Deductibility of fines and penalties
In its decision of 26 September 2016, the Federal Supreme Court had to rule on a case concerning the tax law admissibility of a provision in connection with an EU cartel fine. The affected X. AG filed an appeal against the decision of the Cantonal Tax Office of Zurich with the Tax Appeal Court of the Canton of Zurich, which upheld the appeal. The cantonal tax office appealed unsuccessfully against this decision to the Administrative Court of the Canton of Zurich, which dismissed the appeal in its ruling of 9 July 2014 on both state and municipal taxes and direct federal taxes. The cantonal tax office then lodged an appeal with the Federal Supreme Court in matters of public law.
The federal court considered, among other things:
"7.1 According to Article 127(2) BV, the principle of taxation according to economic capacity must be observed in particular, insofar as the nature of the tax permits.
In the area of taxation of the income of natural persons, the principle of capacity to pay is expressed by the theory of access to net assets ('théorie de l'accroissement du patrimoine' or 'imposition du revenu global net') (cf. Art. 16 DBG), according to which the concept of taxable income corresponds to the surplus of all additions to assets over the disposals of assets within a tax period (BGE 139 II 363 E. 2.2 p. 366; judgment 2C_188/2015 of 23 October 2015). As a subprinciple of the net asset access theory, one part of the doctrine advocates the so-called 'net principle', according to which, when taxing natural persons, all gain costs would have to be deducted from gross income, even if these costs were included in Art. 26-33a DBG (Markus Frei, Steuerrecht, 2nd ed. 2012, pp. 219 et seq. with further references; Derselbe, in Zweifel/Athanas [Ed.], [...] Rz. 12 on Article 25; René Matteotti, Steuergerechtigkeit und Rechtsfortbildung, 2007, pp. 30 et seq.; see Judgment 2C_929/2014 of 10 August 2015 E. 3.2).
In the present case, however, nothing can be deduced directly from the 'net principle' invoked by the doctrine and the lower court (see E. 18.104.22.168 of the contested decision): In contrast to natural persons, in the case of legal entities, it is not the gross income but the net profit calculated in accordance with commercial regulations according to the profit and loss account which is the starting point for the assessment of the profit tax (authoritative principle; Art. 58 para. 1 lit. a DBG). The principle of efficiency of Art. 127 para. 2 BV is thus taken into account in the profit tax of legal entities in that (all) business-related expenses can be taken into account in the income statement. In order to determine the taxable net profit, the law also provides for adjustment regulations which provide for offsetting against the net profit according to the income statement (see Art. 58 para. 1 lit. b and c DBA). These formal-legal correction regulations would be binding on the Federal Supreme Court even if one wanted to see them as a violation of the principle of efficiency (Art. 190 BV). To the extent that Art. 58 para. 1 lit. b DBA only provides for the offsetting of expenses or provisions that are not justified by business, this corrective provision is not constitutive but merely declaratory in nature, especially since the commercial accounting regulations already do not allow for expenses that are not justified by business (see Danon, [...] no. 62 on Art. 57-58; Richner/Frei/Kaufmann/Meuter, [...] no. 75 on Art. 58). Whether the fine of the European Commission in the present dispute proves to be a commercially justified expense is to be determined in the following by interpretation; the principle of efficiency is, however, maintained in this or another way. The same applies with regard to the principle of legality contained in Art. 127, para. 1 of the Swiss Federal Constitution in the law on taxes, according to which the main features of the tax structure, namely the group of taxpayers, the subject of the tax and its assessment, are to be regulated in the law itself: if the interpretation in the present case leads to the conclusion that, in addition to the explicitly mentioned tax fines, other fines are not justified on business grounds, then Art. 58 para. 1 lit. b DBG provides a formal legal basis for offsetting the provision in dispute [...].
7.2 The fact that Art. 59 para. 1 lit. a DBG expressly excludes only the tax fines from the business-related expenses, does not allow the conclusion to be drawn that the other fines and administrative penalties were business-related expenses. As the Federal Council correctly states in its report of 12 September 2014, the aforementioned provision entered into force on 1 January 1995. At that time, however, the criminal liability of companies was not yet provided for in core criminal law (Art. 102 SCC). From the perspective of that time, tax fines were therefore in the foreground in the case of self-inflicted fines of legal entities, which explains why the wording of the law was limited to these. In this context, the objection of the tax office filing the complaint is also noteworthy, since the legal exclusion of tax fines is made in the same sentence as the one used to explicitly describe federal, cantonal and communal taxes as business expenses; in this respect, the limitation of the wording of the law to tax fines can be interpreted as a clarification that the tax fines are not deductible taxes, but are to be classified as fines. This suggests that the legislator did not want to differentiate between tax fines and other fines with regard to the business justification of expenses, but rather between regular expenses and penalties. In this respect, a grammatical-historical interpretation of the text of the law indicates that fines with a penalty character were generally not justified by the legislator in terms of business and were therefore not deductible. This is also supported by the fact that the Federal Council, within the framework of the current legislative procedure, assumes that the planned exclusion of the deductibility of all fines is only an explicit stipulation of the regulation already in force today [...].
