Tax Implications of Providing Corporate Apparel to Employees

Case Study from Accounting and Tax Practice

Does an object for VAT, personal income tax (PIT), and military levy arise when employees are issued corporate (branded) clothing with our company's logo and/or our trademarks?

In our opinion, corporate clothing is clothing that contains any sign (signs) that allows it to be identified with the enterprise or with the goods (works, services) produced and/or sold by it.

Such signs may include:

• company symbols
• trademark
• brand name
• corporate colors, etc.

Accordingly, the wearing of such corporate clothing by the company's employees falls, in our opinion, under the definition of "advertising", which, according to Article 1 of the Law of Ukraine "On Advertising" dated 03.07.96 No. 270/96-VR, is "information about a person or product, disseminated in any form and by any means and intended to form or maintain the awareness of advertising consumers and their interest in such person or product". Thus, the costs of manufacturing (purchasing) and subsequent use of this corporate clothing by the company's employees can be fully considered as "expenses for advertising and promotion of goods".

What definitions should be stipulated in regulatory and administrative documents

In order for the costs of corporate clothing to be classified as "expenses for advertising and promotion of goods", it is advisable to clearly stipulate the following definitions in the company's regulatory and administrative documents:

1. Obligations of certain categories of employees to use exclusively corporate clothing during working hours (this can be reflected, for example, in a collective agreement, employment contract, job description, etc.).
2. The circle of persons to whom corporate clothing will be issued.
3. Definition of clothing design.
4. Service life and issuance norms.
5. Conditions for returning this corporate clothing.

Since the presence of this information in the company's internal documents will indicate that the issuance of corporate clothing is due to the employee performing their labor functions under their employment agreement (contract) or is provided for by the norms of a collective agreement (job description) and is documented, and such clothing is not transferred to the employee's ownership and is subject to return, the value of this corporate clothing, in accordance with sub-paragraph 164.2.17 of the Tax Code of Ukraine (TCU), will not be recognized as an additional benefit for the employee. Therefore, no object for the accrual of personal income tax (PIT) and military levy (ML) for these operations will arise either.

Does an object for the accrual of VAT tax liabilities arise in this case?

According to sub-paragraph 14.1.191 of the Tax Code of Ukraine (TCU), the supply of goods is "any transfer of the right to dispose of goods as an owner, including the sale, exchange, or donation of such goods, as well as the supply of goods by court decision". Given this, we also do not see grounds for the emergence of an object for the accrual of VAT tax liabilities for similar operations (primarily due to the absence of transfer of such corporate clothing to the ownership of an individual, and also due to the necessity (and not the right) of its use in the process of an employee performing their official duties).

Otherwise, one could attempt to "artificially create" an object for the accrual of VAT tax liabilities for any other operations involving the transfer by the enterprise of various tangible assets (TMC) – various devices and mechanisms, raw materials for their further processing – for an employee's use.

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