocal service actually provided. In practice, this means photographs, website screenshots, clippings from newspapers or magazines, records from social media, or reports from a media monitoring service. These documents prove that the logo was actually placed and visible. If it is for a longer period, the documentation should be time-focused so that it is clear during which periods the promotion was visible.

A fourth document can be a confirmation from the recipient – for example, an email or letter in which the recipient confirms that they have fulfilled their obligations under the contract. Such confirmation is not automatically necessary, but in the event of a tax audit, it can become very useful additional evidence. The recipient (sports club or charitable organization) should also keep thorough documentation. They should keep the contract and confirmation of receipt of funds.

If it is a sponsorship, then also documents showing that they actually provided publicity or advertising under the contract. For a donation, they should have a receipt and possibly a written confirmation for the donor for tax return purposes.

VAT Implications of Sponsorship and Donations

The issue of Value Added Tax (VAT) adds another layer of complexity to the topic of sponsorship and donations. While income tax focuses on whether an expense is tax-deductible and whether it increases the tax base, VAT focuses on whether it is a taxable supply and what right to a deduction the provider (or recipient of the service) has.

Sponsorship and VAT

When a sponsor provides funds and receives promotion (advertising) in return, from a VAT perspective, this is the provision of a service – specifically, an advertising service. The provision of advertising is generally considered the provision of a service under the VAT Act, which is subject to the standard VAT rate of 21%. The recipient of the sponsorship contribution (e.g., a sports club) thus becomes the provider of an advertising service and should collect and remit VAT on this service.

In practical terms, this means that when a sports club receives CZK 100,000 excluding VAT from a sponsor for logo placement and promotion, the club should calculate VAT on this amount, i.e., CZK 21,000, and remit it to the state. The sponsor can then deduct this input VAT if they meet the conditions for the right to a deduction.

However, there is an important exception here for non-profit entities. If the recipient is a non-profit organization (e.g., a sports club registered as an association) that was not established for the purpose of doing business, it may be entitled to a VAT exemption for some activities.

Specifically, Section 61(d) of the VAT Act states that the provision of services closely related to sports or physical education by legal entities, which were not established for the purpose of doing business, to persons who perform sporting activities, is exempt from tax without the right to a deduction.

Here, however, we must be careful: the exemption applies to services closely related to sports provided to the athletes themselves, not to advertising for commercial entities. If a club provides advertising, it is a service that is not closely linked to the sport itself, and therefore the exemption does not apply and it must be taxed.

Donations and VAT

With donations, the situation is different. A donation is a gratuitous transfer, and a purely financial donation is not subject to tax under the VAT Act (it is not a taxable supply). This means that a financial donation should not be subject to VAT. When a company provides CZK 100,000 as a donation without any reciprocal service, no obligation to remit VAT arises from this amount.

However, there is an exception here as well. If the donation concerns goods (not money) that were purchased by the provider at some point and for which they claimed a VAT deduction (e.g., they purchased goods with VAT and are now donating them), then this constitutes the use of assets for purposes unrelated to the carrying out of economic activity. In such a case, it is considered a fictitious supply of goods for consideration, and output VAT must be remitted on the donated item.

The rule for advertising or promotional items forms an important exception: if a provider gives an advertising or promotional item (e.g., a T-shirt with their logo), whose purchase price without tax does not exceed CZK 500, and does so as part of their economic activity, it is not considered a supply of goods and no VAT is remitted on it.

Risks and Procedures in the Event of a Tax Office Audit

When the Tax Office conducts a tax audit, one of the typical topics is verifying the legitimacy of individual tax expenses. Sponsorship and donations often become the subject of an audit because they are categories of expenses where entrepreneurs frequently make mistakes.The Most Common Findings by the Tax Office

The Tax Office typically notices situations where a sponsorship is contractually vague. When an audit reveals that the contract does not contain a clear definition of the reciprocal service, there is a risk of a finding that it is a donation, and therefore a non-tax-deductible expense. In such a case, the Tax Office will increase the tax base by the value of the sponsorship contribution and calculate the tax underpayment based on that.

The second typical finding is the absence or insufficiency of documentation that the reciprocal service actually took place. If a sponsor claims that their logo was placed on jerseys but cannot prove it with any photograph or other document, the Tax Office will think it is a fictitious expense and will again increase the tax base.