7.3 The principle of the unity of the legal order requires that contradictory decisions be avoided as far as possible. From this it is derived, for example, that the administrative authority should not deviate from the findings of fact or the legal assessments of the criminal judge without good reason (BGE 136 II 447 E. 3.1 p. 451; Judgments 1C_402/2015 of 10 February 2016 E. 2.3; 1C_171/2015 of 28 October 2015 E. 3.5 f.). The principle of the unity of the legal system is particularly important in the interface area of different legal fields. Here, preliminary questions under foreign law may arise which call for a uniform, harmonising answer (judgments 2C_771/2014 of 27 August 2015 E. 2.1; 2C_628/2013 of 27 November 2013 E. 2.2.2, published in: ASA 82 p. 382, 83 p. 677; StR 69  p. 677). This is often the case in tax law, which closely interacts with other areas of law. When applying federal tax law, the practice and doctrine on similar foreign law issues can (and must) therefore be consulted as long as no valid reasons are apparent that would suggest different treatment (BGE 140 I 153 E. 2.2 p. 155 f. w. H.).
The present case does not directly concern a preliminary question of criminal law, which would have to be answered uniformly or harmonized in tax law. However, as rightly criticised by the tax office filing the complaint and by parts of the doctrine, an affirmative answer to the business case and thus to the deductibility of fines would lead to a sanction imposed by tax law being de facto mitigated. The reduction of the taxable net profit and the profit tax payable thereon would have the consequence that part of the fine would be indirectly borne by the community. It is obvious that this would undermine or partially cancel the punitive effect of the fine intended by the sanctioning authority. Such an influence of tax law on criminal law or on the penal provisions of other areas of law appears fundamentally undesirable from the perspective of the unity of the legal system, especially since this would create a de facto contradiction between the penal and tax decisions; the two decisions would rather (partially) neutralize each other. It could have been expected that the legislator would have made an explicit statement if this significant consequence had actually been desired by him. However, as has already been explained, such a statement does not exist. With regard to the tax fines, the legislator has even explicitly stated the opposite.
Admittedly, it is conceivable that this problem could also be taken into account in the calculation of the fine by taking into account the possibility of deducting the fine and increasing the penalty accordingly (see Opel, [...] p. 211 [...]); in this case, there would be no undesirable reduction in the penalty, at least not on the part of the guilty legal person. However, to the extent that the territorial authority imposing the sanction does not correspond to the tax domicile of the legal person, the assumption of tax deductibility would still have the undesired effect that the community would incur losses in the tax base at the tax domicile and the tax domicile would thus indirectly have to bear the fines of the legal person. Furthermore, taking into account the tax deductibility of the fine would be very difficult for the sanctioning authority: As already correctly stated in the grounds for the deviating motion in the decision of the Tax Appeal Court of 20 December 2013, the (possibly also foreign) criminal judge would have to have in-depth knowledge of Swiss tax law (federal, cantonal and municipal taxes) in order to be able to calculate the financial impact of the fine on the extent of the tax burden of a legal entity domiciled in Switzerland, whereby international or even domestic tax authorities would also have to be involved. Otherwise, the actual tax burden would remain unknown and could not be correctly included in the calculation of the fine. It is therefore obvious that such a solution is not practicable [...]. In the present case, there is no evidence whatsoever that the European competition authority would have assumed that the fine was tax deductible when it assessed it and would have taken this factor into account when calculating the fine; even the defendant does not claim anything of the kind.
In view of the above, a systematic interpretation of the law, which takes into account the principle of the unity of the legal system and the most consistent possible interaction of the various areas of law, precludes the commercial justification or deductibility of fines or financial administrative sanctions of a penal nature.
