On December 18 2015 the Federal Council initiated a consultation on a bill regarding the tax treatment of fines and financial penalties. According to the bill, fines and other punitive financial penalties imposed against companies should not be tax deductible. However, non-punitive profit disgorgement penalties should remain tax deductible.

Legal context

According to the Federal Tax Law, only expenses that are justified for business purposes (ie, expenses incurred in connection with the company's business activity) may be deducted from taxable profit. However, it is not expressly stated in the law whether fines and financial penalties imposed against companies are considered as business-related expenses. Thus, under present legislation, the tax treatment of fines and financial penalties is open to interpretation. However, there is a consensus that non-punitive profit disgorgement penalties should be deductible from taxable profit.

In a July 9 2014 judgment concerning an antitrust fine imposed by the European Union against a Swiss corporation, the Zurich Administrative Court held that, even though the antitrust fine was punitive in nature, it qualified as a business-related expense. Based on the existing Federal Tax Law, it may therefore be deducted from taxable profit.

The case is awaiting judgment before the Federal Supreme Court. If the Zurich Administrative Court judgment is upheld, its conclusion regarding the EU antitrust fine will probably apply to fines and financial penalties in general, which would then be deductible for tax purposes.

However, the Federal Council is of a different opinion. In a September 12 2014 report, the council stated that the tax deductibility of fines and punitive financial penalties results in the actual reduction of their punitive effect, as well as in the undesirable transfer of the burden to other taxpayers. Accordingly, the Federal Council considered that fines and punitive financial penalties imposed against companies do not qualify as business-related expenses and consequently may not be deducted from taxable profit. As opposed to fines and punitive financial penalties, non-punitive profit disgorgement penalties should remain tax deductible, since their main purpose is the repayment of illegally obtained profits, not the punishment of the company.

Considering the controversial legal situation regarding the tax deductibility of fines and financial penalties, an explicit legal rule in this respect would be welcome.

Bill

The bill published by the Federal Council on December 18 2015 lays down rules with regard to the tax treatment of fines and financial penalties. According to the bill, fines and punitive financial penalties imposed on companies (or partnerships), as well as the connected procedural costs, should not be deducted from taxable profit, whereas non-punitive profit disgorgement penalties should remain tax deductible. In case of penalties containing both a punitive and non-punitive part, it would be for the taxpayer to prove the extent to which a penalty is non-punitive and, consequently, deductible from taxable profit.

The consultation on the bill is open until April 11 2016. Until then, the cantons, political parties and any other interested persons or organisations can present their comments and observations. After that, the bill must be approved by Parliament and is subject to an optional referendum. If proper approval is obtained, the bill will be officially published and the date of its entry into force made known.

For reasons of legal certainty, and assuming that the bill will be approved, the new rules regarding the non-deductibility of fines and punitive financial penalties for tax purposes should apply only to facts which occurred on or after the bill's entry into force. Thus, with regard to fines and punitive financial penalties imposed before the bill enters into force, the question of tax deductibility must be answered based on the interpretation of the existing Federal Tax Law (hence the relevance of the case pending before the Federal Supreme Court).

Tax deductibility of DOJ fines

Tax deductibility of fines and financial penalties has become increasingly relevant in recent years, especially due to the considerable fines imposed by the US Department of Justice (DOJ) against Category 2 Swiss banks (ie, banks with reason to believe that they have committed tax-related criminal offences in connection with undeclared US-related accounts).(1) The question of the tax deductibility of these fines is significant to the banks, as the amount of profit tax to which they are subject would be considerably reduced if such a deduction were accepted by the tax authorities.

Although the bill will bring clarity to the tax treatment of fines and punitive financial penalties in general, the question of the tax deductibility of DOJ fines must be answered based on existing legal grounds, since, even if approved, the bill will apply only to facts which occurred on or after its entry into force – this is not the case for DOJ fines. It could be concluded that at least the non-punitive part of these penalties should be tax deductible. Therefore, taxpayers are well advised to substantiate that the relevant fine contains such a part.

For further information on this topic please contact Andrea Opel or Thaís Bdine at Meyerlustenberger Lachenal by telephone (+41 44 396 91 91) or email (andrea.opel@mll-legal.com).The Meyerlustenberger Lachenal website can be accessed at www.mll-legal.com.

Endnotes

(1) According to information provided by the DOJ, the 80 Swiss banks that signed a non-prosecution agreement under Category 2 paid a total of more than $1.36 billion in fines. The highest individual fine was imposed on BSI SA and amounted to $211 million.

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