Graduation ceremonies will soon begin – a period during which many companies see a noticeable increase in the redemption of gift cards given as graduation presents. At the same time, the annual financial reporting season is also at its peak. This means that companies are reviewing the previous year’s marketing expenses, gifts given to employees and business partners, and the related tax accounting.
From a taxation and accounting perspective, gift cards are not merely payment instruments. Their treatment depends both on the type of gift card and on whether the card is sold or given away free of charge. Therefore, now is a good time to revisit when and how gift cards should be taxed and how they should be properly recognised in accounting.
For VAT purposes, the key term is not “gift card” but “voucher” (Section 2(13) of the Estonian Value Added Tax Act). Based on Article 30a of the EU VAT Directive (2016/112/EU), vouchers are divided into two categories:
This distinction determines when taxable turnover arises for the issuer of the voucher, when VAT must be accounted for, and how the transaction is recognised in accounting.
For clarity, discount coupons are not treated as gift cards for VAT purposes. Those relate to price reductions on goods or services and whether and how they affect the taxable value of a transaction.
This article focuses on gift cards intended for the payment of goods and services. It does not address vouchers for one-off promotional services or product samples provided for marketing purposes where the value excluding VAT does not exceed EUR 10 per gift.
Under the VAT Act, a gift card is an instrument entitling the holder to acquire goods or receive services. In substance, gift cards are treated similarly to ordinary means of payment under VAT rules – like cash in a wallet, but in another form and with restricted use.
The VAT Act distinguishes between gift cards for one simple reason: their tax treatment differs.
For single-purpose gift cards, the sale of the card itself is treated as the sale of goods or services for VAT purposes.
Example: if a company sells a gift card redeemable only for massage services in Estonia (subject to 24% VAT), taxable turnover and the obligation to declare and pay VAT arise immediately upon sale of the gift card. Whether and when the customer actually redeems the card does not affect taxation.
One particular feature of gift cards is that a long period may pass between their sale and actual redemption. During this time, prices and tax rules – including VAT rates – may change. Estonia’s recent history provides a good example, with VAT rates having increased from 18% to 24% over the years. Therefore, besides income and expense recognition, companies must also pay attention to when the VAT liability arises and which VAT rate applies. This is especially important for gift cards with long validity periods, where the issue and redemption dates may fall into periods with different VAT rates. For single-purpose vouchers, the transaction is taxed when the voucher is transferred. Consequently, a later change in the VAT rate does not affect the VAT treatment of the goods or services redeemed with the voucher.
Selling a gift card to a customer does not in itself create a separate corporate income tax liability – it is ordinary business income. However, if the same single-purpose gift card (e.g. for a massage) is given to an employee, business partner or another person and does not qualify for a tax exemption (such as certain employee health or sports benefits), it is treated as a fringe benefit or gift and becomes subject to income tax and, in the case of fringe benefits, also social tax no later than in the tax period when the card is transferred.
Whether the gift card is actually redeemed is not relevant from the perspective of income tax or VAT.
Upon sale of the gift card:
Upon redemption:
Upon expiry (if the gift card is not redeemed):
When given away:
What happens if a single-purpose gift card is never redeemed?
From a tax perspective, there is generally little difference. If the amount received for an unused single-purpose gift card is not refunded to the purchaser and is retained by the issuer, the tax authority considers there to be no basis for reducing VAT liability. According to the tax authority, VAT could only be reduced if the amount retained before the supply of goods or services constituted a penalty or compensation payment. In practice, this is rarely the case.
The ETCB’s position is based on Section 29(9) of the VAT Act: if payment has been received but goods or services are not supplied, VAT may be left unaccounted for only if the amount is refunded to the purchaser.
The author does not agree with this interpretation. Non-redemption is the customer’s choice, while the issuer has nevertheless assumed an obligation. Therefore, retaining the funds should effectively be regarded as compensation for readiness to supply goods or services. However, final clarity would likely only emerge through litigation.
From an accounting perspective, both cash and accrual accounting principles become relevant, as well as whether the gift card is redeemed or expires unused.
While VAT accounting for single-purpose vouchers follows a cash basis and VAT liability arises upon receipt of payment, accounting recognition of income and expenses generally occurs only upon redemption or expiry of the voucher.
Another important aspect is that if the gift card is redeemed as intended, the amount is recognised as sales revenue when the service is provided. If the gift card expires unused, the amount is generally recognised as other operating income.
Multi-purpose gift cards are sold by bookstores, Amazon and similar businesses. These are companies selling goods or services subject to different VAT rates. Here, the situation becomes more complex – and the accountant more important.
For multi-purpose gift cards, the sale of the gift card itself does not create taxable turnover for VAT purposes. The law distinguishes these vouchers because, at the time of sale, it is not known which VAT rate will apply to the goods or services ultimately chosen by the customer.
From a VAT perspective, the sale of the gift card is therefore a non-taxable transaction because the taxable object is not yet known.
But what happens if a multi-purpose gift card is never redeemed? According to the tax authority, since it is not known what goods or services would have been purchased, no taxable supply arises and no VAT becomes payable. Advance payments create taxable turnover only when linked to a specific supply, which is not the case for multi-purpose vouchers.
For gift cards with long validity periods, VAT rate changes over time become particularly relevant. Since VAT becomes chargeable only upon actual supply of goods or services, the VAT rate in force at that moment must always be applied.
An important nuance is that for income tax purposes, redemption is irrelevant – taxation arises already upon granting the right represented by the gift card.
Upon sale:
Upon redemption:
Upon expiry:
When given away:
In summary, the taxation logic of gift cards can be analysed along two axes:
| Situation | VAT | Corporate income tax | Accounting rules | Expiry |
|---|---|---|---|---|
|
Single-purpose voucher – sale
|
VAT arises immediately upon sale of the gift card
|
Not applicable
|
Recorded as an advance payment; recognised as sales revenue upon redemption
|
Recognised as other operating income in accounting; VAT on the original sale cannot be adjusted
|
|
Single-purpose voucher – giftin
|
Input VAT is not deductible; if deducted, it must be taxed as self-supply
|
Treated as a gift/fringe benefit at the time of gifting
|
Marketing expense/payroll expense + related tax expense
|
Does not affect the giver’s tax liability
|
|
Multi-purpose voucher – sale
|
VAT is declared and paid only upon redemption
|
Not applicable
|
Recorded as an advance payment; recognised as sales revenue upon redemption
|
Recognised as other operating income in accounting; no VAT adjustment required because no VAT arose upon sale
|
|
Multi-purpose voucher – gifting
|
Input VAT is not deductible because the sale of the voucher itself is not taxable
|
Treated as a gift/fringe benefit at the time of gifting
|
Marketing expense/payroll expense + related tax expense
|
Does not affect the giver’s tax liability
|
At first glance, gift cards may seem harmless – just some money, plastic or a digital code. In taxation, however, they are masters of timing: the issue is not whether tax arises, but when it arises. Attention must also be paid to the distinction between accrual and cash accounting.
If a company correctly understands the type of gift card and the nature of the transaction, the tax treatment is actually logical and straightforward. But if these two aspects are confused, it quickly leads to situations where VAT is paid at the wrong time, revenue is recognised in the wrong period, and accounting appears contradictory. One simple thing prevents this: discipline and analysing the issue properly from the outset.
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