Internal and external business entertainment is an area that frequently raises questions. Many people even find that the more they read about it, the more complicated it seems. That’s hardly surprising, since small details can make a big difference to what actually applies.
In this article, we go through the fundamentals, clarify common mistakes, and take a closer look at the potential risks of handling entertainment incorrectly.
The framework for internal and external entertainment
The framework for entertainment is set out in the Swedish Income Tax Act (Chapter 16, Section 2). It mentions both internal entertainment under the term “employee welfare” and business entertainment defined as activities intended to “initiate or maintain business relationships”.
However, the legislation also includes several terms and distinctions that require a deeper understanding in order to handle business entertainment correctly for tax purposes.
The following are key terms to be familiar with:
- Internal entertainment – activities aimed at employees, such as staff parties, internal training sessions or information meetings.
- Business entertainment – activities directed at existing or potential clients, for example client meetings, anniversaries or product demonstrations.
- Direct association – the expense must be directly related to your business, meaning the activity should take place in close connection to the meeting, with the same participants and in a relevant setting.
- Staff welfare – initiatives intended to promote wellbeing and a sense of community among staff.
- Allowable expense – costs must be proportionate to the purpose and not excessive.
- Light refreshments or meals – a simple roll or snack may be regarded as light refreshments, whereas a filled baguette may be considered a meal, which has different tax implications.
- Minor value – currently, items valued at SEK 60 excluding VAT are regarded as being of minor value for light refreshments.
Risks of mishandling entertainment
One of the greatest risks when it comes to entertainment is that the Swedish Tax Agency (Skatteverket) carries out a tax audit of the organisation. They are aware that entertainment is often perceived as complicated, which makes it a frequent focus of review.
An audit may cover up to six years, and incorrect deductions or missed benefit taxation can quickly become costly. Many organisations choose to bear these costs themselves so that employees do not have to pay the additional tax – which in turn may lead to further employer charges and benefit costs.
Beyond the financial risks, there is also the risk of reputational damage. The media and whistle-blowers can be quick to highlight cases of improper entertainment. Even if what has occurred is not illegal, it can still be perceived as inappropriate. This can have serious consequences: loss of trust, difficulties in recruitment, and in the worst-case scenario, a crisis within the organisation that may even lead to the Managing Director or senior management being forced to resign.
Common mistakes
Because the rules on entertainment can be open to interpretation, there are many grey areas where businesses can easily make mistakes.
A typical example is a round of golf with clients on a sunny summer’s day. If there is no meeting held directly in connection with the activity, the event lacks a direct business purpose. In that case, it is treated as client entertainment, and the cost is not allowable for tax purposes.
Another common mistake is recording work meetings as entertainment. Lunches during departmental or board meetings are part of normal business operations and must therefore be taxed as a benefit.
Documentation is another area where errors frequently occur. For the records to be sufficient, they must clearly state who attended, which organisation they represented, and the purpose of the meeting. Simply writing “client lunch” on a receipt is not enough – but a short note indicating which client attended and what was discussed makes a big difference.
The distinction between light refreshments and meals is another area that often causes confusion. A pastry with coffee counts as light refreshments, whereas a filled baguette is considered a meal – again with different tax implications. Small details can determine how the cost should be handled.
An area not to be taken lightly
Mishandling business entertainment is not something to be taken lightly. It can lead to costly audits, double taxation and employer contributions, as well as a loss of trust — both internally and externally. In other words, this is not an area to be careless about. By understanding the rules, avoiding the most common pitfalls, and keeping proper documentation, you reduce the risk of unexpected costs and damaged credibility.
If you have questions or need help understanding the legislation on internal and business entertainment, we’re here to help. Learn more about our tax advisory services here.
