Federal Council clarifies tax treatment of fines
Bern, 12.09.2014 - During its meeting today, the Federal Council adopted a report on the tax treatment of fines. Fines are punitive in nature and cannot be deducted from taxes. The same applies for financial administrative sanctions that are punitive in nature. However, profit disgorgement sanctions, which require repayment of taxable profits obtained by illegal acts, can be deducted. With the report, the Federal Council has responded to the Leutenegger-Oberholzer postulate (14.3087) submitted by the National Council.
Neither private individuals nor companies may deduct tax fines. This follows from the regulations set out in the Federal Act on Direct Federal Taxation (DFTA) and the Federal Act on the Harmonisation of Direct Taxation at Cantonal and Communal Levels (DTHA). In the Federal Council's view, other fines are not business-related expenses either and therefore cannot be deducted from the assessment basis for taxable profit. The deductibility of such fines under tax law would reduce the punitive effect of the fines. The burden of the ensuing tax reduction would indirectly have to be shared by taxpayers, which is inconsistent with the purpose of a fine according to the Federal Council. The same applies for financial administrative sanctions, provided they are imposed for punitive purposes.
In contrast, profit disgorgements are tax-deductible. As their purpose is not punitive, they constitute business-related expenses. The tax treatment of fines, financial administrative sanctions and profit disgorgements is not explicitly regulated in the existing legislation. It can only be determined through interpretation of the law whether expenses are business-related or not. The Federal Council thus deems it conceivable to include clarifying provisions in the DFTA and DTHA.
The report also addresses the issues of burden of proof and recognition of provisions.
Issues in an international context
The report also comments on fines, financial administrative sanctions and profit disgorgement sanctions that can be imposed on a Swiss company with a permanent establishment or subsidiary abroad. In this context, however, it is necessary to examine whether a fine, financial administrative sanction or profit disgorgement is involved, where the profit disgorgement is directed and where the profit to be disgorged was taxed. Fines are not tax-deductible in an international context either. The same questions arise in the case of an out-of-court settlement that takes the place of criminal proceedings.
Fines: Fines are financial sanctions provided for under criminal law to atone for the culpable commission of a criminal offence (disciplinary fines, fines, monetary penalties).
Profit disgorgement sanctions: These aim to correct an economic advantage that was obtained by illegal acts. They are thus a remedy to restore the situation to one of proper conduct and not a punishment.
Financial administrative sanctions: These can have the features of a fine or of profit disgorgement.
Business-related expenses: Costs that are necessary to generate gross profit. The term covers solely business-related activities, i.e. those aimed at generating profits. Neither the DFTA nor the DTHA defines the term. The relevant legislative provisions merely list some examples of business-related expenses. Whether administrative sanctions and profit disgorgements are business-related is not expressly regulated and has to be determined through interpretation of the law.
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