Correct handling of entertainment – ensure deductibility and avoid benefit taxation
To handle entertainment correctly, you need more knowledge than simply reading the paragraph (Chapter 16, Section 2 of the Income Tax Act). Small differences in purpose, participants or cost levels can determine whether an expense is deductible or should be subject to benefit taxation. In this article, we explain how to ensure correct handling of both internal and external entertainment, and which rules apply.
The immediate connection
For a deduction to be allowed, the entertainment expense must have a direct and clear link to the company’s business activities ,an immediate connection. This means, for example, that for a dinner with a client to be deductible, the immediate connection must be fulfilled. All three of the following criteria must be met:
- It must takeplace in close connection with a business meeting (time connection)
- Theindividuals attending the dinner must also have participated in the meeting (participant connection)
- The entertainment must take place in a location relevant to one of the parties (location connection)
There is no fixed time limit for the time connection, but it must be reasonable. For example, it would not be reasonable to hold a business meeting on a Thursday and then attend an event with the same client on the Saturday.
The participant connection means, for example, that if spouses join a dinner with a client, the requirement is not fulfilled, as they are unlikely to have attended the business meeting beforehand.
Internal entertainment
Internal entertainment refers to activities aimed at the company’s own employees. This may include staff parties, information meetings, internal courses or planning conferences.
To be tax‑free, internal entertainment must meet certain conditions. It must not be held too frequently, at least two weeks should pass between occasions. In addition, the event may last no longer than one week. Meals must be taken together, which means that separate expenses for meals are not considered joint and therefore become taxable.
The standard amounts for 2026 are SEK 124 per person for lunch or dinner, and SEK 62 for breakfast. For simple refreshments, such as coffee with a bun or a sandwich, the limit is SEK 60 excluding VAT. If the cost exceeds SEK 60 excluding VAT, it is no longer considered simple refreshments of minor value, meaning the cost is non‑deductible.
Examples of normally tax‑free internal entertainment include information meetings where management informs staff about goals, budgets or organisational changes, staff parties (two per year with deductibility) and internal training. However, work meetings, departmental meetings and board meetings are considered part of ordinary work. This means that if the employer pays for meals during such meetings (directly or through reimbursement), participants must be taxed on the benefit according to the annual standard amount. The employer must also pay employer contributions.
External entertainment
External entertainment is aimed at customers, suppliers or business partners and must have a clear link to the company’s business.
Examples include business meetings, product demonstrations, presentations of services or goods, inaugurations or corporate anniversaries (25th, 50th, 75th or 100th anniversaries). Luxury entertainment, such as hunting or fishing trips, is rarely deductible because the cost is not proportionate to the purpose and the immediate connection is usually lacking. Pure client entertainment is not considered external entertainment and is therefore non‑deductible.
For client events, it can sometimes be difficult to determine whether costs are fully deductible as marketing expenses, deductible under the limited entertainment rules, or non‑deductible. As larger client events often involve significant costs, it is advisable to make the tax assessment before the event takes place, as there may be opportunities to adjust the content or format to ensure deductibility.
Deductible costs and VAT
Companies may no longer deduct the actual meal cost for entertainment. However, they may deduct simple refreshments as described above, and related costs such as venue hire, music or entertainment, up to SEK 180 per person excluding VAT.
VAT may be deducted on costs up to SEK 300 excluding VAT. If both food (12%) and alcohol (25%) are included, the cost must be allocated proportionally due to the different VAT rates. Standard amounts may also be used: SEK 36 per person for alcohol‑free entertainment and SEK 46 per person if alcohol is included.
Recording an expense as non‑deductible does not remove the risk of benefit taxation. The risk must be assessed separately in each case, as circumstances vary.
Establish good procedures
To ensure correct handling of entertainment, it is important to have clear procedures and guidelines in place. Specify which costs are permitted, how often activities may be held, and what documentation is required for each occasion. Complete documentation should include the date, location, purpose, participants and the organisations they represent.
Documentation is also important for responding to potential questions from the Swedish Tax Agency. Audits may cover the past six years, and thorough documentation is needed to answer questions about the tax treatment and circumstances of the specific expense under review.
By staying up to date on applicable rules and thresholds, maintaining good routines and keeping documentation in order, you can be confident that entertainment is handled correctly and in a tax‑compliant way.
In addition to tax compliance, reputational risks must also be considered. Depending on the type of business and organisation, it is important to reflect on how you entertain. Something does not need to be illegal to be inappropriate, and excessive entertainment may damage the brand and erode trust.
If you have questions about internal or external entertainment, Azets’ experienced advisers are here to help. Read more about our tax advisory services here.
