A transaction with the tax authorities is not deductible as a business expense
March 2021 – In 2014, the tax authorities conclude an agreement with a company and the directors of this company concerning the payment of the tax evaded. In addition to the taxes, the company pays a transactional amount. The Income Tax Code prohibits the deduction of fines. But does a transactional fine constitute such a non-deductible fine?
A case from 2012
In October 2020, the Ghent Court of Appeal had to rule on a dispute from 2015, which itself originated in a tax fraud committed from 2010 to 2012.
An audit concerning this tax fraud had led to an agreement in 2014. The company had paid the evaded tax. The public prosecutor's office dropped the criminal proceedings in return for payment of a settlement amount corresponding to 65% of the tax payable.
The company wanted to deduct this amount as business expenses, but the tax authorities refused. Article 53, 6° of the CIR92 provides that fines are not deductible. The question that arises is therefore whether the transactional sum can be qualified as a fine.
The Court says this, the Court says that.
According to the Bruges court, the sum is of a criminal nature and therefore falls under the prohibition of deduction.
The Ghent Court of Appeal disagrees, its main argument being that the settlement was not imposed by a judge under criminal law. It is therefore not a "penalty". On the contrary: the payment of the sum of money leads to the termination of the public action.
The legislator
However, it seems that the legislator has meanwhile decided the issue.
In the course of the corporate tax reform in 2017, the above-mentioned Article 53, 6° of the CIR92 has been adapted. Since 1 January 2020, administrative fines are also subject to the prohibition of deduction.
This change in the law was primarily intended to prevent the deduction of cartel fines imposed by the competition authorities. In reality, however, this amendment to the Act has rewritten the philosophy behind the prohibition of deduction. Unlike before, the criminal nature of the fine is no longer decisive.
An administrative fine is no longer deductible either, even if it relates to deductible taxes and irrespective of the classification of fines or increases as a criminal sanction.
The judgment of the Ghent Court of Appeal is still relevant for old cases, but for transactions concluded as from 1 January 2020, no further discussion is possible: the agreed fine is a non-deductible fine.
