A transaction is not a deductible business expense
June 2022 – Sanctions and fines are generally not deductible. Not even if they are related to the professional activity. This non-deductibility was introduced in order not to dilute the effect of the sanction. Transactions, however, seemed not to be subject to this rule. But things change in 2022.
The general principle
The non-deductibility of fines is described as follows in the Income Tax Code 1992. The following are non-deductible: fines, including transactional fines, administrative fines imposed by public authorities, even when these fines do not have the character of a criminal sanction and even when their amount is calculated on the basis of a deductible tax, confiscations and penalties of any kind.
Even when an employee incurs a fine and the employer pays it, the fine is not deductible.
However, this non-deductibility must be qualified.
Tax surcharges are deductible, provided that the tax itself is also deductible (e.g. withholding tax).
Interest on late payment of taxes and social security contributions is also subject to the principle that the accessory follows the principal, where the accessory is the interest on late payment and the principal the tax or social security contribution. If the tax or contribution is deductible, the default interest is also deductible.
The following are also deductible: parking fees, fines relating to the Eurovignette, fines for late filing of annual accounts, etc.
Compensation is also deductible, since it is not a penalty.
Settlement
The settlement is contained in Article 216bis of the Code of Criminal Procedure (C.C.P.), which was modelled by the Financial Transaction Act. The Financial Transaction Act offers the possibility of extinguishing the public prosecution in return for payment of a sum of money.
Is this a sanction?
The Ghent Court of Appeal ruled at the end of 2020 that this was not the case. According to the Court, it would be sufficient to refer to the general principles regarding the deductibility of expenses. In the case before the Court, a taxpayer had paid a settlement to fight against damage to his reputation. The expense was therefore intended to preserve taxable income and was therefore deductible.
Legislative intervention
The reaction was swift. At the end of 2021, a ban on the deduction of transactions was introduced into the law in question. The following are no longer deductible: sums of money referred to in Article 216bis of the Civil Code.
According to the Council of State, it was never the intention of the legislator to make an exception to the non-deductibility of transactions. According to the members of the Council, however, the law in question was not an interpretative law. A provision is considered interpretative when it clarifies an existing provision. This implies that the amendment made is not a real amendment, but that it restates in clearer terms what the legislator actually meant. An interpretative provision or law is therefore applicable as from the entry into force of the interpreted provision. And therefore with retroactive effect.
This was not the case in this instance.
The measure does not therefore apply to the past.
The law was published in the Belgian Official Gazette on 31 December 2021 and came into force ten days after its publication, i.e. on 10 January 2022.
This means that the question of the deductibility of transactions concluded before this date remains unresolved. The taxpayer will argue that the non-deductibility only applies from 10 January 2022, and not before. The tax authorities will argue that the Council of State clearly states that it was not the intention of the legislator to make the transaction deductible. The judge who will be seized with such a case will therefore have to deliberate with all the wisdom that befits his or her function.