7.4 The same result can be achieved by including the legal provisions on the treatment of bribery payments:
With the Federal Act of 22 December 1999 on the inadmissibility of tax deductions for bribes (in force since 1 January 2001; AS 2000 2147; BBl 1997 II 1037, IV 1336), Art. 59 para. 2 DBG was inserted. This norm expressly stipulates that payments of bribes within the meaning of Swiss criminal law to Swiss or foreign public officials are not part of business expenses. According to Art. 322ter and Art. 322septies StGB (in each case in conjunction with Art. 102 para. 1 and para. 2 StGB), bribery of Swiss and foreign public officials is also a criminal offence: Irrespective of the criminal liability of natural persons, a company is punishable by a fine of up to CHF 5 million if it is accused of not having taken all necessary and reasonable organisational measures to prevent such a criminal offence. If the lower court were to assume that fines and financial administrative sanctions of a penal nature (with the exception of tax fines) were part of the business expenditure, the paradoxical consequence would be that although the bribes paid could not be deducted by the company, a criminal fine imposed on the same company for the bribery would be.
Also in this context, a systematic approach argues against the deductibility of fines and financial administrative sanctions for legal persons.
7.5 As already explained, the Federal Supreme Court has already ruled that fines are not justified on business grounds and are therefore not deductible [...]. Also, teaching considers fines and other financial sanctions of a penal nature for self-employed natural persons as non-business expenses [...]. For this reason, the question arises whether there are such substantial differences between natural and legal persons that unequal treatment would be justified.
According to Swiss law, a legal entity is not a fictitious entity, but a real, actually existing person, which differs fundamentally from the natural person only in that it does not act through physical organs, but through organs in the legal sense (so-called 'reality theory'; Arthur Meier-Hayoz/Peter Forstmoser, Swiss Company Law, 11th ed. 2012, § 2 para. 17 f.). Likewise, the legal entity has its own original will (see Art. 55 para. 1 ZGB). As explained above, a fine or a financial administrative sanction may be imposed on the legal person on the basis of its own responsibility; like the self-employed natural person, the legal person is punished for its own conduct. In so far as this is of interest here, the legal person and the natural person are therefore essentially on an equal footing.
Admittedly, the lower court and parts of the doctrine point out in this respect that a legal person - unlike natural persons - does not have a private or highly personal sphere which can be distinguished from the business sphere, which is why a fine in the case of legal persons cannot be assigned from the outset to an area outside business (E. 2.3.5 of the contested decision [...]). A distinction can only be made between expenses which fall within the sphere of the enterprise and those which fall within the sphere of the shareholders; the former are justified on business grounds, the latter not. However, this objection is not convincing: From a formal point of view, it is true that in the case of legal persons, a distinction between a private and a business 'sphere' is naturally unnecessary. However, it cannot be deduced from this that the monetary sanctions imposed on a legal entity should always be treated as expenditure justified by business. This would only be the case if the differences between independent natural persons and legal persons were sufficiently significant to justify the creation of unequal legal consequences, which appears very doubtful in view of the similarities shown above.
In the present context, the tax office filing the complaint also makes an accurate comparison with the sanctions provided for by Swiss law in the case of unlawful restrictions of competition (Art. 49a of the Federal Act of 6 October 1995 on Cartels and other Restraints of Competition [Cartel Act, KG; SR 251]): Accordingly, a company that participates in an illegal agreement or behaves in an illegal manner will be charged an amount of up to 10 percent of the turnover achieved in Switzerland in the last three financial years. An "enterprise" is defined as any buyer or supplier of goods and services in the economic process, regardless of its legal or organisational form (Art. 2 para. 1bis KG). As the complainant rightly submits, it would be incompatible with the principle of equal treatment laid down in Article 8(1) BV if such an administrative sanction for an identical infringement of rights were to be allowed to be deducted as business expenses in the case of an undertaking in the form of a legal person, but not in the case of an undertaking of a self-employed natural person.
The same must also apply to the European Commission's competition fines in this case and, in general, to fines and financial administrative sanctions of a penal nature, in the absence of any recognisable significant differences in the types of sanctions. Here again, the dogmatic differences between legal persons and independent natural persons, which are brought to light by the doctrine and the majority opinion of the lower court, do not justify privileging legal persons with regard to exactly the same type of fine or treating them differently from independent natural persons. A constitutional interpretation of Art. 58 para. 1 lit. a and lit. b as well as Art. 59 para. 1 lit. a DBG, which in particular preserves equality of rights, therefore also leads to the result that fines and other financial administrative sanctions of a penal character do not qualify as business expenses even if they are imposed on legal persons on their own responsibility.
