Deductibility of fines

By decision of 11 November 2009, the European Commission imposed a fine in the amount of <br>€ 348'000 on a Swiss corporation. The Federal Supreme Court had to decide whether or not this fine could be deducted from taxes in Switzerland.

This decision is based on the following facts:

X. AG took over the coordination and administration of joint activities/agreements for a group of companies in connection with pricing in the respective industry. In its verdict, the EU Commission found that X. AG has carried out administrative activities in the context of cartel agreements for remuneration. In particular, it organised meetings of the cartel members, provided meeting rooms, prepared minutes and statistics, calculated and monitored delivery quantities or rather quota agreements and acted as a mediator in the event of tensions among the cartel members. On the basis of these activities, the EU Commission fined X. AG.

On the occasion of the threatened fine, the company formed provisions which were booked as business expenses in the financial statements under commercial law. These provisions were not recognised by the Zurich Cantonal Tax Office and were offset in the relevant assessment. An appeal against the assessment ruling of the cantonal tax office was unsuccessful. The taxpayer then appealed to the Zurich Tax Appeals Court, which approved the appeal in a decision dated 20 December 2013. The Cantonal Tax Office of Zurich appealed against this decision to the Administrative Court of Zurich, which upheld the decision of the Tax Appeal Court. The Cantonal Tax Office appealed against the decision of the Zurich Administrative Court to the Federal Supreme Court.

In its decision of 26 September 2016 (2C_916, 917/2015), the Federal Supreme Court upheld the appeal and referred the matter back to the Zurich Administrative Court for reassessment. In its consideration, the Federal Supreme Court differentiates between fines with/without punitive character.

In accordance with the authoritative principle, the balance sheet compliant with commercial law is authoritative for the tax balance sheet, as long as there are no fiscal correction regulations. However, these correction regulations are not exhaustively listed in the law. The Federal Supreme Court uses this scope for interpretation in this ruling on the following grounds. According to the Federal Supreme Court's reasoning, fines and other financial penalties of a punitive nature are not deductible from tax. The Federal Supreme Court refers to the principle of the uniformity of the legal system, which requires that the various areas of law cooperate as consistently as possible. In accordance with this principle, the Federal Supreme Court establishes non-deductibility as follows;

"that a sanction imposed would be effectively mitigated by tax law. The reduction in taxable net income and the resulting tax on profits would result in a portion of the fine being borne indirectly by the community." (E. 7.3)

Thus, criminal law should not be undesirably influenced by tax law and, moreover, it is not the intention of the legislature that the punitive effect could be undermined by deductibility.

The Federal Supreme Court considers fines and other financial penalties which serve to create profit to be justified in business terms and thus deductible. On the grounds that this type of sanction is in no way punitive, but merely a rectification of the unlawful state.

In this case, the Zurich Administrative Court has to re-examine the case and clarify whether the fine imposed by the European Commission contains a punitive character that would prohibit deductibility.