In a decision rendered on October 11, 2016, the Swiss Federal Supreme Court ("SFSC") ruled that criminal fines and other financial penalties are not income tax deductible, as they do not constitute a justified business expense. At the same time, the Swiss Federal Supreme Court ruled that any illicit profits seized by foreign or inland courts and/or governmental agencies can be deducted from corporate taxable income.
In the case at dispute, the European Commission had imposed on a Swiss company in 2009 a fine of EUR 348'000 due to a various anti-cartel violations. As a result, the company had taken a provision in the amount of approximately CHF 460'000. Both the Tax and the Administrative Courts of the Canton of Zürich allowed this provision following appeals by the Tax Authorities of the Canton of Zürich.
The SFSC held that criminal fines and other financial penalties should not be deductible as the taxpayers as a whole would have to bear at least a part of the brunt and, therefore, the punitive effect of the criminal sanction would be undermined. The SFSC also referred to its judicial practise rendered for the first time in 1944, according to which self-employed business persons cannot deduct criminal fines and other financial penalties in their income tax return, so allowing corporate businesses in Switzerland to do otherwise would result in an undue tax privilege
The highest court in Switzerland reminded the parties of its long standing income tax practise in the field of briberies by saying that it would be paradoxical if illicit payments for bribes could not be deducted, whilst criminal penalties due to a bribery would become income tax deductible.
Finally, the SFSC held that companies still qualify for income tax deductions as long as the criminal fines and other financial penalties encompass judicial and/or governmental seizures of illicit profits, as these profits had been previously taxed.
The case now goes back to the Administrative Court of the Canton of Zürich, where the tax paying company will have a chance to demonstrate that part of the European Commission's fine of EUR 348'000 was aimed at seizing illicit profits gained through the company's cartelistic activities.
The SFSC's decision of October 11, 2016, is in line with current legislative action in Switzerland. In December 2015, the Swiss Federal Government had proposed a bill which deals with the income tax treatment of criminal penalties, whereby the government's core proposals correspond with what the SFSC just ruled.
Against the background of multibillion fines handed down mainly by the U.S. Department of Justice against the Swiss banks over the last 36 months in various criminal and other proceedings, there are also critical voices in the current Swiss Parliament lobbying for a wider income tax deductibility of criminal fines, as these U.S. fines are quite often difficult to be reconciled with Switzerland's rule-of-law perceptions.
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