7.6 Nothing else results from the value neutrality of tax law, as emphasised by the lower court and parts of the doctrine [...]:
According to this principle, no distinction is to be made between illegal and permitted transactions (judgments 2C_94/2010 of 10 February 2011 E. 3.4.1, published in: RDAF 2012 II 17; 2C_520/2009 of 31 May 2010 E. 2.4.3; 2C_426/2008 and 2C_430/2008 of 18 February 2009 each E. 3.4; 2C_17/2008 of 16 May 2008 E. 6.2; 2C_16/2008 of 16 May 2008 E. 5.2, publ. in: RDAF 2009 II 177, ASA 78 p. 243) However, in the cases listed, the Federal Court always applied this principle in connection with unlawfully obtained income or transactions subject to value added tax law, and not in connection with costs or expenses. The court always argued that it was contrary to the principle of 'nemo auditur propriam turpitudinem allegans' ('no one is heard if he invokes his own immorality') and thus also to the prohibition of abuse of rights and the principle of good faith (Art. 5 para. 3 BV and Art. 2 para. 2 ZGB) if tax exemption could be demanded by invoking unlawful acts. Thus, the Federal Supreme Court, in its reference to the value neutrality of tax law in the cases mentioned above, was precisely intended to prevent taxpayers from ultimately being favoured on the basis of the illegality of their actions or that those who conclude permissible transactions would be disadvantaged. For this reason, it is questionable whether the value neutrality of tax law or the tax treatment of unlawful business activities can actually be assumed to be based on a strict parallelism between income generation and extraction costs, as implied by the previous instance and the above-mentioned doctrines. In judgment 2C_566/2008 of 16 December 2008 E. 4.3, published in: StE 2009 B 22.3 no. 99, StR 64 (2009) 561, the Federal Supreme Court did not consider this question to be material to the decision in the case of self-employed natural persons, particularly since the permissible deductions in Articles 26-33a DBA are in principle exhaustively listed there (Article 25 DBA; see E. 7.1 above) and in each case it is only necessary to examine whether or not the conditions prescribed by law for a tax deduction are fulfilled.
It is not necessary to make a final assessment of the individual circumstances of this case. The lower instance primarily deduces from the principle of value neutrality that, if income from tort would be taxed, the necessary costs of obtaining the income would have to be deducted (E. 22.214.171.124 of the contested decision). As the complainant correctly objects, however, this conclusion was in principle complied with in the assessment: The defendant's expenses for services rendered in connection with the anti-competitive agreements, consisting, for example, of the salaries of the employees, the rent of meeting rooms for the cartel members, etc., were allowed to be deducted. According to the cantonal tax office, the same applies to the legal costs incurred in connection with the anti-competitive fines in dispute, which the respondent does not deny. Thus, the question in this case is not whether or not the extraction costs associated with unlawful or immoral income are deductible, but rather whether or not a fine or a monetary administrative sanction of a penal nature is part of the ordinary extraction costs, like the other expenses mentioned. This is to be denied according to the above.
7.7 In addition to the penal sanctions already discussed, there are also monetary sanctions which serve to absorb profits. As a rule, these are of a guilt-free nature and can be imposed on a legal entity if there is an objective violation of the law [...]. Accordingly, their purpose is not to atone for a violation of the law, but merely to correct a situation that has arisen as a result of the violation; in doing so, the legal situation is to be restored by skimming off that portion of the profit that results from the violation of the law. With this type of sanction, there is no tension from the outset between the assessment under tax law and that under criminal law, or between the principle of the unity of the legal system and the principle of taxation according to economic capacity: on the one hand, there is no subjective (guilty) accusation against the legal person, and on the other hand, there is no longer any reason to tax the illegal share of the profit because of the integral absorption of the illegal share of the profit. For this reason, profit-absorbing sanctions without a penal character are convincingly described by the doctrine as business-related expenses and thus as tax deductible [...], which is correctly recognised by the previous instance (E. 2.3.2 of the contested decision). In its aforementioned report of 12 September 2014 on the tax deductibility of fines and financial administrative sanctions, the Federal Council also expressed itself in the same way (E. 3.3.2, p. 10 f. of the report [...]), and the draft Federal Act on the Tax Treatment of Financial Sanctions, which has also already been discussed, provides for the express inclusion in the DBG of the commercial justification of profit-absorbing sanctions without a criminal purpose (Art. 27 para. 2 lit. f. and Art. 59 para. 1 lit. f. of the E-DBG). On the basis of the above, however, this already applies de lege lata.
7.8 In summary, fines and monetary administrative sanctions of a penal nature imposed on legal persons on their own responsibility are in principle considered as non-business expenses and are therefore not tax-deductible. Pursuant to Art. 58 para. 1 lit. b DBG, provisions and write-downs made in respect of such expenses must be added to the taxable net profit as shown in the income statement. On the other hand, profit-absorbing sanctions are justified on business grounds and therefore tax-deductible, provided they do not pursue a penal purpose.
On the basis of the above, the Federal Supreme Court upheld the appeal concerning state and municipal taxes and set aside the contested ruling of the Zurich Administrative Court.
Federal Court, 26.9.2016, 2C_916 and 2C_917/2014.