The third finding is exceeding the limit for donations. If a legal entity provides and claims donations in its tax return exceeding 30% of its tax base (valid for 2026), the Tax Office will reduce the tax deduction so that this legal limit is strictly adhered to, and will tax the difference.

A fourth finding is often a discrepancy between the tax return and the accounting records. If sponsorship appears as a donation in the accounting records and as an advertising expense in the tax return, the Tax Office will raise questions about consistency and credibility.

How to Defend Against an Audit: Practical Steps

The first and most important step is to have correct and thorough documentation. If you have a contract, payment documents, and photographs or other evidence of the reciprocal service provided, you will be fine in most cases. The lawyers at the ARROWS law firm recommend keeping all documentation in order and organized so that it is easily accessible in case of an audit.

The second step is to consult with an expert before the tax procedure. If you are unsure whether it is a sponsorship or a donation, contact a lawyer and a tax advisor. They will help you correctly classify the transaction and ensure that it is properly documented and established.

The third step, if the Tax Office is already conducting an audit and a finding has been made, is to contact a lawyer immediately. They can help you with representation in negotiations with the Tax Office, in preparing a statement, and possibly in filing an appeal.

The lawyers at the ARROWS law firm have experience with such representation and are familiar with the Tax Office's procedures, which will help you achieve the best possible outcome.

Specific Issues Concerning Sports Clubs and Charitable Organizations

Sports clubs and charitable organizations are the most common recipients of sponsorship contributions and donations. From their perspective, it is important to understand how such received funds are taxed and what obligations arise from them.

Tax Treatment of Sponsorship Contribution Income for a Sports Club

If a sports club receives a sponsorship contribution with a clearly defined reciprocal service in the form of promotion, it is income from providing an advertising service. Such income is always taxable with income tax, regardless of whether the club is a non-profit organization or a business corporation. The club must therefore include the income in its tax return and tax it.

If the club is a non-profit organization (e.g., an association), the income from economic activity (providing advertising services) is subject to corporate income tax. The club must therefore include the income in its tax return and tax it.

Tax Treatment of Donation Income for a Sports Club

If the club receives a donation without any reciprocal service, the situation is different. The donation may be exempt from income tax if the legal conditions are met.

Specifically, if the donation is in the form of money or an item and was provided for an approved tax purpose (e.g., sports), and the recipient is a non-profit organization, then the donation is usually not taxed.

This is significantly more advantageous for clubs than sponsorship because no tax is paid on the income. This is precisely why clubs sometimes "invent" donations instead of entering into contractual sponsorships – to avoid having to report taxable income. However, this is exactly the situation that the Tax Office tries to uncover during audits.

Obligations of a Charitable Organization Upon Receiving a Donation

Charitable organizations (foundations, public benefit organizations, etc.) have additional obligations related to receiving a donation. [They should issue a donation confirmation for the donor, which can then be used in the tax return].

This confirmation is a very important document for the donor and should be received immediately after payment, or after the end of the tax period (calendar year) for all donations made in that year.

A charitable organization should also keep a record of donations so that it can prove at any time who provided the donation, in what amount, and for what purpose. If an audit occurs, it should be able to present these documents. The lawyers at the ARROWS law firm can help charitable organizations set up the correct documentation and processes to comply with the law.

Final Summary

The difference between sponsorship and a donation is vast from both a legal and tax perspective, yet in practice, these terms are often dangerously confused. While sponsorship represents a commercial transaction with a clear reciprocal service (advertising) and can be claimed as a full tax-deductible expense, a donation is a purely gratuitous transfer that can only reduce the total tax base within strict legal limits.

The key to a safe tax procedure is always a precise written contract supplemented with clear evidence of the promotion that took place. If the contract is vague, lacks a specific list of advertising services, or even uses misleading terms like "sponsorship donation," the tax office will, with high probability, reclassify the advertising expense as a non-taxable donation, which usually ends with a tax assessment and harsh penalties.

However, incorrect setup of these relationships carries not only tax risks. Poorly formulated agreements can lead to the absolute invalidity of the transaction, legal disputes with the supported entity, or unnecessary reputational damage if expectations regarding your visibility are not met.

Do not leave your support for sports or charity to chance. The lawyers and tax specialists at the ARROWS law firm have extensive experience in both preparing and reviewing sponsorship and donation agreements to ensure they safely withstand any audit. For a consultation and the correct setup of your contracts, contact us at consultation@arws.cz.