On 20 December 2012, the Belgian Constitutional Court rendered an important judgment which will certainly have significant consequences for large companies. Indeed, the financial stakes of the question submitted to the court were high, namely the tax treatment of fines imposed by the European Commission for cartel violations.

The origin of the European Commission's investigation

The Treaty on the Functioning of the European Union allows the Commission to impose sanctions for violations of the prohibition on the formation of cartels. In 2004, the Commission launched an investigation into whether the Belgian company Tessenderlo Chemie had violated the rules of European competition law.

From the outset of the investigation, and over the course of many years, Tessenderlo consistently set aside reserves in order to hedge against the risk of the imposition of a fine by the Commission, the amount of which would surely be substantial (more than EUR 84 million).

Under Belgian tax law, "reserves for risks and expenses" are, as a general rule, exempt from tax. That being said, this is only the case when the expenses for which the reserves are constituted qualify as deductible business expenses.

Article 53(6) of the Income Tax Code expressly provides that fines and penalties of any kind do not constitute business expenses. However, this statutory provision has given rise to discussion over the years, mainly concerning the definition of "fines". Indeed, for some time, this article has been interpreted as disallowing the deduction of criminal fines only, not administrative fines.

Consequently, Tessenderlo Chemie set aside, since 2004, tax-exempt reserves to hedge against the imposition of a deductible "administrative" fine by the European Commission.

The administrative circular

On 13 August 2008, the tax administration issued a circular in which it let it be known that, in its opinion, fines for cartel violations were not deductible, having regard to their repressive character. In the wake of this circular, the administration sent Tessenderlo Chemie a notice of adjustment, stating that the reserves it had built up were not tax-exempt and that the company thus owed back taxes amounting to approximately EUR 25 million. It is interesting to note, however, that the Antwerp Court of Appeal, in a similar case in 2009, had accepted the deductibility of a fine imposed by the Belgian Competition Council. 

In the case at hand, after the rejection of its objection, Tessenderlo Chemie commenced proceedings before the Brussels Court of First Instance, contesting the tax adjustment. In the context of these proceedings, the court decided to submit a request for a preliminary ruling to the Constitutional Court on the following question: Is it discriminatory to disallow the deduction of criminal fines, contrary to administrative fines?

Allowing the deduction of fines for cartel violations would undermine the Union's general policy

The proceedings before the Constitutional Court took a remarkable turn, and certain parties were allowed to intervene, including the European Commission, and provide their opinion on the consequences that would follow from a decision to allow the tax deduction of fines for cartel violations.

In its submissions, the Commission stated that the main purpose of fines sanctioning violations of EU competition law is to dissuade companies from engaging in anti-competitive practices (notably, the formation of cartels). It follows that fines for cartel violations are per se both persuasive and punitive in nature.

In other words, allowing the deductibility of fines for cartel violations would undermine the Commission's general policy of dissuasion, which is designed to protect consumers against cartels.

This position was echoed by the Constitutional Court, following its analysis of the case law of the European Court of Justice. It concluded that the possibility to deduct European fines would compromise the efficacy of the sanction. Moreover, the court found that, in the context of European policy, loyal cooperation between the Member States is necessary. Consequently, a provision of domestic tax law should not jeopardise the realisation of the Union's objectives.

Conclusion: a truly dissuasive effect on companies

This judgment comes during a period in which the commitment of the Member States to a European-wide policy of integration is more relevant than ever.

The 2008 circular touched on this point: other Member States, including France and the Netherlands, do not allow the deduction of European fines; moreover, allowing the deduction of European fines would in essence amount to subsidisation by the Belgian government of this sanction.

Finally, it should be noted that the Constitutional Court did not rule on the compliance of the Belgian system with EU law.  Certain questions thus remain unanswered. Nonetheless, the trend appears to be toward disallowing the deduction of European fines, which could have significant financial implications for large companies.